<blockquote>'Put simply, current market conditions are associated with small potential returns and enormous latent risks across nearly every asset class. The combination of extreme valuations, weak prospective returns, and emerging risk-aversion suggests that market losses could unfold abruptly, creating an interconnected Rube Goldberg chain of consequences because of the steep leverage that investors and corporations have taken on in recent years. The image that comes to mind is that of speculators scrounging around on their hands and knees to pull a few pennies from the catch of a mousetrap whose hammer is tied to the lid of a box of angry bees and a switch that drops an anvil. Even if there are rewards in the short-run, the situation isn’t likely to end well.'
- John P. Hussman,
Ph.D., Overvaluation, Deteriorating Market Action, and Coordinated Exit, October 10, 2016</blockquote>
'As we closely monitor the Chinese Credit Bubble over the coming weeks and months, let’s be mindful of the central role China has come to play in the greatest global Bubble the world has ever experienced. There is tremendous uncertainty as to how this will play out.'<blockquote>'There is great instability in China, masked by historic Credit expansion. It’s important to appreciate that China is new to this Capitalism thing. They’re completely inexperienced when it comes to mortgage finance Bubbles – and that goes for apartment owners, bankers and regulators. They are novices with massive corporate debt booms. They are newcomers in the face of a $30 TN banking system. They have outdone even the U.S. in mismanaging “shadow banking.” The Chinese have followed the “developed world” lead in repo, derivatives and “sophisticated” structured finance.
Years of exceptionally loose finance have surely nurtured unprecedented amounts of fraud and malfeasance – not the recipe for a sound financial system. Worse yet, they grabbed the Credit Bubble baton at the worst possible time – the conclusion of a historic global Credit Bubble, with all the associated economic, financial, social and geopolitical risks. Chinese rulers saw their juggernaut economy as ensuring global power and prestige. Things – at home and abroad – are developing much differently than they had anticipated.
New realities were discussed in a Friday FT article, “China Rethinks Developing World Largesse as Deals Sour.” With clients such Venezuela, Zimbabwe and Sudan, China developed into the world’s subprime lender. Form the FT: “Six of the top 10 recipients of Chinese development finance commitments between 2013 and 2015 were classified alongside Venezuela in the highest category of default risk ranked by the… OECD.”
October 13 – Financial Times: “When China signed up to build Venezuela’s Tinaco-Anaco Railway in 2009, the scheme was hailed as proof of the effectiveness of socialist brotherhood. Gleaming new Chinese trains were envisaged, whisking passengers and cargo along at 137mph on about 300 miles of track. Hugo Chávez, the late Venezuelan president, called the $800m project ‘socialism on rails’ and said the air-conditioned carriages would be available to everyone, rich or poor. But the endeavour has become what locals call a ‘red elephant’, the vandalised and abandoned symbol of Venezuela’s deepening economic crisis… For China, the project represents more than just an isolated example of a dream turned to dust. Over the past decade, the country has transformed itself from a marginal presence to the dominant player in international development finance with a loan portfolio larger than all six western-backed multilateral organisations put together. Outstanding loans from the two big Chinese ‘policy’ banks and 13 regional funds are well in excess of the $700bn owed to the western-backed institutions…”
As we closely monitor the Chinese Credit Bubble over the coming weeks and months, let’s be mindful of the central role China has come to play in the greatest global Bubble the world has ever experienced. There is tremendous uncertainty as to how this will play out.
As I’ve argued in the past, China is one enormous EM Credit system and economy. EM Credit Bubbles notoriously end with a destabilizing “hot money” exodus. A crashing currency then limits the central banks ability to reflate, and the whole thing turns sour.
In contrast, Beijing has orchestrated this strange dynamic of aggressive “money” and Credit inflation, while significantly restricting the capacity for this liquidity to exit the Bubble. Might this have only created a wall of “hot money” to be let loose once the dam breaks? How much leverage has accumulated with money borrowed cheap overseas to speculate in higher yielding Chinese securities and financial instruments? Lots of questions and few answers. I’m not so sure Chinese policymakers have the answers either. They just recognize they have a major problem. We all share the problem.'
- Doug Noland,
The Perils of a Resurgent China Credit Boom, October 15, 2016</blockquote>
Context<blockquote>
'Deutsche Bank is a potential catalyst for the bursting of the global Bubble .. with global central bankers, lost their minds, with massive QE and negative rates..''..China .. is emerging as the epicentre of risk..''..German policy to grow the surplus further is outrageous .. the consequences for Germany (and China and Japan) would be devastating.'</blockquote>