Category Archives: Financial Crisis

China’s debt bubble is getting only more dangerous – The Washington Post

It would be like finding out Warren Buffett’s financial empire may have been, quite possibly, a sham.

That’s what happened last year when China’s richest man — at least on paper — lost half of his wealth in less than half an hour. It turned out that his company Hanergy may well just be Enron with Chinese characteristics: Its stock could only go up as long as it was borrowing money, and it could only borrow money as long as its stock was going up. Those kind of things work until they don’t.

The question now, though, is how much the rest of China’s economy has come down with Hanergy syndrome, papering over problems with debt until they can’t be anymore. And the answer might be a lot more than anyone wants to admit. Although we should be careful not to get too carried away here. Hanergy is now a nothing that used debt to look like a very big something, while China’s economy actually is a very big something that is using debt to look even bigger. In other words, one looks like a boondoggle and the other a bubble. But in both cases, excessive borrowing — especially from unregulated “shadow banks,” such as trading firms — has made things look better today at the expense of a worse tomorrow.

China’s debt bubble is getting only more dangerous – The Washington Post

The cause of the next financial crisis might surprise you: US house prices

The next bubble could be in the most dangerous asset of all – again

What’s really interesting is that Grantham reckons US house prices might be at risk of moving back into bubble territory. In fact, they’re pretty much already there.

Grantham defines a bubble as any asset that moves to two standard deviations above its long-term average (in other words, it rises a long way above its historical trend).

As of the end of last month, the ratio of the median US house price compared to the median family income was one and a half standard deviations away from its long-term average (going back to 1976).

The cause of the next financial crisis might surprise you: US house prices

This is how the next financial crisis will spread around the world economy | Voices | The Independent

A new economic crisis, which I believe we are on the brink of experiencing, will have similarities, and differences, to 2008. The problem of crowded trades – where market participants all have the same basic positions and strategies, and identical risk models – will be familiar.

To recapitalise banks, regulators have approved risky hybrid securities, such as contingent capital and bail-in bonds. In the event of a systemic crisis, losses will be transmitted to insurance companies, pension funds and private investors; bailing them out may be politically necessary or expedient.

The combination of size, the nature of the underlying assets and the redemption feature may prove especially toxic. It is simply not possible to transform highly illiquid instruments, using financial engineering into liquid equivalents. This lack of liquidity is not reflected in pricing, with the premium for liquidity risk in most segments having fallen to 2007 levels of below.

Financial market shocks flow through into the real economy, affecting the supply of credit, growth, investment and employment. In turn, this feeds back into further sovereign and financial sector weakness.

The exact sequence of events is unpredictable because of the complexity of transmission pathways. But once these feedback loops start, they are very difficult to control.

This is how the next financial crisis will spread around the world economy | Voices | The Independent

Recession May Loom for Next U.S. President No Matter Who That Is

Talk about a poisoned chalice. No matter who is elected to the White House in November, the next president will probably face a recession.

The 83-month-old expansion is already the fourth-longest in more than 150 years and starting to show some signs of aging as corporate profits peak and wage pressures build. It also remains vulnerable to a shock because growth has been so feeble, averaging just about 2 percent since the last downturn ended in June 2009.

“If the next president is not going to have a recession, it will be a U.S. record,” said Gad Levanon, chief economist for North America at the Conference Board in New York. “The longest expansion we ever had was 10 years,” beginning in 1991.

Recession May Loom for Next U.S. President No Matter Who That Is

China’s Economy Is Past the Point of No Return | The National Interest

The economy is essentially moribund as there is not much that can stop the ongoing slide. A contraction is certain, and a severe adjustment downward—in common parlance, a crash—looks likely.

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The first-quarter 6.7 percent was too good to be true, however. And there are two reasons why we should be particularly alarmed.

First, China’s statisticians appear to be just making the numbers up. For the first time since 2010, when it began providing quarter-on-quarter data, NBS did not release a quarter-on-quarter figure alongside the year-on-year one. And when NBS got around to releasing the quarter-on-quarter number, it did not match the year-on-year figure it had previously reported.

NBS’s 1.1 percent quarter-on-quarter figure for Q1, when annualized, produces only 4.5 percent growth for the year. That’s a long distance from the 6.7 percent year-on-year growth that NBS reported for the quarter.

Second, the central government simply turned on the money taps, flooding the economy with “gobs of new debt,” as the Wall Street Journal labeled the deluge.

China’s Economy Is Past the Point of No Return | The National Interest

Chinese banks grappling with ‘crisis level’ bad debts

China’s bad debts are reaching “crisis level”, says one of Asia’s leading brokerage and investment groups, CLSA.

The company’s head of China-Hong Kong strategy, Francis Cheung, yesterday released research showing China’s non-performing loans reaching up to 19 per cent of bank assets, way above the official figure of 1.6 per cent and the global average of 4.5 per cent. Most of the bad debts are attributed to loss-making companies.

Yet the government is injecting massive new stimulus into the economy under pressure from unemployment as manufacturing jobs contract, bond defaults and slowing gross domestic product growth, while foreign direct investment is falling in key sectors. The property sector turned negative in the final quarter of 2015 for the first time in decades.

Capacity utilisation was also running at levels last seen as the global financial crisis hit eight years ago, Mr Cheung said, reinforcing the bad debt trend.

“I think the government knows there’s a problem,” he said, but it lacks a comprehensive strategy to tackle the challenge, with the stimulus effect already fading as overcapacity grows.

Chinese banks grappling with ‘crisis level’ bad debts

Warnings mount on world’s corporate debt, China crisis

Corporate debt has reached extreme levels across much of the world and now far exceeds the pre-Lehman financial bubble by a host of measures, the global banking watchdog has warned in a deeply-disturbing report.

“As the credit cycle ages, following years of record-setting bond issuance, there are growing concerns about signs of stress in corporate balance sheets,” said the Institute of International Finance in Washington.

The body flagged a double threat: a five-fold rise in company debt to $25 trillion in emerging markets over the past decade; and record junk bond issuance in US and Europe, along with shockingly-irresponsible levels of US borrowing to buy back shares and pay dividends.

Warnings mount on world’s corporate debt, China crisis

Something odd is happening in China, and it echoes major financial crises of the last 20 years

In their view, the bigger problem is the “rapid credit expansion within the financial sector itself.” New credit has surged since mid-2014, and is now about 23% of 2015 GDP. They point to the explosion of credit extended by smaller banks as a major red flag and cause for concern.

So how does it all play out?

Zhang and Zeng are increasing the probability of China’s growth falling below 6% for four consecutive quarters from 2017 to 2019 to 20% from 25%.

But they assign just a 10% chance of China’s 2016 growth falling below 6% as the extension of credit is likely to continue to serve as a stimulus.

China gap between M2 and credit Asian financial crisis – Business Insider

Risk Doesn’t Stand Still – Online Library of Law & Liberty

Ip begins his book two decades before that, in 1989, at a high-level conference on the topic of financial crises. (Personally I have been going to conferences on financial crises for 30 years.) He cites Hyman Minsky, who “for decades had flogged an iconoclastic theory of business cycles that fellow scholars had largely ignored.” Minsky’s theory is often summarized as “Stability creates instability”—that is, periods of safety induce the complacency and the mistakes that lead to the crisis. He was right, of course. Minsky (who was a good friend of mine) added something else essential: the rise of financial instability is endogenous, arising from within the financial system, not from some outside “shock.”

At the same conference, the famous former Federal Reserve Chairman Paul Volcker raised “the disturbing question” of whether governments and central banks “end up reinforcing the behavior patterns that aggravate the risk.” Foolproof shows that the answer is yes, they do.

Besides financial implosions, Ip reflects on a number of natural and engineering disasters, including flooding rivers, hurricane damage, nuclear reactor meltdowns, and forest fires, and concludes that in all of these situations, as well, measures were taken that made people feel safe, “and the feeling of safety allowed danger to re-emerge, often hidden from view.”

Risk Doesn’t Stand Still – Online Library of Law & Liberty

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe: Greg Ip: 9780316286046: Amazon.com: Books

Foolproof was excellent and much more subtle and thought provoking than its subtitle “Why Safety Can Be Dangerous and How Danger Makes Us Safe” would lead you to think. Instead of a retread of the well known Peltzman effect (the idea that innovations design to enhance safety just lead to greater risk taking without necessarily increasing safety) the book is actually a subtle and wide-ranging exploration of when it is true, when it is not, and its implications (e.g., seatbelt—the original Peltzman claim—actually don’t have the effect because people forget they are wearing them so don’t actually alter their behavior much, but antilock breaks are something you directly engage with while driving and lead to less safe driving). The wide-ranging aspect is a substantial amount of economics which is Greg Ip’s speciality, especially the recent financial and eurozone crises, but also safety in areas like food, floods, wildfires, automobiles, airplanes and professional football. Although Ip somewhat heroically tries to extract some lessons from all of this, the real strength of the book is tying together disparate topics and making you realize that there are no easy answers to any of these questions. That said, I personally find myself generally more sympathetic to what Ip calls the engineers (i.e., the people who try to make innovations to increase safety) rather than the ecologists (i.e., the people who worry about preserving the ecosystem as a whole without disturbances like new safety innovations). But overall an exciting read and thought provoking whether or not you agree with every part of it.

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe: Greg Ip: 9780316286046: Amazon.com: Books

Economic Crisis This Year? Let’s Look at the Forecast | Institutional Investor

That said, there are real mechanisms that could lead to contagion from a China crisis. The country’s economic and financial situation influences Europe’s financial markets for two main reasons. First, the deterioration in the competitiveness of Chinese industry leads to a decline in the volume of China’s imports, and therefore a decline in the volume of euro zone exports to China and to countries that have trade ties with China. Second, depreciation of the yuan would lead to a decline in the value of euro zone exports to China. We would consequently see a decline in European share prices, which would then lead to weaker household consumption and corporate investment.

Any economic forecast depends on myriad factors, though an economic crisis of a magnitude greater than that of 2008 seems highly unlikely in the short to medium term. Indeed, the reforms of the Basel III Accord on bank capital have been read by many bankers as an extended mea culpa for getting things so grievously wrong before the crisis.

Despite the widespread belief of a new crisis roughly every eight years — 1990, 1998, 2007–’08 and perhaps 2016 — what seems more likely is a cyclical slowdown in the U.S. and Europe, because of the ongoing decline of the corporate investment cycle in the U.S. and the weakness of exports to emerging-markets and oil-exporting countries. Let’s hope that Brazil continues to float in 2016.

Economic Crisis This Year? Let’s Look at the Forecast | Institutional Investor