One River CIO "We’re Willing Participants In Our Own Demise"

Tyler Durden's picture

With the world's focus falling on Beijing this week, where president Xi Jinping give a glowing account of China's future during the 19th Party Congress, boasting that “the banner of scientific socialism with Chinese characteristics is now flying high and proud for all to see," not all are impressed by China's vision of the world in which China sees itself as increasingly taking over from the US as the world's superpower. And it's not just stories about China's neverending behind the scenes bailouts of anything that may telegraph a hard landing for the economy (as decribed in "China's Government Is Expected To Buy 24% Of All Residential Real Estate For Sale In 2017"); it's the country's entire financial system, which Kyle Bass has been shorting for nearly two years now but which he has failed to recognize now holds the entire world hostage: if it goes, so does the global financial system, unleashing a worldwide depression the likes of which have not been seen.

Here is Eric Peters, CIO of One River Asset Mgmt, explaining why everyone is wrong about the $35 trillion Chinese financial system, and yet how Beijing has figured out a way to become a parasite on the global financial system, resulting in an outcome in which "we’re willing participants in our own demise."

Excerpted from One River's latest Weekend Notes:

“China’s financial system is a hermetically sealed snow globe,” he said. “They’ve built a system to resemble ours on the surface, but scratch it and you discover something altogether foreign.”

 

China has banks. They lend money. But pierce the patina and you find a vast subsidy machine, with no cold-blooded allocation of capital. There are no defaults to speak of; just bailouts, no reckonings.

 

“The appearance of a modern financial system allows western financiers to pretend one exists. We are willing dupes in this charade.”

 

Throughout history failing nations have turned to printing presses to arrest their decline. It has led to ruin. Always.   

 

But never has an emerging superpower used the printing press to turbo charge growth, dominate industries. The Chinese have reimagined the vast power of fiat. And they’re wielding it to build a 21st century nation atop the history’s greatest credit boom.

 

The fate of this debt is uncertain, but the extraordinary infrastructure is not.

 

“Ask any portfolio manager if they invest their personal wealth in Chinese debt? Not one will answer ‘Yes.’ But before long, we’ll all own Beijing’s bonds in our 401k.”

 

The Chinese understand the agency problem in western asset management. We invest other people’s money, not our own. So they’re muscling their way into global indexes. Where passive flows will race to hit Chinese benchmarks, without anyone making a decision at all.

 

We’re willing participants in our own demise.

 

First, they exploited the west’s corporate fixation on short term profits, granting market access in exchange for local design/production, usurping our intellectual property. Next, they’ll exploit our financial system deficiencies to fund their unprecedented credit excess.

 

“We continue to think of banking and finance though our own narrow lens. But the Chinese see an entirely different system. And they know that Rome was not built by bankers. It was built by force.”

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VIS MAIOR's picture

investment to own country and people are best. 

 

Escrava Isaura's picture

"We’re Willing Participants In Our Own Demise"

Exactly.

US cannot compete with China because China growth is not accompanied by private debt.

Dollar is a private money. Chinese money is mostly soverign money.

 

UndergroundPost's picture

Communists will be communists. American & western greed for cheap (slave!) labor & the products forged by the hands of the enslaved makes this ruse possible

Escrava Isaura's picture

Well, it’s not written in stone that you have to be a wage slave.

Just ask Trump and the congress to change the current social contract.

Good luck on that.

 

ZD1's picture

China's debt is based on sovereign money printed out of thin air. 

Escrava took too many red pills again. 

 

4freedom78's picture

All non-chinese better take notice

Disgruntled Goat's picture

Ain't no Superpower where the people eat rats and dogs, son!

Winston Churchill's picture

No chinese takeaway anywhere close to you ?

yomutti2's picture

Actually, the British ate both in the early 19th century, when they were the world's leading superpower.

 

 

11b40's picture

When were you last in China?

Batman11's picture

When did globalisation go wrong?

In the design stage.

They used neoclassical economics that doesn’t look at private debt. It had already demonstrated its problems in the 1920s that roared with debt based consumption and speculation before tipping over into the debt deflation of the Great Depression.

Financial liberalisation was rolled out globally and economies started blowing up in the late 1980s, early 1990s, e.g. Japan, UK, Australia, Canada and Scandinavia. Richard Werner was in Japan at the time and wondered what had gone wrong and he put some effort in to work it out.

Productive lending goes into business and industry and gives a good return in GDP.

Unproductive lending goes into real estate and financial speculation and it doesn’t give a good return in GDP.

Excessive unproductive lending into the economy leads to financial instability and crises.

As unproductive lending doesn’t give a good return in GDP, the debt-to-GDP ratio shows unproductive lending building up in the economy.

Financial stability in 15 mins.

https://www.youtube.com/watch?v=EC0G7pY4wRE&t=3s

‘The pesky matter of debt has not disappeared: the level of global debt to gross domestic product is now 40 per cent higher than it was in 2008’

Why is that Richard?

This is what unproductive lending into real estate and financial speculation does, it doesn’t give a good return in GDP.

The UK demonstrates by developing a financial speculation and real estate economy after 1980:

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.png

It was OK before 1980, and then unproductive lending really gets going.

China is as clueless as everyone else.

Batman11's picture

“Can we avoid another financial crisis?” by Steve Keen is the must read book for Central Bankers.

China, Ireland, Hong Kong, Norway, Sweden, Belgium, Australia and South Korea are in trouble due to their debt (It's too late you're fucked).

Perhaps China’s central banker purchased a copy and looked in horror at the diagram on page 97, China was due for a Minsky Moment. I had purchased the book some time ago and was well aware of its plight. The BIS popped up about a month ago with the warning I was expecting, they are a bit slow.

Steve Keen saw 2008 coming in 2005 by looking here.

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png 

1929 and 2008 stick out like sore thumbs.

If only the FED had consulted the expert.

css1971's picture

Globalisation didn't go wrong. It did exactly what it was supposed to do.

Haven't you noticed who did well and who didn't out of it?

BritBob's picture

Very clever people - always put business before anything else

China – Argentina – the Falklands

In tune with Macri's words, Xi Jinping thanked Argentina "the support they have given us for our claim of a single China as we support theirs for the Falkland Islands."  (Telam 17 May 2017)

Suppose China didn't take territory in the 19th century?

 

Falkland Islands – The Usurpation (1 pg): https://www.academia.edu/34838377/Falkland_Islands_The_Usurpation

css1971's picture

Falklands For Sale!

$1.

DeeZ_nutZ's picture

fuck this cio dude... china has a vision and shit, what does this cio have?

Winston Churchill's picture

Hey Bob,

I'm thinking your posting from those natural caves under Gibraltar, got lost potholing,

and can only send repeat posts because its very dark down there.

Tap any key if thats correct....?

RawPawg's picture

Um,OK

But it's still my Silver(buried in MY Lake)

east of eden's picture

Well, a rather 'misleading' tale to be sure. It shows that Canada, next to China, has had the biggest 'increase' in Debt to GDP, which, while true, simply means that we went from a debt to GDP ratio of 0.56% to 1.14%, which I don't think is a big deal and which is not really reflected in the graph.

The Ram's picture

When I hear all this babble about Chinese 'strategic' planning, I really laugh.  Yes, China has come a long way in 40 years, but we need to note just two major conditions (and there are others): 1) Western industry (especially American) was pretty much whole sale transferred to China; 2) China has used the global ponzi and the petrol dollar to ring up massive debt which they can now hide in various global schemes.  The growth in China was in no way organic.  The NWO or whatever you want to call the scam artists were more than willing to sacrifice American industry to grow the global ponzi.  The problem now is how does the host (China) kill the parasite (US) without killing itself.  As US 'real' GNP and western GNP declines, China will need to massively subsidize US and Westwern exports to keep the western economies in the 'game' of global consumption.  To subsidize the failing western societies, China will need exponetial growth in debt.  So, the only real question is when the does the excessive debt cause massive instability in both the Chinese and western economies??  Sorry folks, but this is not an ancient civilization with a grand plan.  This is about a modern China playing in a major global ponzi scheme that they cannot control.  I suppose the next step is to go on wish.com and see how much 'free' stuff the Chinese need to give away to keep their workers employed!  

not a yahoo's picture

I shudder to think how much foreign debt (doesn't matter whether local or USD) they really owe. 

Dragon HAwk's picture

So if all the Debt was paid back we would have No Money on the Planet.. Sounds legit to me..

chestergimli's picture

It seems to me that China doesn't have to worry about debt since (correct me if I'm wrong) the government owns the central bank instead of a bunch of private Jewish bankers. The government just prints up the funds to get things done in the economy and they don't have to worry about paying it back to anyone. It shouldn't be inflationary as long as the money that is printed merely matches what it has been printed for.

east of eden's picture

Well, not exactly. They have already declared they will pay in gold for oil, so the amount they can print is at least limited by that.

fbazzrea's picture

They have already declared they will pay in gold for oil

well, not exactly.

they're paying in yuan but saying you can take your yuan and purchase gold at the SGE on the open market AND actually take delivery. that's the diff.

Zorba's idea's picture

I'm afraid you're going to need more than a chinese abacus to reconcile any chinese balance sheets..their game of "Financialization" absent the Tribe is quite clever and perhaps the reason Kyle Bass's predictions will not be seen in his lifetime.

css1971's picture

And... What? you think the Western financial system is built on blind capitalism? Don't be stupid. Failure only applies to you if you are a little person. One of the outsiders... CENTRAL BANKS FFS.

John C Durham's picture

I don't think this writer understands.

KrazyUncle's picture

“China’s financial system is a hermetically sealed snow globe,” he said. “They’ve built a system to resemble ours on the surface, but scratch it and you discover something altogether foreign.”

China has banks. They lend money. But pierce the patina and you find a vast subsidy machine, with no cold-blooded allocation of capital. There are no defaults to speak of; just bailouts, no reckonings.

KUncle: And what is so foreign about that?

 

“The appearance of a modern financial system allows western financiers to pretend one exists. We are willing dupes in this charade.”

KUncle: The appearance of a western modern financial system in the west is all pretend! And we are dupes in that! And you want to blame it on China?

gcjohns1971's picture

Everyone wants to be a parasite on the global economy.

It is impossible for everyone to live at someone else's expense.

That is why it Will surely fail

Fractional Reserve banking will fail because it is parasitic.

Socialism will fail because it is parasitic.

Communism in China and elsewhere will fail because it is parasitic.

The welfare State will fail because it is a parasite on the banking industry, itself a parasite.

None of this, including the certain knowledge that these systems are unproductive, parasitic, and destined for failure will disuade anyone.  Instead they will all try to "get theirs" before they complete the destruction of civilization.

We are witnessing a Grand Global Moral failure.

Rest assured, production that cannot sustain itself because of excess parasitism - won't.

Atlas will shrug.

root superuser's picture

Just what is not parasitic then?

Umh's picture

It's the same as the US system, rigged.

Sudden Debt's picture

How many pension funds own Spanish and Italian bonds...

not a word so far but it's hughe.

 

BurningBetty's picture

Some great comments worth reading here.