How long will China last?

Even I can't write about Brexit everyday - the newspapers seem less reticent. Surely Brexit insomnia will set in soon?


However, on a wider note, I have been considering recently how much longer China's debt bubble can last. As with all markets, accurate prediction is the key, without that there is no chance of making money. With China, being a communist controlled state, they have a lot more levers to pull when it comes to juicing their finances than most countries. Plus as the largest economy in the world they can also rely on everyone else to play the extend and pretend game in order to keep the party going.


The chart above shows the path that Japan and Korea both pursued during their own debt fuelled booms. As can be seen, China is on a huge tear currently that will out-shoot even Japan.


Japan has never really recovered from its debt-binge in terms of economic growth and development, sure they have nice stuff there and a high standard of living, but real growth is near impossible due to the debt burden and demographics. China will be in that boat too in short order.


The chart though is quite long-term, so I can see China having another 5 years or so of debt fuelled 5%+ growth before the big crunch. Perhaps this will then coincide with Brexit and the collapse of the Euro - who knows the domino effect.


One thing we can be sure of, this will happen as sure as eggs are eggs. In our own way in the UK, we know all too well the consequences of a debt binge - the China scale is around double the problem in relative terms that we had in 2008;

Back form hols...all a bit worrying... all very 2008 too?

Baltic Dry Rates - Asia to Europe:



FTSE 100:



Brent Oil Price:

 

At least I can think of a few good things:

- No interest rate rises for my mortgage!
- Xmas toys will be cheap
- Filling up my car for under £1 per litre very soon

Apart from that, oh dear.

Oil: Flirting With Double Figures

In October oil stooped briefly to touch $100.  But it rebounded strongly, maintaining a flat-ish $125 through March (which I misread).  The earlier assessment was the correct one: the distinct prospect of GlobalRecession2 has put a dent in commodities, even as producing nations are opening the taps;  the Baltic Dry Index, that traditional coalmine canary, is in decline once more; and oil dipped back into double figures again this week. Since GR2 isn't remotely played out, we may expect more flirtation with $99.

Stock markets have found reasons for optimism just now, but overall it looks like another crisis brewing: number 94 in a long and tiresome series. And right on cue, for whatever you think it's worth, gold and silver have broken out of their 3-month-long down-trend.  I'd assess that particular uptick as more meaningful than the stock markets' own burst of green.

ND  

Letter From Singapore

So, off to Singapore, "the world's top-ranked economy for ease of doing business" (World Bank) to check out how the mighty C@W is faring in Asia, and whether Henry Porter is correct when he writes:

"we are going to find it much more difficult to face the world. The riots will be at the back of our minds for years to come and we will wear their shame for a very long time"

Actually of course my hosts (all Chinese) are far too polite to do anything more than ask some concerned questions; though the Straits Times helpfully notes that they, of course, retain corporal punishment for such occasions. Oh, and capital punishment. In return, I don't mention that in his first National Day address on TV, their new Prime Minister seemed a little nervous about whether Singapore can maintain its enviable successes for the future and promised, guess what ? ... new measures to curb unskilled immigration. S'porean jobs for S'porean workers, then. Still, we have to admit he's got a better starting-point than our own new-ish PM.

In the wake of Norway, Syria and of course Croydon, I wonder which world leader rests easy in his or her bed. Hosni Mubarak looks jolly uncomfortable in his. In my travels I am told that the lesson third-world leaders are taking from his plight and that of Gaddafi, is - ignore the West and do what you have to. (Singapore, lest I be misunderstood, is decidedly not third-world.) Then again, how many lectures will they be getting from Cameron any time soon ?

Anyhow, I am glad to report that the Asian edition of C@W is going down very well. This may have something to do with the ads we are running in our sidebar - see below. Stick to business, eh ?

ND

Here we go, here we go, here we go

Supposed to be going to the Footie tomorrow night with clients, expecting that to be called off this morning.

Anyway, another day in the UK and another day of blind panic and disorder - just the FTSE so far mind:

That is a pretty nice drop from yesterday's dismal close. There is panic in the markets and more importantly there are robots and margin calls. I think the combination of these two is not working out so well. The robots sell and buy to increase the size of the waves, which in turn force more margin calls on leverage investors - which has driven volatility up to 2008 highs.

Clearly, the macro picture is not helping and with civil disorder across the UK even without the impending collapse of the Euro and Dollar the markets would be down three figures today in any event.

Cant' see anything that is going to end this anytime soon; good sign that as a contrarian indicator. Mind you I thought yesterday would be the ow-off capitulation so my judgement is not to be trusted at the moment.

G20: It demonstrates how witless politicians are

Finally the g20 meets today. There have been high hopes that this real summit can reach agreement on major issues that will help to slow the slide into Global Depression and perhaps even mark the bottom of the market so to speak.

However, what has been disturbing the past week or so is the divergent politics which are driving the agenda rather than facing up to real problems.

1. Tax Havens - Tax havens did not cause this recession and persecuting them is not going to cure it either. This is a political grab at trying to secure more tax base. it will fail and is the wrong move in any event. What logically you need to do is grow your own tax base, not try to steal someone else's. Why has this even made it onto the agenda? it is the politics of socialist envy.

2. Hedge Funds - Ooh, the bad guys. You know, the ones who said all the banks were broke and full of toxic assets and were proved right. hedge funds account for a small fraction of international financial flows, why all the attention? Again, they did not make the banks invest in sub-prime toxic assets and derivatives.

3. World Trade - Hooray at last, yes increasing trade will help the world recover. Finishing off Doha trade talks should be a huge priority. I hope they can do it.

4. Financial Regulation - Well this is a two edged sword, the right regulation is needed. The regulation of derivatives which has been lacking and support for the ratings agencies to make the markets work again. The idea should be to make the markets far more transparent, not to limit them.

5. Global Stimulus - Well the US and UK have come dangerously close to doing more than enough. The Euro area and China really do need to do more to stimulate demand. You can't save car factories is no one wants to buy their cars.

6. Global Currency - A crazy theoretical idea, but really, are the Chinese going to really undermine their dollar assets when they follow this logic through. How can a real 'world bank' work in conjunction with the world's democracies - already the European Bank is struggling to reconcile the different parts of the Euro area alone

Airline woe

More grim news out today about the World's airlines. It is not just BA heading for big losses, but Cathay Pacific, Delta and a host of others across the world. Although Lufthansa have managed small profit.

In related new, Easyjet has complained about the EU's possible decision to relax the 'use it or lose it' approach to airline slots. I am on easyjet's side, if airlines can't use their slots economically they should give it up to those that can. This is pure flag carrier protectionism once again.

What is perhaps most surprising to me is just how badly airlines are doing considering the huge falls in kerosene seen in the past few months. Many airlines have hedged positions (not Lufthansa, unsurprisingly) too far into the future and are not feeling the full benefits of the drop, but still, to have nearly 1/3rd wiped off your cost base and still lose money says a lot for sheer scale of the decline in traffic.

At least the global warming crowd will be happy as less planes fill the sky for the next few years.

Friday happiness

CU rather snowed at work at the mo. That in itself is probably a good thing on balance.

Here is some more good news, evidence that China is coming out of a relative decline. Other key info is that their electricty needs are picking up and there seems to be a bottom in commodity and shipping prices.

The US looks like it will pass the Obama stimulation too. This may or may not be good for their long-term government finances, but for us in the UK with the US as a big export market a boost to their spending power can only be good.

So, at last some signs that things are not going to get worse and worse forever. Even better, France and Germany, those great lecturers on the failure of the Anglo-Saxon Capitalist model, are themseleves sinking into economic decline. It would take a heart of stone.....

Who next for the Bond market crunch machine?

It might seem an odd title, but things are afoot in the market even as we approach the year end of a truly annus horribilis.

There may be rays of light for the Government in seeing its investment in RBS creep over the rights issue price, but there is gloom elsewhere.

So much gloom in fact that the measure of Bond risk on corporates in Europe has soared to its highest ever level. This sounds obscure to many I am sure (as the does name - itraxx crossover index), but rest assured these were the kind of levels seen in the US prior to Lehman going down in September.

No one can really say how much hedge fund redemption's and other weird market effects are having. But from the stress indicators it seems likely another large company or organisation in Europe is going to suffer from a run on the company and go down in the next few days.

Perhaps it will all pass and the stress will leave the system, however that is not the pattern we have seen throughout the year so far. I think it likely that this is the beginning of the stage when we will see the damage spread further beyond Financials, Housebuilders and retail, perhaps into manufacturing.

“everyone has a share.” The result of G20

Gordon Brown explains Milo Economics to the other leaders of the G20

Milo's M&M Enterpises syndicate is selling seven-cent Maltese eggs to the mess halls at a price of only five cents an egg while still making a profit.

How?

Seven-cent Maltese eggs cost the sellers in Malta four and one-quarter cents each to procure. Milo is actually buying the eggs from himself in Malta, which means that as a seller there he is making two and three-quarter cents each egg. After he resells the seven-cent eggs to the mess halls for five cents each, he is still making a three-quarter cent profit per egg.

However, it turns out that Milo's Maltese eggs are actually one-cent Sicilian eggs which he has secretly shipped to Malta to drive up their value, yielding him another three and one-quarter cents profit per egg.

 "I make a profit of three and one-quarter cents apiece, and everybody comes out ahead."

"Do I have a share?"

"Everybody has a share."

"Does Orr have a share?"

"Everybody has a share."

"And Hungry Joe? He has a share too?"

"Everybody has a share."

"Well, I'll be damned."

"What's good for M&M enterprises is good for the country"

But Orr crashed into the sea and when the crew went to inflate their life jackets..
The life jackets failed to inflate because Milo had removed the twin carbon-dioxide cylinders from the inflating chambers to make the strawberry and crushed-pineapple ice-cream sodas he served in the officer's mess hall and had replaced them with mimeographed notes that read: "What's good the M & M Enterprises is good for the country."

Chaplin: Cheer up Yossarian. Milo's selling oranges and the syndicate is making so much money.
Yossarian: We won't see any of that money. We won't even see the oranges.

G20 - New Labour rules the World

This may seem like an odd title. but I belive it to be true.

With George Bush overseeing things rather than Barack Obama, there is not much the US can agree too. Further more some of the more outlandish ideas, like moving back to the Gold Standard need to be considered over a period of time.

So what we will be left with is an agreement that something needs to be done. This will be tax cuts for all, which have already been pre-announced, a reduction in interest rates, which also have already been done and an agreement for another meeting to discuss Global financial oversight for February 09 when Obama is in power.

So, in effect, we will have a New Labour meeting. No new news, just a re-hash of what has already been done and put on in a nice spinny manner for public consumption. Sadly, we all know now how ineffective a means of government this is.

I wonder if they will even get Madelson and Campbell to draft the final speeches?

Where will we go from here?

I have spent far too much time recently reading blogs, books and watching telly about the current financial crisis. However, it has made me take some decisions which are 180 degrees from what I was thinking a few months ago - events are moving so fast at the moment. I note even the FTSE predicitions market is NEVER right anymore, the betting is just pure guessing.

When I started this blog, I said its purpose was to explain complex financial issues to all, so with that in mind below is a snapshot of what next year may bring to the world and UK.

However, one year and a bit into the financial credit crunch some key decisions have been made that will shape the future for all of us. The banks were bailed out, something I would have been totally against this time last year, but in reality it was needed to stave off immiediate disaster. What was less clear is what long-term effects this will have on us all.

Some though are obvious, the great de-leverage continues across the world. So much so that for once, ALL financial bubbles are bursting at the same time. Not just UK property, but Commodities, Shipping, currencies, BRIC stock markets - everything. This has and is causing massive deflation in a very short space of time. All that excess money is simpy vanishing away and taking the prices away with it. It is also producing some odd effects; in times of stress, Gold is seen as a safe bet even gold is pushed in all the media these days as the only true safe haven. It is now 33% down from its high of the year and I shifted my ETF into short gold with some success last week. De-leverage will bring everything down in price for a while yet. How long it impossible to know, but it will be a few months more would be my guess. The FTSE won't reach 6500 for some time that is for sure, perhaps half of that if the de-leverage continues much into next year.

As this deflation bites across the world consumption will fall and there will be a deep recession. The next stage is potentially worse; there are 2 scenarios.

1 - All the money poured into the banks frees up the system and the world goes back to work, albeit with lower prices, less leverage and bigger public debts in the Western economies.

2- Too much money is created, people realise this and so inflation kicks-in at a very high level. this wipes out the debt, but takes all the savings with it. Worst case we get hyper-inflation, time to put money then into real things, houses, gold etc.

Which of these happens, or a milder combination of both depends on events not too far away. If the G20 meet on November 15th and agree a new bretton woods, then some element of stability will out and the worst of the doomsayers will be wrong. But the Governments have a very poor record of economic management in the crisis to date, so I think scenario two is a distinct possibility.