Bear Market


Here’s a question: Is flipping properties for profit fraud?

February 28, 2013 by · Leave a Comment 

HousingWire executive editor Jacob Gaffney managed to stir up quite a firestorm yesterday in discussing the most recent Bloomberg BusinessWeek housing cover — with an assertion in his own commentary that flipping homes might be considered “fraudulent” activity.

read more

Read more….

Why China’s Economy is Flashing Red

February 28, 2013 by · Leave a Comment 

The Daily Reckoning

There’s a bit of friendly biffo going on in the office over China’s economy. We think the country has deep structural problems, is horribly unbalanced and is about to suffer an almighty credit-induced hangover. For Australia, the fallout won’t be pretty.

My mate Alex Cowie, editor of Diggers and Drillers, thinks otherwise. In Money Morning earlier this week, he made a very bullish (if somewhat flimsy, IMO!) case for China. To paraphrase, he reckons ‘even if the bears make some valid points, the government will be able to kick the can down the road and keep the whole urbanisation thing going for years to come’.

We think this is dangerously complacent, although complacency is all the rage as we head into autumn 2013. It’s a similar kind of complacency shown by our venerable Reserve Bank – although at least Alex is trying to make money for his readers, rather than central banks that are trying to destroy money.

Never one to incite fear about China or look into the source of its incredible growth (credit), RBA assistant Governor Christopher Kent recent delivered a sanguine speech on China’s economy and its effect on Australia.

Such a blasé attitude might, and probably will, seem sensible in the short term. But we think it’s important to understand the problems brewing in the Chinese economy . They are immense. And the implications for Australia are huge. When China’s credit bubble bursts, so will our housing bubble. It’s been a long time coming. So long in fact that just about everyone has stopped waiting for it. They’re going about their business and buying property again.

Well, we think 2013 will mark the end of the phony war. Forewarned is forearmed.

One of the biggest misconceptions about China’s economy is that it has ‘avoided’ a hard landing. We would argue the opposite. To explain why, let’s go back a few years.

In 2008, as you know, global demand plummeted in the face of the credit crisis. This hit China, a trade exposed economy, very hard. In response the government unveiled a huge fiscal stimulus package and commanded its state-owned banks to lend heavily. The aim was to maintain social harmony, keep the people employed and away from Tiananmen Square, and keep themselves in power.

The policy worked a treat. Chinese economic growth boomed as steel-intensive infrastructure investment became the main growth driver. The explosion of Chinese credit (see chart below) provided an exclamation point on Australia’s long commodity boom. Although it narrowed it too. Only coking coal and iron ore enjoyed the ‘benefits’ of China’s policy desperation.

The 2009-11 credit boom flooded Australia with cash as we sent our coal and iron ore to China. While the rest of the world struggled to recover from the credit crisis, Australia’s economy enjoyed the fastest growth in national income in years, which kept unemployment low and handed us successive pay rises.

Chinese Credit Growth at Extreme Levels

Chinese Credit Growth at Extreme Levels

Source: Forbes.com

It was a genuine resource boom, driven by an explosion of credit in our largest trading partner. But it was a sly boom, in that it occurred while Australia’s credit growth slowed to near all-time lows. It gave rise to the two-speed economy, a rising cost of living, the mining tax (if you could call it that) a weak government beholden to special interest groups, and a political atmosphere that is at its lowest ebb in a long, long time.

In short, it was a massive boom that didn’t really feel like a boom to a large proportion of the population.

By mid-2011, China’s credit boom has revealed an overheating property market, overcapacity in a range of industries, most notably steel, and rising inflation. The economy showed signs of extreme imbalance, where infrastructure investment – or ‘fixed-asset investment’ – accounted for around 50% of economic growth, while consumer spending accounted for just 35%. From a historical perspective, these readings were on the extreme end of the scale.

With these various credit boom ailments beginning to show, the government tried ever so gently to slow the boom by tightening monetary policy. It did this, and by late 2011 and into 2012 the economy began to slow.

Inevitably, the slowing economy came with an increase in social friction. Large scale protests increased as people lost money on falling property prices, or were just outraged by the amount of corruption at the highest levels. The receding tide unveiled the detritus that easy money leaves behind.

The painful process of rebalancing wasn’t much fun for China’s leaders. They didn’t really have the stomach for it, not in a change-of-leadership year. They did attempt to rein in lending, and cracked down on the traditional banking sector. But they stood by while the unregulated shadow banking system provided finance to local governments for another round of property and infrastructure spending. According to a recent Forbes article…


‘Credit Suisse estimates that the so-called shadow banking system now totals Rmb22.8 trillion or 44% of GDP, making it the second largest asset class in China!’

If you look back at the chart above, you can see that total credit outstanding was at an all-time of high of over 190% of nominal GDP by the end of 2012. Following a 50% month-on-month rise in credit growth in January, the ratio will soon approach 200%.

What does such a high ratio really mean? Well, if credit growth grows faster than GDP, the ratio increases, and it’s usually a sign that the growth in credit is unproductive. That is, projects undertaken with the proceeds of credit don’t generate much in the way of economic growth. Hence the ratio of credit (debt) outstanding increases relative to the size of the economy.

A recent article in the Wall Street Journal elaborated on this, citing studies from the Bank for International Settlements and the IMF. Referring to the sharp growth in private debt levels, it said:


‘On the most important measures of this rate, China is now in the flashing-red zone. The first measure comes from the Bank of International Settlements, which found that if private debt as a share of GDP accelerates to a level 6% higher than its trend over the previous decade, the acceleration is an early warning of serious financial distress. In China, private debt as a share of GDP is now 12% above its previous trend, and above the peak levels seen before credit crises hit Japan in 1989, Korea in 1997, the U.S. in 2007 and Spain in 2008.

‘The second measure comes from the International Monetary Fund, which found that if private credit grows faster than the economy for three to five years, the increasing ratio of private credit to GDP usually signals financial distress. In China, private credit has been growing much faster than the economy since 2008, and the ratio of private credit to GDP has risen by 50 percentage points to 180%, an increase similar to what the U.S. and Japan witnessed before their most recent financial woes.’

The ratio is probably closer to 200% now. As we wrote to subscribers of Sound Money. Sound Investments this week,


‘Total Chinese credit grew by US$400 billion in January alone. That’s 4.8% of the size of its economy…in one month. Annualised, it represents credit growth equivalent to nearly 60% of GDP. If you can show me any economy in the world that has had such massive credit growth relative to the size of its economy and escaped without a crisis, let me know.

‘It’s only one month, I know. But it’s the crescendo of a credit-driven policy to support economic growth at all costs. And it’s bound to end badly.’

Correction: it WILL end badly.

That doesn’t mean a China bust is imminent. But based on historical precedents, it does tell you that trouble lies ahead.

It should also make it clear that China’s economy hasn’t avoided a hard landing. It has increased the probability of one by doubling up on its credit induced growth path.

Clearly, some people don’t want to come to terms with China’s growth policy. Christopher Kent of the RBA called his mid-February speech ‘Reflections on China and Mining Investment in Australia’. Having read through it, we couldn’t find much reflection at all. There was absolutely no mention of China’s credit boom as being responsible for Australia’s mining boom. We find this astounding…it is similar to the Fed making no mention of the rapid growth in credit (and expansion of the shadow banking sector) in the lead-up to the US housing bust in 2007.

China’s credit boom and Australia’s mining boom go hand-in-hand. When the credit boom ends, the flow-on effects for Australia will be huge.

Regards,

Regards,
Greg Canavan
for The Daily Reckoning Australia

Join me on Google+

From the Archives…

High Tide on Main Street?
22-02-13 – Bill Bonner

The Fed’s Funny Money is Losing its Mojo
21-02-13 – Dan Denning

Resurrecting BHP, the ‘Big Australian’
20-02-13 – Dan Denning

End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
18-02-13 – Chris Mayer

Similar Posts:

More articles from The Daily Reckoning….

Nothing Beats Government When it Comes to Zombies

February 28, 2013 by · Leave a Comment 

The Daily Reckoning

Ben Bernanke spoke out on Tuesday, leaving no doubt where he stands on the QE issue. To print or not to print? He hardly seemed to think about it. Instead, he announced himself four-square in favour. If there is to be any prudence or propriety at America’s central bank, it won’t be on his watch!

This seemed to put some starch into investors’ nerves. After a big sell-off on Monday…and a bounce on Tuesday…they went back into the markets yesterday with a single-minded command: ‘Buy!’

Does that mean you should buy too? Nah…too risky. You don’t make money by buying expensive things with hidden risks. You make money by buying cheap things with the risks right out in the open.

Wait until US stocks are down below eight times earnings…with dividend yields over 5%. Then, we’ll talk…

In the meantime…a real-life close encounter with zombiedom.

You remember our definition of a zombie: someone who takes but doesn’t give? A zombie is a parasite who lives on someone else’s hard work.

By this definition – albeit grosso modo – many people are zombies…even some who don’t realise it. If a man makes a lot of money and gives it to his children, he risks turning them into zombies. They take. They don’t give.

In a private business, or – more likely – in a private charity, you’ll probably find zombies hiding everywhere, even in the boardroom. Some spend their careers in the corporate bureaucracy…not really helping the enterprise or the purpose for which it was intended. A few even gum up the works with pettifogging aggravations.

Whole industries, too, can be zombiefied. Many law firms, for example, are zombie-enablers; they make their money by encouraging people to become zombies. The lawyers may work hard at their jobs. But they contribute to the spread of parasitism, taking wealth from those who earned it, not creating new wealth.

In Baltimore recently, the Cochrane Firm, founded by legendary Johnnie Cochrane, who defended OJ Simpson on murder charges, called a meeting. It was designed to bring together potential plaintiffs.

Background: A doctor recently committed suicide after it was revealed that he had videotaped women undergoing gynaecological examines. Nothing has been reported suggesting that he did anything improper with the videotapes. As far as we know, no one’s privacy or dignity was compromised.

But the Cochrane lawyers are readying a class action suit…sure that they can get the very well-endowed Johns Hopkins hospital to come up with money.

But when it comes to zombies, nothing beats government. The feds have the power to force people to do things they would rather not do…notably, support bloodsucking zombies.

So, when the elite landowners of Anne Arundel County, Maryland, got together with the environmental protectors and enlisted the power of government…you could be sure that money was going to change hands. In the event, some of it came to your humble zombie-fighting editor.

You see, the idea was elegant. Subtle. And very profitable for those who understood what was going on. The landowners – often from old farm families – wanted to hold onto their land. But the cost of holding it was rising. As more and more people built houses in the area, land prices rose.

In 1950, the price of an acre of farmland might have been $100. By 1980, it was $10,000…and far more, depending on zoning, public utilities and so forth. A landowner in 1950 paid a modest amount in property taxes and foregone income to hold land. By 1980, the cost was huge. A 100-acre farm might be worth $1m. He’d pay property taxes. And he’d give up the income and capital gains on $1m of capital.

Meanwhile, many preservationists and environmentalists wanted the farmland to stay farmland. So, they got together – the (rich) landowners with more than 100 acres…and the preservationists.

They got the county to buy the development rights from the large landowners. They took tax money from people with small lots, condos and modest suburban houses…and transferred it to people with large tracts of lands. This reduced the value of the large tracts (they were no longer available for housing developments).

It put money in the landowners’ pockets. It also reduced their property taxes. And it otherwise left them with almost exactly what they had before. The preservationists got to hold back the future. The politicians got to hand out more favours. And landowners got to eat their cake and have it too. Everyone came out ahead – except for the poor taxpayers, but who cares about them?

Your editor was a beneficiary. He sold his development rights (he never had any ambition to build houses on his farm). If we recall correctly, we got a cheque for about $250,000 – which was big money 30 years ago. We used it to build our house.

Plus, we retained the right to build one house on our land for each of our six children. So, if we really wanted to develop the land…we still could, albeit in a low-density way, making nonsense of the whole programme.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

High Tide on Main Street?
22-02-13 – Bill Bonner

The Fed’s Funny Money is Losing its Mojo
21-02-13 – Dan Denning

Resurrecting BHP, the ‘Big Australian’
20-02-13 – Dan Denning

End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
18-02-13 – Chris Mayer

Similar Posts:

More articles from The Daily Reckoning….

Bernanke-Savant Syndrome

February 28, 2013 by · Leave a Comment 

The Daily Reckoning

Stocks are on the rise. Gold is on the rise. Bitcoin is on the rise. Everything is up…up…and, away!

The Dow has been on a tear this week, up 300+ points since Tuesday’s low. What’s causing the rally? Is the economy fixed? Have Bernanke’s magic money elixirs finally done their job? Or is collective delusion on the march once again?

Hmm…it’s hard for us mere mortals to tell. Of course, that’s a qualification that doesn’t apply to the world’s most powerful central banker. Ben Shalom Bernanke has been in the press all week, telling the world that the ‘benefits’ of his policies outweigh the ‘costs and risks’…at least as they are ‘measured’ at this exact moment.

Of course, we’ll never know the real costs or risks of the Fed Head’s ceaseless Bernaniggans. On the face of it, however, Reckoners are well aware that the Fed has been anything but shy when it comes to intervening in the markets.

And what an intervention story it has been! Along the way, we’ve learned terms like ‘quantitative easing‘, ‘ZIRP’ and ‘Operation Twist’, all parts of the Fed’s open-ended, try-anything-once effort to ‘support the capital markets’.

Boy oh boy. It must really be something to be that smart. Mr. Bernanke says he knows exactly how much ‘additional liquidity’ the market needs, and exactly how and when to deliver it.

He knew last September, for example, that the market needed to be relieved of precisely $40 billion worth of mortgage debt per month. And in December, he knew that the asset purchasing program needed to be expanded to $85 billion per month. Exactly $85 billion.

Most of us don’t have the time, nor inclination, to even count to 85 billion, much less realise that’s the precise number of dollars’ worth of ‘assets’ the Fed ought to buy every month. But Mr. Bernanke has it all figured out. It’s not $79 billion…nor is it $85 billion and ten cents.

Amazingly, Bernanke also knows exactly when to begin unwinding his various programs: when the unemployment rate falls below 6.5% (not 6.6% or 6.4%) and inflation projections remain no more than half a percentage point above 2% two years out.

Really, what could possible go wrong?

If Bernanke is right – and he’s pretty sure he is – he has outwitted the greatest minds of history. He has understood, in some kind of zen-like moment of clarity, no doubt, what no other man has ever been able to comprehend.

Was it an epiphany, we wonder? Did he have some line of communication with the gods? Was he visited late one night, perhaps while toiling studiously over his modern economics theory books, by an archangel?

Whence came The Bernank’s omnipotence? When did this one man become, by way of some heavenly transfer of knowledge, Mr. Market incarnate?

Never mind all that. It’s not important how it all came about, only that, at least according to the generally accepted narrative of our time, it did come about. So you see, Fellow Reckoners. There’s no need to worry. Command Central will take it from here. As to exactly where they’ll take it…well, the world will find out soon enough.

Regards,

Joel Bowman
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

High Tide on Main Street?
22-02-13 – Bill Bonner

The Fed’s Funny Money is Losing its Mojo
21-02-13 – Dan Denning

Resurrecting BHP, the ‘Big Australian’
20-02-13 – Dan Denning

End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
18-02-13 – Chris Mayer

Similar Posts:

More articles from The Daily Reckoning….

What I really think about the FHA

February 28, 2013 by · Leave a Comment 

As Chris Whalen is a friend, I won’t dwell on his misrepresentations of facts such as stating I have criticized increased GSE fees (I have not) or I haven’t criticized the National Association of Realtors (I have) or his odd assertion that “the FHA is really doing a pretty decent job.”

 

 

Premium Content

Premium content on HousingWire.com is limited to our paid subscribers.

If you’re already a subscriber, please login to your account, or subscribe today to access this item.

 

read more

Read more….

Iron Ore Holdings, Mineral Resources to develop Iron Valley project

February 28, 2013 by · Leave a Comment 

Australia’s Iron Ore Holdings and Mineral Resources have signed a $150 million to develop the Iron Valley project in Pilbara, Western Australia.

Read more….

MZI Resources posts 60% resource rise at Keysbrook project

February 28, 2013 by · Leave a Comment 

Australian mineral sands company MZI Resources has posted a 60% increase in resources at its Keysbrook project in Western Australia, registering 78.9 million tonnes.

Read more….

Deals this week: Western Pacific, Lara Exploration and more

February 28, 2013 by · Leave a Comment 

Resource company Western Pacific signed an agreement to acquire the Deer Trail Mine in Piute County, Central Utah from the Deer Trail Mining Company, a subsidiary of Unico for $7m to be paid over two and a half years.

Read more….

China January Agri imports weak Corn Wheat m m imports exception

February 28, 2013 by · Leave a Comment 

China and rsquo;s coffee imports pulled back markedly from the previous month and rsquo;s surge. January 2013 imports came in at 4.8Kt compared to 15.1Kt in the previous month which was a record high.

Read more….

MCX Crude Oil sideways to bullish resistance at 5050

February 28, 2013 by · Leave a Comment 

and ldquo;Intra-day traders are advise to use buy on dips strategy for day. One can enter into buying near 5020 with stop loss of 4980 for target near 5080, and rdquo; said Amrita Mashar, Research Analyst, Commodity Online.

Read more….

Next Page »

Bear Market