Tag Archives: ponzi

China On ‘Treadmill To Hell’ Amid Bubble

9 Apr

From Bloomberg:

China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos.

The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said in an interview on “The Charlie Rose Show” that will air on PBS and Bloomberg TV.

China is “on a treadmill to hell,” said Chanos, who said in January the nation is Dubai times a thousand. “They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.”

Property prices in China rose at the fastest pace in almost two years in February even after officials this year re-imposed a tax on homes sold within five years of their purchase to curb speculation and ordered banks to set aside more funds as reserves to cool lending. The boom in China’s real estate has fueled concern that China may face a collapse seen in Dubai that has hurt the ability of some of its companies to repay debt.

Since his January prediction, Chanos, the founder of Kynikos Associates Ltd, has been joined by Gloom, Doom & Boom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s property market.

Barnaby Joyce has been warning about the external threats to the Australian economy since October 2009.  With every passing month, more and more evidence coming from economies around the world – including those such as China that are vital to Australia’s economic interests – indicates that there is big trouble brewing.  While the Ken Henry-led Rudd Government slumbers on in La La Land, spending like drunken sailors, confident of an unending China boom to lift us out of debt, more and more economists abroad are predicting a China crash.

Barnaby is also the only Australian politician with the courage to publicly question the Rudd Government’s weakening of Foreign Investment laws, which have allowed foreign ‘investors’ to help spike Australia’s already unaffordable housing bubble, and put our ownership of vital national assets at risk.  Only Barnaby Joyce has had the courage to call out the Rudd Government for ‘selling the farm’, paddock by paddock.

China Crisis ‘A Lot Worse Than People Expect’

6 Apr

Robert J. Brenner, economic historian and professor of history at the University of California, offers a grim forecast of the future for China in a series titled, “Overproduction Not Financial Collapse Is The Heart Of The Crisis: The US, East Asia, and the World”:

I think the Chinese crisis is going to be a lot worse than people expect, and this is for two main reasons. The first is that the American crisis, and the global crisis more generally, is much more serious than people expected, and in the last analysis, the fate of the Chinese economy is inextricably dependent on the fate of the U.S. economy, the global economy. This is not only because China has depended to such a great extent on exports to the U.S. market. It is also because most of the rest of the world is also so dependent on the U.S., and that especially includes Europe. If I’m not mistaken, Europe recently became China’s biggest export market. But, as the crisis originating in the U.S. brings down Europe, Europe’s market for Chinese goods will also contract. So the situation for China is much worse than what people expected, because the economic crisis is much worse than people expected. Secondly, in people’s enthusiasm for what has been China’s truly spectacular economic growth, they have ignored the role of bubbles in driving the Chinese economy. China has grown, basically by way of exports and, particularly, a growing trade surplus with the U.S. Because of this surplus, the Chinese government has had to take political steps to keep the Chinese currency down and Chinese manufacturing competitive.

Specifically, it has bought up U.S. dollar-denominated assets on a titanic scale by printing titanic amounts of the renminbi, the Chinese currency. But the result has been to inject huge amounts of money into the Chinese economy, making for ever easier credit over a long period. On the one hand, enterprises and local governments have used this easy credit to finance massive investment. But this has made for ever greater overcapacity. On the other hand, they have used the easy credit to buy land, houses, shares, and other sorts of financial assets. But this has made for massive asset price bubbles, which have played a part, as in the U.S., in allowing for more borrowing and spending. As the Chinese bubbles bust, the depth of the overcapacity will be made clear. As the Chinese bubbles bust, you will also have, as across much of the rest of the world, a huge hit to consumer demand and disruptive financial crisis So, the bottom line is that the Chinese crisis is very serious, and could make the global crisis much more severe.

Australia’s ‘Goldilocks’ Economy

31 Mar

From The Intelligent Investor:

Australia is the western world’s ‘Goldilocks economy’. My own particular concern is that the market now assumes this status to be a permanent state of affairs. Most domestic commentators, alive to the opportunities that stem from our increasing reliance on China, are asleep to the potential risks.

The consequences of a significant Chinese downturn will be enormous for us; the Goldilocks economy may start to look like other western nations; indebted, economically promiscuous and unable to spend less than we earn. The resources, banking and property sectors look particularly exposed.

While not all of our analysts are as concerned as I am about the potential dangers of a Chinese downturn, we all agree it’s important for Australian investors to consider the possibility that the Chinese miracle may sour for at least a few years.

A few questions should be asked of your portfolio and financial circumstances; Does your brand of diversification mean that the 15 stocks in your portfolio are all in the mining business? Do you own some genuinely defensive investments? Do you have some spare cash reserves or term deposits? Have you paid down your margin loan? Now’s the time to consider these questions.

How Long Has The Lucky Country Got?

31 Mar

Edward Chancellor is the author of the classic text on financial manias, Devil Take the Hindmost. In 2005 he wrote Crunch time for credit: An enquiry into the state of the credit system in the United States and Great Britain, in which he correctly predicted the GFC. His recent report for Boston-based GMO outlined ten signs of a mania in progress, and showed that the Chinese economy meets all ten of those signs. He has also written recently about the Australian housing mania.

From the Financial Times:

Between 1996 and 2006, US home prices rose by nearly 90 per cent in real terms. Australian home prices rose by roughly the same amount.

Over this period, the US private sector increased its indebtedness by two-thirds of GDP. Australian private debt increased by a similar magnitude. Over the past three years, US home prices have fallen by 30 per cent, according to the S&P/Case-Shiller Composite Index. American households have started to deleverage. By contrast, Australian home prices have climbed 30 per cent since 2006 and households continue to pile on debt.

There are a number of explanations for this divergence…

While other governments expended their resources on shoring up busted banks, the Australian stimulus went straight to consumers. Fiscal transfers increased personal disposable incomes by 4 per cent, according to Professor Steve Keen of the University of Western Sydney. Canberra also bolstered the housing market, raising the subsidy for first-time home buyers to a maximum of A$21,000 (£12,200, €14,000, $18,600). Rising home prices arrested incipient deleveraging by Australian households. Outstanding mortgage debt has actually grown by 6 per cent of GDP since February 2009.

Australia may have been fortunate. But it is not out of the woods. For a start, the real estate market remains in bubble territory. Australian home prices are currently some 70 per cent above their long-term trend level. A recent survey by Demographia International finds that all of Australia’s major housing markets were valued at more than five times average incomes, and defines them as “severely unaffordable.” Initial mortgage payments for a home in Sydney or Melbourne are likely to exceed half of your disposable income, claims Demographia. The Australian housing market looks vulnerable to further rate rises.

Then there are the waning effects of the government’s stimulus to consider. The extra subsidy for first-time home buyers ended last year. The removal of this grant could have a similar effect on Australian real estate as the UK government’s reduction in mortgage interest relief in 1988, which killed off the frenzied Lawson housing boom. Prof Keen claims the first-homeowner’s grant has sucked people into the housing market who would not otherwise have bought. One report suggests many recent first-time buyers in Australia are already struggling to meet payments. This is eerily reminiscent of early stage delinquencies on subprime loans in the US back in late 2005. Australia is also exposed to the removal of China’s stimulus measures. China’s actions boosted commodity prices and improved Australia’s terms of trade. Now, Beijing appears more concerned about inflation and potential bad loans from uneconomic investments.

Aussie house prices have not fallen since the early 1950s. A certain complacency is therefore understandable. Yet not long ago many Americans also believed that domestic home prices could never fall. So far Australia has avoided its day of reckoning. But how long will the lucky country’s luck last?

Not long at all.

A recent survey of 26,000 mortgage borrowers showed that:

Almost half of first-home buyers lured into the market by the Rudd Government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young home buyers are using credit cards or other loans to meet obligations, while those in “severe stress” are missing payments.

Just weeks after the grant was withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting has found 45 per cent of first-home owners who entered the market during the past 18 months are experiencing “mortgage stress” or “severe mortgage stress”.

On Monday, RBA Governor Glenn Stevens appeared on commercial TV – an unprecedented act by an RBA official – to warn the public about the dangers of the property market.

On the same day, I came across the following comment by a reader of The Australian newspaper:

Waiting for the “correction” Posted at 1:22 PM Today

Now here’s something interesting. My “relationship manager” at Westpac says the housing market is heading for a “significant correction” because the major banks are about to insist on much higher deposits because of their alarm at the amount of questionable loans on their books. This guys says the word is that the Commonwealth will soon insist on a 30 per cent deposit for new purchases and then only to existing customers. “When that kind of thing happens, the heat will immediately go out of the market so stay out of it till the dust settles”. This bloke says Westpac is especially worried about the impact of the first home buyers grant and they’re already seeing significant loan defaults as interest rates rise. “These people took their $14-thousand, then got Mum and Dad to throw them the rest of their deposit because they were led to believe they’d miss the boat. Kevin Rudd has used taxpayer funds to entice a whole lot of young people into buying places they couldn’t afford and going bankrupt as interest rates rise”. That’s a direct quote from a guy at Westpac who used to be in the business of throwing money at you. God’s honour. Maybe the South Seas bubble IS about to pop?

To learn more about the dangers of debt, and how it has fueled the Australian housing bubble, visit the website and blog of Professor Steve Keen.

Special Note:

On April 15th through 23rd, I will be joining Professor Keen in his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property (and debt) mania that has been driven directly by Federal Government and RBA policies.

Please consider joining us, for the whole trek or even just for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised will support the wonderful charity Swags For Homeless.

Thanks!

Only US Collapse Can Save The Euro

30 Mar

From Zerohedge:

For once, some actually good insight from a CNBC guest. Philip Manduca, Head of Investment of the ECU Group, discusses Greece and the very severe implications of what the final outcome will look like. “Trichet (Ed: President of the European Central Bank) said the Greeks are crooks, and they’ve been lying about the numbers. There is a deeply embedded corruption within the Eurozone. Combined with the endemic European socialism and there is just no way you are going to get spending cuts and tax raises and maintain a GDP that makes any sense of the percentage aspect of debt to GDP. So the whole show is wrong. This is an intractable situation, this is going to continue on and on. The only hope for the Eurozone, and the Euro as a currency, is that someone takes the spotlight soon, and that may be the United States.

‘Concentrated Risk’ Threat to Aussie Banks

29 Mar

From Contrarian Investor’s Journal:

We must confess, we are getting more and more nervous about the potential for a Black Swan hitting the Australian economy. Particularly, we are looking at a vulnerability in the banking system. Here are some facts about Australian banks:

  1. As at December 2009, around 75% of the Australian mortgage market is held by the Big 4 banks. 50% are held by Commonwealth and Westpac while 25% are held by ANZ and NAB. (source: CoreData’s Australian Mortgage Report Q1 2010)
  2. 60% of Commonwealth’s lending books are residential mortgages.
  3. 50% of Westpac’s lending books are residential mortgages.

Now, here’s an interesting news report from almost two years ago:

“The Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.”

That is only one concern for Australia’s banking system. You know, the one that we are constantly reassured is “world-leading”, “safe and secure”, “the best in the world”.  The banking system that needed a Government (ie, taxpayer)  Guarantee on customer deposits since October 2008, to stop the “run on the banks” that threatened to collapse it.  The banking system that still has wholesale funds frozen to withdrawals, leaving hundreds of thousands of retirees destitute and forced to go back on the government (taxpayer) pension.

There’s also this concern. Australia’s banks have $13 Trillion in off-balance sheet business.  Yes, that’s Trillion with a ‘T’. But, they only have $2.59 Trillion in on-balance sheet assets.

From Money Morning:

We’re sure the banks and the RBA will claim that all the off-balance sheet business is completely offset, so that losses are contained. Personally, we don’t think you should believe a word of it. The number one risk with the off-balance sheet business is counterparty risk. As long as each counterparty can keep the ponzi scheme going then sure, everything will be tickety-boo.

But as we all know, that can’t happen. We’ve seen counterparties collapse before (Lehman, Bear Sterns, etc…) and they’ll collapse or need bailing out again.

There’s only so long that banks can keep the ponzi going. They’ve scraped through by the skin of their teeth thanks to an unprecedented bail-out by the taxpayer.

Our “world-leading” Big Four banking system is a total disaster just waiting to happen. And it’s all thanks to greed… and Debt.

Barnaby is right.

Junk Bonds Record in ‘Goldilocks’ Market

29 Mar

From Bloomberg:

Junk bond sales reached a record this month as rising profits and record low Federal Reserve interest rates foster lending and investment to the lowest-rated borrowers.

Companies worldwide issued $38.3 billion of junk bonds this month, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg. Yields fell 0.95 percentage point this month to within 5.96 percentage points of government debt, the narrowest gap since January 2008, Bank of America Merrill Lynch index data show.

This is “an almost ‘Goldilocks’ environment for leveraged credit markets,” JPMorgan Chase & Co. analysts led by Peter Acciavatti, the top-ranked high-yield strategist in Institutional Investor magazine’s annual survey for the past seven years, said in a March 26 report to the bank’s clients.

This is very bad news.

There has been growing concern around the world that the sales of junk bonds prior to the GFC will lead to a junk bond apocalypse in 2012:

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

Now, the ongoing Zero Interest Rate Policy (ZIRP) in the USA, and near zero interest rates in Japan and many other developed nations, has led to a new record in the sales of those same high risk ‘junk bonds’.

In other words, central banks and governments around the world are adding more fuel to the fire.

Australia’s Property Bubble: It’s Here

27 Mar

From the Sydney Morning Herald:

It’s official: 60 per cent of investors believe Australia has a property bubble. A confluence of housing shortages, low interest rates, speculative fervour and last year’s move by the Rudd Government to relax foreign ownership rules on real estate have turbo-charged house prices.

This is all scary stuff.  Investors played a key role in expanding the property bubble through the late 90s. In 1990 investment loans represented 16 per cent of Australian mortgages at $13 billion. By 2008 that figure had ballooned 2400 per cent to $310 billion, or 31 per cent of total mortgages. Investor attitudes matter.

The survey revealed, however, that moral hazard may be much larger than investors themselves admit, with 42 per cent expecting the Rudd Government to introduce another round of first home buyer grants if the current boom shows signs of ending.

The increase in foreign purchases also cannot be under estimated, following the decision last March by the federal government to relax its rules on property ownership. This abolished mandatory reporting of such acquisitions in a bid to ”enhance flexibility in the market”.

Before the change, foreign investment in Australian residential property had already started increasing, up 33 per cent to $20.4 billion. It is not known what the figures stand at in 2010 but there are suggestions that more than 30 per cent of homes auctioned are purchased by foreign speculators. If this is the case, it will dramatically add to the property bubble.

It is a potential political time bomb. Numerous readers have written in complaining that they are being priced out of the market by overseas bidders…

Another Investor Pulse reader wrote: “So much for Rudd’s ‘working families’. Australians should get priority over foreign investors for what limited housing we have. How can Australians compete when Chinese borrow at home at 1 per cent? The Australian property market is strong and doesn’t need to be propped up. The Government should act now to stop this misguided and UN-Australian policy. Shame on you, Mr Rudd, for selling out on Working Families.”

Barnaby Joyce is the only Australian politician who has been brave enough to endure smears and criticism, by daring to question the Rudd Government’s relaxing policies on foreign investment.

Here’s just one of Senator Joyce’s press releases on the topic from last year,  “FIRB Changes – Australia’s Sovereignty At Risk“:

Senator Joyce today called on Treasurer Wayne Swan to re think his undermining of the present system of reviewing foreign investments and takeovers.

Mr Swan’s announcement should sound very loud alarm bells to anyone concerned with maintaining Australia’s sovereignty over its resources and business interests given that  Mr Swan plans to remove  Foreign Investment Review Board supervision of over 20 percent of all business applications currently reviewed by the board.

This effective sidelining of the FIRB relating to a substantial number of applications is deeply troubling as it removes a long standing and much needed level of accountability and transparency of foreign investment in Australia particularly by individual investors from countries such as the Peoples Republic of China.

It is astounding Mr Swan would seek to punch such a big hole in Australia’s foreign review processes, leaving the back door wide open for foreign interests to buy Australia paddock by paddock, business by business without any accountability to the Australian people.

Unfortunately for Australia each of the announced measures will allow that hole to get bigger to the detriment of Australia’s sovereignty and its national interest.

Yet again, Barnaby is the only one who is on the ball.

UPDATE:

From The Age:

Foreign buyers inflating market

Reserve Bank governor Glenn Stevens says foreign buyers are a factor in rising house prices.

Mr Stevens said the bank was monitoring how much the federal government’s decision last March to relax its rules on foreigners owning property had contributed to surging prices for housing.

He said the role of foreign purchases was ”an important one and it’s one we’re giving some attention to”.

Is Barnaby Really An Idiot?

13 Mar

Take a look at this chart, and then think very carefully about your answer (click to enlarge) –

USA - Federal Surplus / Deficit since 1901

That chart is from the US Federal Reserve, St Louis branch.  For the last 108 years.

And it’s not bang up to date.  It only goes up to end September 2009. Hard to believe, but the US government has gone much, much deeper into the negative in the 5.5 months since then. In February alone, the US went another US$221bn into the hole. That’s a one month record.

Do you remember how the Rudd Labor and mainstream media’s assault on Barnaby Joyce’s economic credibility began?  When he publicly questioned whether the US could default on its debt.

Well… what do you reckon?  Look at that chart.  Think about it.  Use your own commonsense.

Barnaby is right.

And there are plenty of esteemed international economists … including the current chairman of the US Federal Reserve… who agree.

As does US Secretary of State, Hillary Clinton, who called the US deficit a ‘national security risk’ just 2 weeks ago.

Worrier Joyce Gains Traction

13 Mar

A must read article in today’s Sydney Morning Herald:

Why Our Foreign Debt Is A Taboo Subject

It’s become deeply unfashionable to talk about Australia’s foreign debt. Neither the government nor the opposition wants to mention it and the same goes for most economists. In the Reserve Bank’s 60-page quarterly review of the economy it doesn’t crack a mention.

Predictably, however, the subject holds no terror for Barnaby Joyce. As best I can make out, his celebrated mention of ”our net debt gross public and private” was a reference to our foreign debt.

What’s that you say? You thought the pollies had done little else but spar about deficits and debt? Sorry, different debt. They’ve been arguing about the public debt – the amount the federal government owes (mainly to Australians).

On the latest estimates (which are probably too high), the federal budget’s return to deficit is projected to cause the net public debt to peak at $153 billion in June 2014, before falling back.

But as Crocodile Dundee might say, that’s not a debt, this is a debt: according to figures we got from the Bureau of Statistics last week, in December Australia’s net foreign debt reached $648 billion.

And if you enjoy a good worry, as Joyce clearly does, why not quote the gross foreign debt? It stands at a cool $1219 billion.

How on earth did we get to owe all that money? Just who owes it? What’s the difference between gross and net? And why does no one but Bushwhacked Barnaby think there’s much to get excited about?

Perhaps it’s because Barnaby is the only politician in Australia who truly cares about protecting Australians.  And not just his own taxpayer-funded lurks and perks.

There is one serious quibble I have with Ross Gittins’ column. He writes:

Since we’ve run a deficit on the current account almost every year since the year dot, and since we also have to borrow to cover the interest we pay on earlier debt, our total debt to foreigners stands at $1219 billion.

Fortunately, it’s not quite that bad. That’s the gross amount we owe. But while some Australians were borrowing from foreigners, others (mainly our super funds) were lending money to foreigners. As at December, foreigners owed us $571 billion.

So that’s why the net amount we owe to foreigners is $648 billion and that’s the more meaningful figure to focus on.

I disagree completely. With so much evidence emerging almost daily about the growing debt crises in countries all over the world – just see the dozens of articles referenced and linked in this blog –  why should we sit back comfortably and count our chickens before they’re hatched?

If foreigners owe us $571 billion, what makes us think that they can pay us back? What good reason is there to believe we can count on that $571 billion owed back to us?

I applaud Mr Gittins’ story overall. At least he’s bringing attention to the great taboo subject of foreign debt. But I fear that, like so many mainstream economists, he fails to see these simple, logical flaws in the “popular” wisdom.

The exact same flawed argument is made by the government, Treasury, the RBA, and all their many cheerleaders in the mainstream media, when it comes to Gross vs Net public debt.  And, gross vs net Interest on Debt.  Again, they always argue that it is only the Net figure that matters. Because they believe that we can count on the amounts owed back to us as a sure thing.

Morons. Blinded by “conventional wisdom”, and too much time staring into the crystal balls of economic “theory”. Even Gittins manages to concede as much, in a butt-covering final paragraph:

Of course, the conventional wisdom among economists could be wrong. It has been known.

Indeed.

Not one “conventional” economist predicted the GFC.  Many – like the Rudd Labor team of economic illiterates – were still shrieking about “the inflation genie” in the middle of 2008.  Even though the GFC tsunami had already started to wash over the USA back in the middle of 2007!

The “conventional wisdom” is BS.

Barnaby is right.

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