'August 13 - Bloomberg (Yalman Onaran): "In 1988, 9 of the 10 largest banks in the world were Japanese. Three years later the country's financial system, along with its lenders, collapsed, sending Japan into its infamous lost decade (or three, considering the country is still struggling to escape deflation and low growth). The nine Japanese companies in the top ranks by assets 30 years ago have since consolidated into four successors. Only one turns up in this year's ranking. By 2007 all of the top 10 slots were filled by U.S. and European lenders. A year later the subprime mortgage meltdown hit the U.S. The sovereign debt crisis followed in Europe. Four of the 10 had to be bailed out by their respective governments… U.S. and European economies, like Japan's, have contended for most of the past decade with low growth. It's 2018, and the rankings teem with Asian banks again. This time the top four by assets are Chinese."
..
August 17 - Bloomberg: "China's government bonds declined as funding costs rebounded amid expectations of rising supply, giving the 10-year yield its biggest two-week advance since December 2016. The yield on notes due in a decade rose four bps to 3.65% Friday, taking its two-week increase to 19 bps… Bond futures also declined… The Ministry of Finance on Tuesday urged local governments to accelerate bond issuance to support economic expansion, spurring speculation that supply will jump in the coming weeks. The overnight repurchase rate surged 76 bps this week, after the People's Bank of China suspended reverse-repurchase operations for 18 days in a row… 'The previous market-supportive factors such as ample liquidity and gloomy economic outlook seem to have waned this week,' said Li Qilin, chief macroeconomic researcher at Lianxun Securities Co."
Beijing faces a huge dilemma. The faltering EM Bubble poses significant risk to the unbalanced Chinese economy. Moreover, global de-risking/deleveraging dynamics exacerbate risk to Chinese finance and the renminbi. The policymaker impulse is to orchestrate another round of fiscal and monetary stimulus. Meanwhile, China's historic mortgage finance and apartment Bubbles maintain powerful momentum. Stimulus measures at this stage of the cycle pose extreme risk. For one, it would surely push non-productive Credit growth to perilous extremes. Second, the combination of additional system liquidity and escalating systemic instability would exacerbate already significant risk of a disorderly Chinese currency devaluation.
That things look "terrible" in China, in contrast to obvious greatness in the U.S., is to provide the Trump administration a decisive trade negotiation advantage. And I can see the perceived benefit of scheduling low-level trade discussions ahead of a big trade meeting with the Chinese after the midterms. A temporary "truce" would be viewed as bolstering U.S. equities and supporting "great again" campaigning into November. I'm not, however, convinced this gambit will reverse the bursting of the EM Bubble. And I don't believe pushing serious negotiations out to November will in anyway resolve China's deteriorating financial and economic positions.
All in all, it was another ominous week for highly unstable global financial markets. Bubbles bursting, Bubbles faltering and Bubbles inflating. Global financial and economic prospects are dimming rapidly. I would be less apprehensive if U.S. equities (and Chinese apartment prices!) were adjusting to new realities. But it's not as if Bubble resilience is without precedent.
The S&P500 peaked on July 20, 1998, just weeks prior to near global financial meltdown. Back on August 25, 1987, the S&P hit a record high about six weeks before the "Black Monday" market crash. And looking back to fateful 1929, the DJIA traded to a record high on September 1st, with the Great Crash erupting the following month. Those that have studied the late-twenties should recognize ominous parallels. How on earth were they so completely blindsided?'
- Doug Noland,
Instability, August 18, 2018
Context'..this extends to corporate bonds, equities and real estate prices. It is a global ‘everything bubble’.''..the long-run negative effects of debt eventually outweigh their short-term positive effects..''..an escalation of the unfolding EM crisis..'