A SELF SUSTAINING RECOVERY? NOT YET.
by ilene - April 22nd, 2010 4:50 pm
A SELF SUSTAINING RECOVERY? NOT YET.
Courtesy of The Pragmatic Capitalist
Richard Koo’s latest commentary is not quite as wildly bullish as equity investors have gotten in recent weeks and I fully agree with his outlook. The markets are pricing in a self sustaining organic recovery and I still believe we have anything but that. While we are still very constructive on the economy in H1 (and likely into Q3), I believe we are still mired in a balance sheet recession that is simply being papered over by extraordinary amounts of government spending. In essence, the government has implemented a massive private sector crediting of accounts while their balance sheets remain highly indebted and continue to be worked down. Richard Koo agrees. Mr. Koo notes that the lending market is actually not improving at all:
“From borrower’s perspective, credit crunch is worsening Amid a severe nationwide credit crunch, the Fed is now actively listening to borrowers and trying to build a close cooperative relationship with the National Federation of Independent Business (NFIB), a leading small business organization. This is a major, unprecedented change. Traditionally, the Fed paid little attention to the views of borrowers, and as a result there were no data series like the index of banks’ willingness to lend as seen by the borrowers found in the Bank of Japan’s Tankan survey. Without input from borrowers, the Fed tended to administer policy based solely on the views of lenders—ie, the financial sector.”
“Like the Bank of Japan, the NFIB has been asking borrowers for their views on banks’ willingness to lend for many years. The relevant question asks businesses whether they find it easier or harder to obtain bank loans than they did three months ago. Recent numbers are deep in negative territory, indicating that banks are much more reluctant to lend than they were three months ago. This suggests that the credit crunch is not over and in fact is growing worse.
Koo elaborates on the deep weakness in the credit markets by claiming that mark to market would result in widespread banking bankruptcies if they were forced to actually mark these assets down to their true values:
“If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of
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Seeing Through the Fog of Funny Money Policymaking
by ilene - December 11th, 2009 1:11 pm
Seeing Through the Fog of Funny Money Policymaking
Courtesy of Michael Panzner at Financial Armageddon
OK, let’s go through this one more time. Despite what we keep hearing from the politicians and moneymen, things are not getting better. Yes, we have seen the economic equivalent of a dead cat bounce — how could we not, given the trillions that have been thrown at the system — but it is simply not sustainable.
The reality is that we’ve just careened through decades of overborrowing and malinvestment, which created an array of dangerous imbalances and undermined our nation’s economic foundations. Now that the party is over, the wreckage is going to weigh on our prospects for years, if not decades.
Unfortunately, those who live in a bubble (i.e., Washington) or who’ve come to depend on them (e.g., Wall Street) have not seen through the fog of funny money policymaking. But as Bloomberg reports in "Americans Grow More Pessimistic on Economy, Nation’s Direction," the average Joe (and Jane) seem to have their eyes wide open when it comes to today’s depressing reality.
[Click on table to enlarge]
Americans have grown gloomier about both the economy and the nation’s direction over the past three months even as the U.S. shows signs of moving from recession to recovery.
Almost half the people now feel less financially secure than when President Barack Obama took office in January, a Bloomberg National Poll shows.
Those concerns have put consumers in a miserly mood as they head to the mall for holiday shopping, with half the country planning to spend less on gifts than last year and few buyers willing to run up credit-card debt for Christmas.
“The recession may be over, but the administration seems to be losing the battle when it comes to winning the hearts and minds of Americans,” says Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This is important because the spending of consumers is the main factor that will turn the economic recovery into a self- sustaining one.”
Obama yesterday addressed anxiety over the economy with a speech proposing new spending on the nation’s transportation system, tax credits to spur hiring by small businesses and incentives to make homes more energy efficient.
Unemployment in November stood at 10 percent, a drop from 10.2 percent in
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Of Bubbles and Busts: Which Way for China?
by ilene - October 23rd, 2009 1:29 am
Jesse, at Le Cafe, reports on the bubble made in China. (If you missed my interview with Jesse, it’s posted here and here, my space on Seeking Alpha.) – Ilene
Of Bubbles and Busts: Which Way for China?
Courtesy of Jesse’s Café Américain
"Mischief springs from the power which the monied interest derives from a paper currency which they are able to control, and from the multitude of corporations with exclusive privileges…which are employed for their benefit." Andrew Jackson
While the crowd has been chortling over the anticipated decline and fall of the American Empire, they may also be overlooking the dangerously unstable bubble in China, and the implications for that phenomenon when the global economy shifts again.
There has been little doubt in our minds for a long time that China was in an impressive growth cycle that was fueled by overly cheap money and a spectacular equity bubble. This is why we posted that documentary about the Crash of 1929 yesterday, in commemoration of the 80th anniversary of Black Thursday. The collapse of bubbles will not be in the US alone, and the description and atmosphere as described in that film sounds much more like China today than it does the US.
The reasoning behind this is fairly straightforward.
It may be hard to remember from the current lofty heights of the ‘China miracle’ but their economy was a train wreck in the latter part of the 20th century. Prior to 1980 the state owned People’s Bank controlled all the financial resources of the command driven economy. The government created State Chartered Banks (SCB’s) in the 1980′s, but their business activities were still driven by state policy initiatives, and they quickly became burdened by bad debts. A speculative push and some tax breaks for foreign direct investment helped to further distort the economy, which led to a severe domestic slump, with banks burdened by Non-Performing Loans. But it was still a centralized economic regime, with a reminder served by the brutal suppression of the student demonstrations in Tiananmen Square in 1989.
In 1994 China tried to cure the serious problems in their domestic economy by devaluing the yuan from 5 to 8.3 to the US dollar in order to facilitate an export driven recovery. That is a 40% devaluation! All your costs were just marked…
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Chinese officials warn banks about reckless lending
by ilene - July 27th, 2009 12:56 pm
Chinese officials warn banks about reckless lending
Courtesy of Edward Harrison at Credit Writedowns
In late June, I posted two items China’s present growth story is built on malinvestment and Chinese stock market bubble inflating, on the building bubble in Chinese lending and asset markets. The crux of the posts was that China, in its efforts to reflate the economy to meet very high growth short-term targets and start a new domestic demand dynamic, was creating a credit bubble. Much of the lending mandated by Chinese authorities was finding its way into housing and shares, inflating those markets in an unsustainable way.
Chinese authorities are onto this and have decided to act. The Financial Times reports.
Chinese regulators on Monday ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming.
The new policy requires banks to monitor how their loans are spent and comes amid warnings that banks ignored basic lending standards in the first half of this year as they rushed to extend Rmb7,370bn in new loans, more than twice the amount lent in the same period a year earlier.
Beijing’s concerns are echoed in other countries across the region, most notably South Korea, where the government says it is taking steps to cool a real estate bubble, and Vietnam, where the government has ordered state banks to cap new lending to head off inflation.
The situation in much of Asia is very different from most Western economies, where governments have flooded the financial system with liquidity to encourage unwilling banks to lend more.
In China, regulators are now concerned that too much money is being lent by the state-controlled banks and the country’s tentative economic rebound could come at the cost of a stable financial system…
The flood of new lending also has implications for the quality of bank loans and the country’s overall growth.
“China’s economic recovery is being constructed on the back of a savaged banking system,” said Derek Scissors, a research fellow at the Heritage Foundation in Washington. “Tens of billions – and perhaps hundreds of billions – of dollars of loans will not be repaid.”
He points out that in recent years total loan growth of around
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site