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Chinese Debt Matters PDF Print E-mail
Written by Jack Crooks - Currency Currents   
Tuesday, 22 July 2014 06:59


“You are a slow learner, Winston."
"How can I help it? How can I help but see what is in front of my eyes? Two and two are four."
"Sometimes, Winston. Sometimes they are five. Sometimes they are three. Sometimes they are all of them at once. You must try harder. It is not easy to become sane.” 

George Orwell, 1984

 [I think of the US Federal Reserve Bank when I read Orwell’s quote.]

Commentary & Analysis

Aussie could suffer a lot more if Chinese debt matters

“Overall credit growth continues to outstrip growth in value added, which is not sustainable,” said Stephen Green, chief China economist at Standard Chartered.

 Financial Times


The Financial Times reported yesterday Chinese debt/gdp is now at a whopping 250%.  I thought it was only the slovenly West that doled out debt in such large quantities in order to save its respective economies?  Nothing like Westernizing is there…

The total debt-to-gross domestic product ratio in the world’s second-largest economy reached 251 per cent at the end of June, up from just 147 per cent at the end of 2008, according to a new estimate from Standard Chartered bank.

Even GaveKal, who seem to be quite smitten by China, sound concerned: “China’s current level of debt is already very high by emerging markets standards and the few economies with higher debt ratios are all high-income ones,” said Chen Long, China economist at Gavekal Dragonomics, a research advisory. “In other wordsChina has become indebted before it has become rich.”

And from Reuters today, trouble in the Chinese construction industry indicating the real estate market is losing momentum at the least:

SHANGHAI, July 22 (Reuters) - Yields on a short-term bond issued by atroubled Chinese construction company have more than doubled in recent days as hope fades that the firm can avoid defaulting on Wednesday.  On July 16, unlisted Huatong Road & Bridge Group Co Ltd announced that it was uncertain about its ability to make payment on a 400 million yuan ($64.4 million) one-year bond issue that matures July 23, after its chief executive was placed under investigation for illegal behaviour.

“The real estate sector in China accounts for 15 percent of China’s economy and impacts 40 other business sectors,” says Reuters.

So how is this debt problem and real estate linked?  A great chart of this dynamic comes from the FT


But many analysts imply rising debt in China doesn’t really matter much because China will keep rolling over bad debt problems into the balance sheets of Chinese banks.  But Prof. Michael Pettis thinks it does matter; here is why…

At any rate for several years I have been arguing that the main reason analysts have managed to get China so wrong is because of their failure to understand the basic distortions driving the economy and one of the major consequences of these distortions is the creation of debt, which itself further impacts the evolution of these distortions. All rapid growth, Albert Hirshman argued in the 1960s and 1970s, is unbalanced growth, and in many if not most cases the kinds of imbalances that result from rapid growth may be acceptable and even necessary in a growing economy.

But as the economy changes, the nature and extent of the imbalances change too, and it is inevitable that eventually the system forces a reversal of the imbalances. This is especially true in countries, like China, with highly centralized decision-making. In these countries the imbalances can be taken to extremes impossible in other countries, thus creating all the more pressure for a reversal of the imbalances.

This means that in China, if you can figure out how the growth model works and how the model generates imbalances and debt, you can pretty much figure out logically, albeit fairly broadly, the various paths that the country must follow in order the reverse the imbalances.

Pettis, I believe correctly, argues China at this stage of development (and given the global backdrop) has two options: 1) sharp slowdown in GDP growth, or 2) continued unsustainable increase in debt.

Some implications of hiding the bad debt in China, according to Prof. Pettis:

  1. China’s GDP may be overstated by as much as 20-30%.
  2. Productivity numbers are biased upwards.
  3. Losses rolled over do not just disappear [there are real implications even in a command-control economy.]
  4. Effective transfer of this bad debt has fallen on the household sector; it reduces their consumption [which is the sector vital in making the transition to a more balanced economy.]
  5. Bad debt must be assigned somewhere; socializing debt does not change this.
  6. When debt stops being hidden, which seems part and parcel to real financial reform in China, GDP growth will become biased downward.
  7. Three places China can assign the bad debt: households, business, or government.
  8. Assigning debt and slowing GDP does not necessarily lead to crisis.  If the household sector is not assigned, income will grow despite a lower GDP.  Rising household income equals a stable social environment and aids the transition to more healthy domestic demand.

Thus, it seems likely sooner rather than later China’s GDP growth will decelerate faster than is now expected.  And though this may be a healthy change for China as malinvestment is reduced, it will likely not be a healthy change for its raw-material satellite country, aka Australia. 

This resource demand aspect of the China story triggered by rising debt and overinvestment, which to reiterate doesn’t necessarily lead to crisis for China, is the a big part of why I expect the Aussie to grind lower in the months ahead (which would be quite welcomed by the Australian central bank by the way).  Here is our weekly chart view for the Aussie possibly heading to the low 80’s:


If you would like to sample our forex service, I will set you up for a two week trial and you can see more of what we do and determine if Black Swan Forex could be a resource to help you make real money in the currency market.

Please click here to request a free trial.  We simply need your name and email address.

Here are the last 10 closed trades we recommended in Black Swan Forex; it produced 215 total pips and $2,173 in total profit, assuming you traded just one-lot or regular-sized contract per recommendation:


Jack Crooks

President, Black Swan Capital

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Twitter: @bswancap


#1 Most Viewed Article: On Sale! (if we depreciate our currency) PDF Print E-mail
Written by Victor Adair via Drew Zimmeran @ PI Financial   
Saturday, 19 July 2014 08:45

Another shot fired in the Global Currency Wars: Airbus CEO says the ECB must tackle the “crazy” strength of the Euro…the ECB should intervene in the currency markets to push the Euro down… "Europe cannot be the only economic zone that doesn’t consider its currency as a weapon…as a key asset to promote its economy."

Well, you can’t get any more clear than that! If you can’t compete then depreciate your currency or put up tariffs or take other protectionist measures…beggar thy neighbor on the race to the bottom.

Last week on the Moneytalks Radio show while commenting on the Ontario debt/deficit situation I said that the Ontario government would love to see CAD at 80 cents…to kick start their export industry…so the government can continue their tax and spend ways.

I have shifted ~30% of my net worth from CAD to USD over the past few years at around par. I don’t think it makes any sense for an individual to have 100% of their net worth in any one currency…you diversify the rest of your holdings, why not diversify your currency exposure?

Short term trading:

Currencies: We’re short CAD. We think the rally off the March lows has been short covering and that the 94 cent level is a roof. We continue to hold long USD Index positions…essentially betting on a weaker Euro…we see the troubles in Portugal as symptomatic of European bank weakness and expect to see the Euro lower over the next 12 months as the Fed begins to tighten while the ECB goes the other way.


Stocks: We think it’s a great time to be defensive. I told a friend the other day that I’m positioning my money for 100%+ returns…I mean, I’m looking to at least get my money back…I want to defend against taking any big losses.


Credit markets: On the Moneytalks Radio show I also said that governments everywhere need more money…and they’re coming for yours…it seems people have forgotten that as trillions of dollars-worth of global stimulus has driven stock and real estate markets higher…while ultra-low interest rates force “everybody” to over-reach for yield. (Investors are lending billions to countries you couldn’t find on a map.) What’s the biggest investing mistake people are making right now? Over-reaching for yield…buying crap for a few extra points.

But…it’s a Risk-On market with ultra-low volatility, lots of leverage and new highs day after day. Markets are unprepared for a reversal…which we think would cause:

A break in the stock market
A sharp widening in credit spreads, and
A higher USD.

Crude: WTI broke above its apparent $105 roof on June 12 as the insurgency in Iraq shocked the markets…running all the way to $107.50. But WTI has dropped >$7 since June 25 as the insurgence has not threatened oil production. We had been short WTI on a bearish supply/demand story but were stopped out on the break above 105. The massive build-up of speculative long positions in June created a great opportunity to re-short the market but we didn’t get the trade done. Pity.


Gold: Jumped over $40 on June 19 as the market feared contagion from the Iraq insurgency…a weak USD throughout June also helped gold rally ~$100 on the month. We see resistance around $1350 with the big increase in spec longs over the past month leaving the market vulnerable to a break (WTI is now trading below where it was prior to the Iraq scare…a similar move in gold would see it drop below $1240.) We still see gold as “out-of-favor” relative to stocks and expect that a break of $1240 would set up a test of the lows made last year around $1180.


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Currencies & Gold, Big Picture PDF Print E-mail
Written by Gary Tanashian: NFTRH   
Friday, 18 July 2014 06:54

We have not checked in on this motley crew at the public site in a long time (NFTRH keeps a running tab each week). Here are the monthly views of the basket cases we call major currencies.

Uncle Buck and his reserve status were leveraged to the hilt by “The Hero” and now his successor is trying to gently talk the Fed out of its policy stance over time. In other words, tightening is going to come one way or another and Janet Yellen is trying to go the orderly route. When this process becomes disorderly, the USD is likely to benefit from the liquidations elsewhere in the asset world.

Technically, USD is in a long basing pattern. There are those who think it is basing before a renewed decline, reading a Symmetrical Triangle (continuation) pattern into poor old Unc. I think the odds are it is bottoming over the post-2008 years when inflation – try as they might to have promoted it – simply has not taken root. Leaning bullish, watch support and resistance.


Long ago we projected a rally in Uncle Buck’s chief competitor, the Euro. This was due to a bottoming pattern (formed on shorter term charts) and unsustainable negative hype about the Euro crisis. The target was around 140 +/-, which is the top of the post-2008 downtrend channel. Euro remains in a big picture downtrend and if global asset markets start to come unwound in the coming months, it is not Euros people are going to run to, I can tell you that. Bearish below the upper trend line.


Canada… oh Canada. For many months NFTRH has been noting the thick cap of resistance on the Canada dollar. For the last few it has been rising to test this resistance. On the big picture, the state of CDW (a ‘commodity currency’) is a bearish omen for commodities as long as it remains below resistance. There is a ton of hot air between the current level and any notable support. Inflationists better hope CDW negates resistance. Bearish.


Fellow commodity currency the Aussie is also bearish as it dwells below a thick cap of resistance. As with Canada, get above resistance and we’ll change our tune. But not until.


The Swiss Franc seems to benefit in the run ups to global monetary crises owing to Switzerland’s reputation as a sound money haven and sound economy. I am not sure if that reputation is as well founded as it once was, but the Swissy continues in a long-term uptrend channel (with a channel buster up in the Euro crisis). Going strictly by the chart, the XSF seems to be the best long-term bet of all the major currencies over the span of what we call the ‘Age of Inflation onDemand’ © (i.e. post-2000).


But wait, there is another sound currency in circulation and it is called the Indian Rupee. This may not be considered a major currency, but it denominates a large emerging economy and most importantly, it is stewarded by a Central Banker (Raghuram Rajan) with the rarest of things, integrity. Lately Rajan has been open to easing his firm grip in the fight against inflation and he has been working with Modi. The result has been an India with a launching stock market and a still firm currency, which looks by the way, like a buy right here.


Last but never least in ‘confidence paper’ sweepstakes, the Japanese Yen. The chart says what it needs to say regarding resistance and support. If global liquidity becomes constrained we’d look for Yen to rise to some degree along with the USD (both being anti-markets to varying degrees, with the rest of the asset world on the other side of the trade). If a continued asset market party is to be the play, expect the Yen to tank to support. Yen is neutral at the current level.


Finally, the worst currency of them all… gold. Why this heavy metallic relic has proven useless to all those people who flooded into the supposed safe haven in refuge from the Euro crisis (a global knee jerk into gold). Various developed nations have been able to leverage their currencies to economic or at least stock market gains, after all. What has gold done? Why, it has just sat there retaining value and not only paying out nothing, but erasing the principle of the Knee Jerks and other assorted casino patrons who thought it was as easy as ‘run to gold, be safe’.


t doesn’t work that way. When you are holding value (in this case monetary value) you are holding something that will lose assignedvalue when confidence in official policy making is high (it has been since 2012) and it will gain value when the angry mobs come after the policy hacks after the magic wears off (it will).

Lecture aside, gold is trying to bottom here. The disasters that are the Middle East and Ukraine are not helping gold’s case, don’t fall for it. Just as the 2011 ‘Knee Jerks’ hurt gold’s investment sponsorship greatly on a large scale, the small scale panics can be damaging on a short-term basis.

But if that is a bottoming pattern, we are on a count down to a time when the most boring currency of them all starts to slowly gain respect in the eyes of rational value seekers. | Notes From the Rabbit Hole | Free eLetter | Twitter

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