Thursday, June 20, 2013

Worldwide Financial Bubbles Beginning to Burst?

The US Federal Reserve has finally explained that it intends (maybe, if conditions allow) to slow it's massive $1 Trillion per year bond buying/money creation program.

I think everyone in the world can plainly see that the Federal Reserve is way over it's head in moral hazards with it's overly-long-lasting zero interest rate policy, outright "monetization" (or financing) of a majority of the US Federal government's deficit spending using "printed money," thereby allowing for a continuation of chronic trade deficits, and inflating financial bubbles as far away as Asia.

It's likely that bursting bubbles in Asia will be the trigger for a larger world-wide financial bust:  So, get ready for huge financial turmoil.  Asian bubbles include:  China's credit market bubbles (official and shadow markets), China and Hong Kong's property/debt bubbles, Thailand's property/debt bubble, Australia's property and debt bubbles, and inflated emerging market equity markets all threaten a similar repeat of the Asia Crisis of 1997.  When bubbles burst, banking system crises and currency crises are sure to follow.  Capital flight from emerging markets have already started and will aggravate the problems.

Last night, word from Bloomberg was that Chinese officials are trying to "prick" the financial bubble in China as interbank lending rates went up to 25%.  This means that banks are unwilling to loan to each other---not unlike what happened in the US in 2008.  The Chinese authorities are sending the markets a message but they are playing a dangerous game as we saw in the US in 2008. We know that interbank lending stress will weaken their economy further.  Business in China is already not good as export markets in Europe collapse.  A credit crisis will worsen their economy and the other economies in the region.

Then, news that the PBoC rescued a bank last night and is rumored to be in discussions with other troubled banks. There are tons of bad loans on all of their bank's books and "off-book." Expect more trouble to come as the government has spent, using government captive bank's credit, and year after year, in amounts equivalent to about 50% of their GDP on unnecessary and un-economic infrastructure projects. These loans  will go sour.  Bad loans are hidden but it is a sure bet that bad loans are a huge number. Expect more financial distress in China--maybe calamity.

No one in the entire world has uttered the word "recession" with regard to China.  That alone is scary.  Fitch reported back in May 2011 that there was a 60% chance of Chinese Banking crisis by 2013. That prediction may prove prescient.

Then a few days ago, Fitch issued an even worse report on China claiming that China has the "worst financial credit bubble in modern world history."  Those words from financial rating agencies are never spoken.   From Telegraph,
The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.
"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.
"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.
While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.
Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system.
Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up. "Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire US commercial banking system in five years," she said.
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," she said.

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