Wednesday, November 6, 2013
China
Excellent article in today's Torygraph by our old friend Ambrose Evans-Pritchard on the China theme - http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10431582/Chinas-Communists-want-unattainable-goal-of-affluence-without-freedom.html - executive summary: it's all going to end in tears. Only surprise is he doesn't somehow conclude it's all the fault of the Euro.
Sunday, November 3, 2013
Asian Financial Crisis, take 2 - A sense of deja vu
In the early 90s interest rates in the West were slashed - particularly in the US where rates fell to 3% in 1992 from as high as 8-9% in the late 80s. This was partly in repsonse to a housing bubble bursting and also in resonse to the Savings and Loan crisis in which many US Savings and Loan companies (basically a building society) went bust.
This dramatic drop in rates led to Asian borrowers overborrowing in what now appeared to be "cheap" US dollars. When US interest rates started to rise, and the currency went up with them, many of theses borrowers found themselves unable to pay the interest on their now expensive US dollar borrowings. Some of these borrowers were sovereigns, some major financials, some major corporates. The result was a spike in defaluts and ultimately the Asian Financial Crisis in the late 90s.
Fast forward 15 years or so and everywhere I look I see Asian borrowers issuing US$ denominated debt. My inbox is full of new issue offerings from a bewilbering array of names, many of which I've never heard of before. Lots are unrated, and trade on implicit support from governments (especially China, Singapore and Malaysia), los are property developers of one form or another. None of them are worth touching with a bargepole.
In the private sector, household debt levels have jumped in Singapore, Malaysia, Thailand and China in particular - again often fuelling property speculation
When US rates go up, and liquidity flows out of Asia back to the States, a lot of these companies and individuals will find themselves high and dry. And so many are property developers that a small fall in property values and demand could cause a snowball effect of failing developers and defaulted debt. They are all on the same side of the trade, and have no obvious protection. It may not be exactly the same as the US RMBS and sub-prime debacle, but it could easily end up the same way - a lot of borrowers, borrowing money they can't really afford, but they can manage as long as property prices keep going up. When that circle stops, and the developers are left with unsold inventory or forced to sell at a loss, then the game will be up.
It could be 2 years, 5 years, 10 years or tomorrow - it's a confidence game and who knows when the emperors new clothes will be pointed out for all to see - but it will come. Asia seems destined to repeat the mistakes of the past, only this time on a much bigger scale and with much bigger global ramifications.
This dramatic drop in rates led to Asian borrowers overborrowing in what now appeared to be "cheap" US dollars. When US interest rates started to rise, and the currency went up with them, many of theses borrowers found themselves unable to pay the interest on their now expensive US dollar borrowings. Some of these borrowers were sovereigns, some major financials, some major corporates. The result was a spike in defaluts and ultimately the Asian Financial Crisis in the late 90s.
Fast forward 15 years or so and everywhere I look I see Asian borrowers issuing US$ denominated debt. My inbox is full of new issue offerings from a bewilbering array of names, many of which I've never heard of before. Lots are unrated, and trade on implicit support from governments (especially China, Singapore and Malaysia), los are property developers of one form or another. None of them are worth touching with a bargepole.
In the private sector, household debt levels have jumped in Singapore, Malaysia, Thailand and China in particular - again often fuelling property speculation
When US rates go up, and liquidity flows out of Asia back to the States, a lot of these companies and individuals will find themselves high and dry. And so many are property developers that a small fall in property values and demand could cause a snowball effect of failing developers and defaulted debt. They are all on the same side of the trade, and have no obvious protection. It may not be exactly the same as the US RMBS and sub-prime debacle, but it could easily end up the same way - a lot of borrowers, borrowing money they can't really afford, but they can manage as long as property prices keep going up. When that circle stops, and the developers are left with unsold inventory or forced to sell at a loss, then the game will be up.
It could be 2 years, 5 years, 10 years or tomorrow - it's a confidence game and who knows when the emperors new clothes will be pointed out for all to see - but it will come. Asia seems destined to repeat the mistakes of the past, only this time on a much bigger scale and with much bigger global ramifications.
Friday, November 1, 2013
China
Headline in the FT - China manufacturing data surges to strongest reading in 18 months.
And now supposedly Chinamis storming ahead. Really? The ever growing number of ships parked off the East Coast here in Singapore tells me otherwise.
Official China data isn't worth the paper it's printed on. They're trying to pretend all is well when it patently isn't.
I believe the Chinese economy is a huge Ponzi scheme relying on sucker westerners pouring in capital at the bottom. Once the west stops pouring the cash in as it finds cheaper places to make its cheap plastic rubbish (SE Asia, Africa, Bangladesh etc) the Chinese economy is going to be in real trouble.
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