There are many myths and mysteries about China. Many people seem to believe that because it has a state led, largely command economy, and a truckful of reserves the normal rules don't apply there and China can go on growing at 8%+ indefinitely.
Sadly I think this is far from the truth. Asians are as obsessed with house prices and ownership as the Anglo-Saxon world of US, UK, Ireland and Australia
High house prices are viewed as a source of local pride - a benchmark on well a country is doing. In fact just like elsewhere, high house prices create highly indebted, highly leveraged and highly immobile workers, and lingering social discontent as those "on the property ladder" see their theoretical wealth climb, and younger generations have to wait ever longer to be able to buy their own home.
The good news for those younger workers is that Chinese property prices
are now falling. The bad news is this creates the same negative equity and wealth destruction loops as in the US and elsewhere. Chine3se banks are highly leveraged to this market, as well as to dubious loans to many state related entities. This could lead to a dramatic fall in capital levels and so ability lend, for Chinese banks.
If the current gentle falls turn into a rout I would expect there to be some serious issues in China, and many of the China bulls to get their bulls badly burnt.
Thursday, January 19, 2012
France and the rating agencies.
Today France will be looking to sell Eur9.5bn of medium and long term debt. There seems to be some trepidation in markets that they may struggle to sell all, or achieve a decent rate of interest after the ratings downgrade by S&P.
I understand the logic of the concern, but the reality is european banks are sitting on Eur480bn'ish of 3 year money from the ECB and no one really thinks France will default in the near future, so my prediction is it will be a rip roaring success with a high bid to cover ratio as the ECBs QE by stealth works. I would also imagine that the French Tresor will have made a few calls to the major french banks reminding them who bailed them out earlier in the crisis, and calling in a few favours.
The crisis continues, but this will be a silver lining, not a cloud.
I understand the logic of the concern, but the reality is european banks are sitting on Eur480bn'ish of 3 year money from the ECB and no one really thinks France will default in the near future, so my prediction is it will be a rip roaring success with a high bid to cover ratio as the ECBs QE by stealth works. I would also imagine that the French Tresor will have made a few calls to the major french banks reminding them who bailed them out earlier in the crisis, and calling in a few favours.
The crisis continues, but this will be a silver lining, not a cloud.
Monday, January 16, 2012
The answer is simple, but painful
S&P has now downgraded the EFSF to AA+ from AAA. This should not be a shock after the downgrades of France and others last week.
What is a shock, to me at least, is that this is seen as the end of the EFSF as "the big bazooka" to fix all Europe's woes, and markets attentions are now turning to the ESM to fulfil that role.
How stupid are these people? As someone with 20 years on a bank trading floor I can say with conviction the answer is very.
THERE IS NO BIG BAZOOKA. THERE IS NO QUICK FIX.
Europe as a whole is about to go through a period of Thatcherism, except this time it will be called Merkelism.
As with the UK when Thatcher came to power. The problem is too much debt. The solution is to pay off that debt. That takes time. And it hurts. There will be economic stagnation, and people are going to lose their jobs. But the alternative is mass default and economic collapse. Austerity sucks, but it will eventually lead to financial stability and growth. it's going to take 5 to 10 years to get these problems under control.
It's going to hurt. The alternative is far far worse.
Malthus revisited
As if the current economic woes aren't bad enough, overlying the current fiscal disaster in western economies is a demographic catastrophe.
All the world's major economies are experiencing falling birth rates, with many now at the point where their population is either falling (Japan) or would be falling but for immigration (most of the rest of the developed world). An extreme example would be my hometown of Singapore where thre fertility rate now stands a shade over 1. The government is cmpensating by encouraging immigration, as are many other countries.
There are many problems with this.
Most obviously where are all these immigrants going to come from? if the developed world is all looking to import "talent" (as it is known here) then the immigrants have to come from less developed countries. These immigrants are3likely to be less qualified and productive than developed world trained employees simply because they come from less developed countries with poorer education systems.
Secondly it creates a huge brain drain on those less developed countries, as their brightest and best get lured away. Asan example there is a growing expat indian population here in Singapore who are largely well-educated, experienced professionals fed u with the the corruption and squalor of home.
It also creates tensions in their new homeland. Immigrants are likely to have a different culture, different expectations, and a different way of life. This can cause resentment both ways creating future social problems.
Perhaps the politicians are looking at this the wrong way. instead of encouraging immigration to keep populations growing, maybe they should ask themselves why their population isn't growing organically.
Could it be that falling fertility rates are simply an animal-like response to reducing space and increasing confinement? Many animals won't reproduce in captivity. are humans the same? In Singapore the population now stands at a shade over 5million and we are the most densely populated country on earth. We have endless blocks of high rise flats, most of them tiny. about 80% of the population lives in these tiny flats, often with elderly parents in the same flat as a young couple. is it any wonder they don't breed?
Over half the humans who have ever lived are alive today.
Maybe the world is full?
Or maybe, again like many animals, we have experienced a population explosion that is about to go into freefall. Locusts do it. so do lemmings. There are good years (for us improvements in healthcare and farming techniques) that allowed our population to explode, but now we are reaching a point where the resources aren't growing fast enough to sustain our past growth rate, and so crunch is coming. Rising commodity prices globally certainly indicate increasing pressure on what we have.
Perhaps politicians and economists should focus less on absolute GDP and more on GDP per capita. Perhaps Bhutan with it' Gross National Happiness index is the model we should look to for the future.
All the world's major economies are experiencing falling birth rates, with many now at the point where their population is either falling (Japan) or would be falling but for immigration (most of the rest of the developed world). An extreme example would be my hometown of Singapore where thre fertility rate now stands a shade over 1. The government is cmpensating by encouraging immigration, as are many other countries.
There are many problems with this.
Most obviously where are all these immigrants going to come from? if the developed world is all looking to import "talent" (as it is known here) then the immigrants have to come from less developed countries. These immigrants are3likely to be less qualified and productive than developed world trained employees simply because they come from less developed countries with poorer education systems.
Secondly it creates a huge brain drain on those less developed countries, as their brightest and best get lured away. Asan example there is a growing expat indian population here in Singapore who are largely well-educated, experienced professionals fed u with the the corruption and squalor of home.
It also creates tensions in their new homeland. Immigrants are likely to have a different culture, different expectations, and a different way of life. This can cause resentment both ways creating future social problems.
Perhaps the politicians are looking at this the wrong way. instead of encouraging immigration to keep populations growing, maybe they should ask themselves why their population isn't growing organically.
Could it be that falling fertility rates are simply an animal-like response to reducing space and increasing confinement? Many animals won't reproduce in captivity. are humans the same? In Singapore the population now stands at a shade over 5million and we are the most densely populated country on earth. We have endless blocks of high rise flats, most of them tiny. about 80% of the population lives in these tiny flats, often with elderly parents in the same flat as a young couple. is it any wonder they don't breed?
Over half the humans who have ever lived are alive today.
Maybe the world is full?
Or maybe, again like many animals, we have experienced a population explosion that is about to go into freefall. Locusts do it. so do lemmings. There are good years (for us improvements in healthcare and farming techniques) that allowed our population to explode, but now we are reaching a point where the resources aren't growing fast enough to sustain our past growth rate, and so crunch is coming. Rising commodity prices globally certainly indicate increasing pressure on what we have.
Perhaps politicians and economists should focus less on absolute GDP and more on GDP per capita. Perhaps Bhutan with it' Gross National Happiness index is the model we should look to for the future.
Thursday, December 22, 2011
Repeat ad nauseam
The last week or 2 have become so repetitive that there's little new to cement on, but some elements of Europe's gran plan are becoming clear.
The ECB will never directly lend to governments by buying their bonds in the primary market.
They will however continue to "stabilize" the market by buying on dips in secondary.
They will also led indirectly through Europe's banks via the new 3 year lending facility. This allows banks to lock in cheap funds and use them to buy government bonds, earning a handsome spread at the same time. This funds governments and allows banks a nice fat profit with minimal capital use to effectively rebuild their balance sheets.
As long a the sovereign bonds in question don't default first of course.
And therein lies the rub.
Personally I think the plan will work but it will take time. That is always going to be a problem when facing a hyperactive and hypernervous bond market, but it's time supposed market professionals for their heads round the fact that there is no quick fix to this. It's going to take a long time to fix both the banks and the governments.
3 years ago governments bailed out banks. Now it's time for banks to return the favour.
Happy Christmas
The ECB will never directly lend to governments by buying their bonds in the primary market.
They will however continue to "stabilize" the market by buying on dips in secondary.
They will also led indirectly through Europe's banks via the new 3 year lending facility. This allows banks to lock in cheap funds and use them to buy government bonds, earning a handsome spread at the same time. This funds governments and allows banks a nice fat profit with minimal capital use to effectively rebuild their balance sheets.
As long a the sovereign bonds in question don't default first of course.
And therein lies the rub.
Personally I think the plan will work but it will take time. That is always going to be a problem when facing a hyperactive and hypernervous bond market, but it's time supposed market professionals for their heads round the fact that there is no quick fix to this. It's going to take a long time to fix both the banks and the governments.
3 years ago governments bailed out banks. Now it's time for banks to return the favour.
Happy Christmas
Sunday, December 11, 2011
More imperfect evidence
I can't help but notice that the airwaves here in Singapore are suddenly full of adverts by car companies with offers of free insurance, free tax and free petrol.
To top it off, COE peices are falling for those not in Singapore, COE stands for certificate of entitlement. This is a 10year permit that allows you to put a car on the road. Here in Singapore cars are rationed strictly, and buyers of new vehicles have to buy a COE before they can put their new car on the road. COEs are sold twice a month on an auction basis, and so are a pretty good indicator of immediate economic health and confidence. And prices are falling, admittedly only from 75k to 72k, but only a month or 2 ago people were talking 100k. I have a theory that COE prices are only still so high because car importers are registering their cars and then struggling to flog them.
Singapore is calming down, and Singapore is the canary in the Asian coalmine. If Singapore goes into reverse then Asia is in trouble.
To top it off, COE peices are falling for those not in Singapore, COE stands for certificate of entitlement. This is a 10year permit that allows you to put a car on the road. Here in Singapore cars are rationed strictly, and buyers of new vehicles have to buy a COE before they can put their new car on the road. COEs are sold twice a month on an auction basis, and so are a pretty good indicator of immediate economic health and confidence. And prices are falling, admittedly only from 75k to 72k, but only a month or 2 ago people were talking 100k. I have a theory that COE prices are only still so high because car importers are registering their cars and then struggling to flog them.
Singapore is calming down, and Singapore is the canary in the Asian coalmine. If Singapore goes into reverse then Asia is in trouble.
Dont mention the war
It's 1939 again. Britain stands alone against the forces of Europe, marshalled by Germany. Except this time both Germany and Britain are right. Ish.
Germany are right to refuse the idea of "Eurobonds" and Britain are right to stand against the move to federalism.
Eurobonds make no sense without at the very least fiscal federalism first. Why would any country agree to underwrite issuance by another country without control over that country's spending and borrowing? A moments thought reveals that to be self evident. Without that what is to stop governments going on reckless spending sprees off the back of northern European fiscal prudence?
And Britain is right to veto the idea of being tied into the same fiscal system as the Eurozone members. Britain's biggest asset right now is sovereign control over its own currency, budget and economy. Giving that up without getting something in return makes no sense.
There is a lot of talk about a "two speed Europe" now that Britain has exercised its veto.
I think that is right, but not in the way Europeans are portraying it. The beneficiaries are the Plucky Brits. A flexible labour market, a flexible economy, continuing membership of the European Union with its attendant free trade zone, strong ties to the slowly recovering US economy, a government that got on top of its debt problems early, a very low refinancing need due to the long average maturity of UK government debt, and lastly control over its own currency mean the UK is likely to recover sooner and faster than a Eurozone which is only now facing up to its problems, and then reluctantly.
Germany are right to refuse the idea of "Eurobonds" and Britain are right to stand against the move to federalism.
Eurobonds make no sense without at the very least fiscal federalism first. Why would any country agree to underwrite issuance by another country without control over that country's spending and borrowing? A moments thought reveals that to be self evident. Without that what is to stop governments going on reckless spending sprees off the back of northern European fiscal prudence?
And Britain is right to veto the idea of being tied into the same fiscal system as the Eurozone members. Britain's biggest asset right now is sovereign control over its own currency, budget and economy. Giving that up without getting something in return makes no sense.
There is a lot of talk about a "two speed Europe" now that Britain has exercised its veto.
I think that is right, but not in the way Europeans are portraying it. The beneficiaries are the Plucky Brits. A flexible labour market, a flexible economy, continuing membership of the European Union with its attendant free trade zone, strong ties to the slowly recovering US economy, a government that got on top of its debt problems early, a very low refinancing need due to the long average maturity of UK government debt, and lastly control over its own currency mean the UK is likely to recover sooner and faster than a Eurozone which is only now facing up to its problems, and then reluctantly.
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