22/10/2013: Keiser Report this week

Latest Keiser Report (E513) show with Stacy Herbert: Irish Bailout 'Exit', Greek Bailout 3.0, UK's China Model and the End of Pax Americana... with my contributions... http://www.youtube.com/watch?v=E20ycoQMEpY&feature=youtu.be

Any source

28/8/2013: Some charts on China's debt addiction (via FT)

China has been the 'Big Asian Hope' when it comes to global growth and more recently, the 'Big Asian Worry'. The problem, however, is that China is not unique. Like the rest of the world, China is incapable of delivering growth at the rates below the rate of expansion of debt. Leveraging seems to be the worldwide story when it comes to growth generation, as if the entire global economy is populated by compulsive gambler-states...

FT has a fascinating set of slides on China's debt-growth links: http://www.ft.com/intl/cms/s/0/e76db82e-0a4d-11e3-aeab-00144feabdc0.html#slide0

And here are my two favourites:

Chart above clearly shows that China is in a league of its own when it comes to debt vs GDP per capita. If anything, the healthy due of countries by these metrics are Russia and Mexico (note South Korea, in my opinion, does not belong with Emerging Markets - it is an advanced economy). India is a sick economy, compared to the rest. But China... well, China is on its own.

Worse, however, as the chart below shows, China's mountain of debt is now shifting out of the banking sector and into the least transparent and trust loans markets:

Now, trust loans are debt that has been dressed up as 'investment product' and sold onto retail investors. This debt is funded usually by banks and/or investors. Back in 2010 these were problematic already, but arguably manageable. Since then they have shot up in importance. Trust loans are short-term finance, with maturities of few months and up to a year, implying high risk of exposure to liquidity shocks and interest rates shocks. They are also expensive. Roll over risk is rising in the Chinese economy.

FT had additional coverage on these back in 2010 here: http://ftalphaville.ft.com/2010/07/15/286766/chinas-trust-factor/

All of the above speaks of severe debt addiction in the Chinese economy. 

Any source

China's Astonishingly Bizarre Land Development Finance System

One thing casual observers of China's real estate markets always try to say is that there is comparatively little leverage in the system, which means that any decline in prices is borne principally by the holders of the property and there are not ripple effects through the rest of the system. This is similar to how declines in stock prices tend to have very little collateral damage since they are very nearly entirely bought without leverage. Sure there is up to 2% of stock bought on margin in periods of excess, but compared to real estate markets, it's modest. That's why the stock market could shed $7 trillion in value during the 2000-2002 bear market and the broader economy felt very few ill effects from it. However, a similar decline in the value of residential real estate nearly destroyed the global financial system.

In China, however, it is simply not true that all real estate transactions are financed with equity. Indeed, a great deal of development is done by local governments, who engage in a program not entirely dissimilar from Tax Incremental Financing (TIF) in this country, where they borrow to develop certain properties and hope that they eventually pay for themselves (that's a very quick and dirty version of it). However, their practices are far sloppier than TIF districts in this country, and that's disheartening since a good number of TIF districts have run into trouble as well. Needless to say, in both cases, if the development stops, these financing deals run into serious serious trouble.

However, unlike TIF, properties are not valued according to fair market value, but in many cases in appears that local governments can just simply say what they're worth and use those amounts as collateral. This would be similar to if a financially troubled TIF district could hire an assessor to say that a $5 million hotel was really worth $57 million and collect the corresponding taxes on it. Fortunately, we have many safeguards in our system of property assessment and property taxation that prevent that from happening, including appeals and state oversight of local governments. China does not have much of a system of property taxation (though that is starting to change), and hence no good comprehensive system of property assessment.

Here are a couple of stories to chew on:

http://www.reuters.com/article/2011/07/14/markets-ratings-china-idUSL3E7IE0F520110714

http://www.bloomberg.com/news/2011-06-27/china-audit-office-warns-of-risk-on-1-7-trillion-of-local-government-debt.htmlAny source

Does China's First Quarter Trade Deficit Mean Anything?

http://www.marketwatch.com/story/china-hits-first-quarterly-trade-deficit-since-04-2011-04-10

The short answer here is that it is too soon to tell. You'll notice that it was the first trade deficit since 2004, which was when China's trade surpluses really began to take off, reaching stratospheric levels in 2007 and 2008. China's first quarter trade numbers are always a little weird due to the strong seasonal effects of the Chinese New Year, but most of all the problem is likely tied to the deteriorating terms of trade that China faces due to skyrocketing commodity prices while consumer and industrial demand for Chinese products elsewhere in the world isn't growing that fast.

As to whether even a persistent trade deficit would mean anything for China, that's not clear either. Trade deficits can be problematic for countries with fixed currencies, but we are a long way off from a point of a balance of payments crisis in China. As a matter of fact, we are so far off from that that I feel bad for even including those words in the same sentence.

China's more serious problem has to do with its very sick real estate markets that are flooded with too much liquidity, too much supply, and prices that don't reflect reality.Any source

Trade war brewing for China & US?

You might have noticed some headlines over the weekend about protectionist back-and-forth between China and the US.

Specifically, the issue at hand centered on US tariffs imposed on Chinese steel goods and a resulting Chinese probe into US car imports. Of course, this is just the latest chapter in a growing list of Sino-US trade disputes.

However, Monday's news that a US trade panel has rejected an investigation into imports of Chinese steel fasteners may go some way to smoothing over latest tensions.

The timing of this trade debate is especially noteworthy as US President Barack Obama is scheduled to make his first trip to Asia next week, with stops in Beijing and Shanghai.

In the meantime, let's take a look at this post, "Is There a Trade War Between China and the US?", from Jim Gobetz (aka Aiki14) which examines trade practices between China and the US from both sides. Any source

Zhao Ziyang: the guy behind the guy

Very interesting article from this weekend's Financial Times about Zhao Ziyang, the Communist Party official who may have been the impetus for some of the major economic reforms credited to China's Paramount leader Deng Xiaoping.

Excerpt from, "Beijing fails to silence voice from the grave":

"When former Chinese Communist party boss Zhao Ziyang died four years ago, the only news published in China was a two-line statement on Xinhua, the state news agency.

The Beijing authorities were afraid the death of the leader ousted for opposing the violent crushing of demonstrators in 1989 would re-open debate about the Tiananmen killings.

Mr Zhao has not been easy to silence, however. Just weeks before the 20th anniversary of the crackdown, his secret memoirs are about to be published, based on 20 tape recordings that friends and associates managed to smuggle out of the country.

An extremely rare first-hand account of elite Chinese politics, Prisoner of the State argues that the decision to impose martial law in May 1989 was illegal and the violent suppression of the protests was a "tragedy".

It also casts light on Deng Xiaoping, the former paramount leader, suggesting it was Mr Zhao who was the real instigator of many of the country's economic reforms and that Mr Deng was a fervent supporter of one-party dictatorship..."

I was scanning the paper when I saw this article, and ended up reading the full piece. Maybe you will find it to be a worthwhile read as well. Enjoy!Any source

You are being lied to about pirates

Probably one of the most interesting articles I've seen in the past 24 hours, although this commentary originally appeared on January 5. Given all the news we've seen about pirates this past week, I thought this was rather timely.

From The Independent's Johann Hari, "You are being lied to about pirates", makes the case that while "some are clearly just gangsters", many Somali pirates are simply members of a failed state who are trying to survive and protect their waters from toxic waste dumping and illegal fishing trawlers.

Here's an excerpt from the lead-in:

"Who imagined that in 2009, the world's governments would be declaring a new War on Pirates? As you read this, the British Royal Navy – backed by the ships of more than two dozen nations, from the US to China – is sailing into Somalian waters to take on men we still picture as parrot-on-the-shoulder pantomime villains. They will soon be fighting Somalian ships and even chasing the pirates onto land, into one of the most broken countries on earth. But behind the arrr-me-hearties oddness of this tale, there is an untold scandal. The people our governments are labelling as "one of the great menaces of our times" have an extraordinary story to tell – and some justice on their side.

Pirates have never been quite who we think they are. In the "golden age of piracy" – from 1650 to 1730 – the idea of the pirate as the senseless, savage Bluebeard that lingers today was created by the British government in a great propaganda heave. Many ordinary people believed it was false: pirates were often saved from the gallows by supportive crowds. Why? What did they see that we can't? In his book Villains Of All Nations, the historian Marcus Rediker pores through the evidence..."

Judging from the comments on this editorial, I'd say the author has stirred up quite a debate over the assertion that pirates have been, historically and presently, unjustly villified.

What do you say? Is there enough evidence to support either side's argument (pirates as villians vs. egalitarian thieves/survivors) in this this debate, or is the bulk of what we've heard about pirates just a total fantasy? Any source