UPDATE: It's happened - China has suffered its first domestic corporate bond default as Chaori fails to meet interest payments on schedule and rather more surprisingly failed to receive a last-minute mysterious or otherwise bailout...
*CITIC BANK WON'T HELP CHAORI MAKE INTEREST PAYMENT: 21ST HERALD
Ever since the specter of the first real domestic default on a Chinese corporate bond hovered over the markets, the Chinese credit markets have been leaking lower. The last 3 days have seen the biggest drop in Chinese credit markets in almost 4 months. That situation, wistfully occurring half way around the world while US equity markets press on to ever more exuberant (and ignorant) heights, meant at least 3 other Chinese firms pulled their bond issues today and, as Reuters reports, has "triggered widespread upheaval in the bond market." Banks are awash with liquidity (as indicated by low repo/SHIBOR rates) but clearly unwilling to lend and external investors are now running scared.
There’s good propaganda and bad propaganda. Bad propaganda is generally crude, amateurish Judy Miller “mobile weapons lab-type” nonsense that figures that people are so stupid they’ll believe anything that appears in “the paper of record.” Good propaganda, on the other hand, uses factual, sometimes documented material in a coordinated campaign with the other major media to cobble-together a narrative that is credible, but false. The so called Fed’s transcripts, which were released last week, fall into the latter category... But while the conversations between the members are accurately recorded, they don’t tell the gist of the story or provide the context that’s needed to grasp the bigger picture. Instead, they’re used to portray the members of the Fed as affable, well-meaning bunglers who did the best they could in ‘very trying circumstances’. While this is effective propaganda, it’s basically a lie, mainly because it diverts attention from the Fed’s role in crashing the financial system, preventing the remedies that were needed from being implemented (nationalizing the giant Wall Street banks), and coercing Congress into approving gigantic, economy-killing bailouts which shifted trillions of dollars to insolvent financial institutions that should have been euthanized. What I’m saying is that the Fed’s transcripts are, perhaps, the greatest propaganda coup of our time.
When Arthur Levitt's SEC adopted Rule 2a-7 in 1998, it handed the TBTF banks and GSEs a mortgage monopoly on a silver platter.
Once we get rid of these obsolete middleman parasites - Wall Street, the banking sector and the Federal Reserve - we have a delightful question to answer: what else can we do with the $1.25 trillion we'll save every year by eliminating these obsolete financial middleman parasites? A lot.
Chinese capital markets are quietly turmoiling as debt issues are delayed and demand for "Trust" products - the shadow-banking-system's wealth management 'investments' - is tumbling. As Nikkei reports, since January, 9 companies have postponed or canceled issuance plans (around $1 billion) and is most pronounced in privately-owned companies (who lack an implicit government guarantee). This, of course, is exactly what the PBOC wanted (to instill some fear into these high-yield investors - demand - and thus slow the supply of credit to the riskiest over-capacity compenies) but as non-performing loans in China surge to post-crisis highs, fear remains prescient that they will be unable to "contain" the problem once real defaults begin (as opposed to 'delays of payment' that we have seen so far).
As we first reported one week ago, the first shadow default in Chinese history, the "Credit Equals Gold #1 Collective Trust Product" issued by China Credit Trust Co. Ltd. (CCT) due to mature Jan 31st with $492 million outstanding, appears ready to go down in the record books. In turn, virtually every sellside desk has issued notes and papers advising what this event would mean ("don't panic, here's a towel", and "all shall be well"), and is holding conference calls with clients to put their mind at ease in the increasingly likely scenario that there is indeed a historic "first" default for a country in which such events have previously been prohibited. So with under 10 days to go, for anyone who is still confused about the role of trusts in China's financial system, a default's significance, the underlying causes, the implications for the broad economy, and what the possible outcomes of the CCT product default are, here is Goldman's Q&A on a potential Chinese trust default.
“The only thing we have to fear is fear itself.”
Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, I realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.
With all eyes glued to the anniversary of the assassination of JFK 50 years ago, we thought it worth noting that the death of another important American figure - the USDollar - began exactly 100 years ago. Today in 1910 Sen. Aldrich, 1 yr after introducing an amendment to establish an income tax, convened the first secret meeting at Jekyll Island.
- Desperate Philippine typhoon survivors loot, dig up water pipes (Reuters)
- Fading Japanese market momentum frustrates investors (FT)
- China's meager aid to the Philippines could dent its image (Reuters)
- Headline du jour: Granted 'decisive' role, Chinese markets decide to slide (Reuters)
- Central Banks Risk Asset Bubbles in Battle With Deflation Danger (BBG)
- Navy Ship Plan Faces Pentagon Budget Cutters (WSJ)
- Investors pitch to take over much of Fannie and Freddie (FT)
- To expand Khamenei’s grip on the economy, Iran stretched its laws (Reuters)
- Short sellers bet that gunmaker shares are no long shot (FT)
- Deflation threat in Europe may prompt investment rethink (Reuters)
Ben Bernanke is participating in an IMF panel with Larry Summers, Ken Rogoff, and fromer Bank of Israel chief Stan Fischer... Full speech below...
David Stockman, author of The Great Deformation, summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank...
What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut...
He calls this condition "Sundown in America".
If ever there was an investor reaction that summed up just how much the Federal Reserve has broken the markets it was yesterday morning's post-dismal-jobs-report surge. As John Phelan notes, we now appear to be in a position where the interests of financial markets are precisely at odds with the interests of the rest of the economy; where the good news for us is bad news for them and bad news for us is good news for them. The one way bet of the Greenspan Put maintained, so far, by Ben Bernanke, has created a market of monetary-punch-drunk liquidityholics. On its 100th birthday the Federal Reserve has the tricky task of sneaking the punch bowl out of the party, a task it seems they’ll struggle to manage without starting a riot. They may have printed themselves into a corner.
Today we present the Target2-system and the fiscal bail-out facilities in our series on European efforts to bail out itself. For new readers, check out part 1 here http://bawerk.net/?p=123
Those who follow the mainstream media’s “all Federal Reserve, all the time” coverage of financial news naturally conclude that Senator Chuck Schumer neatly summarized reality last year when he declared that the Federal Reserve “is the only game in town.” This lemming-like belief in the power of the Federal Reserve generates its own psychological force field, of course; the actual power of the Fed is superseded by the belief in its power. The widespread belief in the Fed’s omnipotence is the source of the Fed’s power to move markets. We can thus anticipate widespread disbelief at the discovery that the Fed is either irrelevant or an impediment to the non-asset-bubble parts of the economy. There is much we, as individuals, can do to ignore the Emperor's clothes (or lack thereof) and focus on how to pursue our own prosperity and happiness irrespective of the meddling of central planners. The real power is in our hands, should we choose to believe it.