Raven Runs

Ever-Grander Fears

Buy now you've heard about this Evergrande situation where this Chinese real estate developer owes USD 305 billion as it starts to default on some of its bonds.Beijing insists that even if it should default, it won't become a contain to affect global markets. A proper cynic would say, "of course they would say that."

There are two things that really worry me in this situation. One is that Evergrande is not going to be bailed out in anyway by the government because the CCP government intends to make an example out of it. It might be unwise to ignore the significance of letting Evergrande fail or implode. We only have to think back to the Bear Stearns moment during the GFC. That led to a bunch of other moments of sheer financial anguish and terror right up to and beyond the Lehman Shock. The point is, Bear Stearns didn't fail alone. When the tide went out, a lot of firms were exposed without their metaphorical pants on. The noises coming out of Beijing seem to indicate they're not thinking about this as a market problem, they're thinking about this as political problem because to the CCP all problems are political problems. 

So that leads me to think Evergrande and its pile of debt isn't out there on its own. There is a whole flotilla of these kinds of companies, each owing way too much money. The total size of this debt in the real estate  sector in China is pegged to be between USD 50-60 Trillion. The China's GDP is USD 16.6 Trillion

In other words, this thing is huge enough to swallow up China's economy. The calming words of China's central bank is no panacea to the pile of risk. With all due respect, it's a big pile. Evergrande might end up being the only company that goes under in this bubble-bursting moment. Something tells me that would be way too optimistic. Chances are better than even the whole sector in China will be on the receiving end of the stick. If there's no contagion to the globe, that's one thing - but there's no assurance there won't be a contagion of sell orders in China. This could become a massive market crash "with Chinese characteristics".  

The second thing that really has me worried is that the Renminbi is pegged to the USD. This is good for China because it will probably stop a currency crisis from blowing up during the debt crisis for which they have lit their fuse to blow up. It's certainly wonderful for them that their astronomical debt is denominated in USD and so, while it is pegged, cannot blow out against the USD. But it also means it commits the test of the world to be dragged in by the unfolding debt crisis. Instead of China's Renminbi collapsing in value, it will stay pegged to the USD - and through the pressure it puts on the USD, we will feel it everywhere on the globe. This isn't Greece with its GDP of USD 200 billion which cause so much heartburn during the last decade. This is China doing the dragging. It's going to weight everybody down. 

Happy days, no? Some think this won't be the Minsky Moment for the globe. Sure, easy to say. Yet here's another thing on top of all the above. The US markets are ready for another 'Taper Tantrum'. The FRB is trying to taper back the stimulus and rate cuts it brought in to bolster the markets during the pandemic. Just as it happened in the wake of the GFC, the markets have sent signals to the effect it does not like the taper. Combine it with the fact that we're in October, the month of crashes - c.f. 1929, 1987, 1989, 2007, and with the last week of October looming (when these crashes tend to happen), you're made to ponder if you're staring at the crest of the giant wave that's about to break. Is this the moment the global property bubble comes unstuck? And what is that going to do to the economy?

The deferred Evergrande coupon payment date from 25 September comes up Monday next week. The tea leaves say they'll probably default. The FRB will meet on 2nd November. In between those 2 dates, there's a solid week for things to go pear-shaped. Hold on to your hats. 

Come Join The Fun!

View From The Couch - 27/Aug/2015

Norovirus

I've come down with some weird lurgy this week. It's giving me nausea and acid reflux. I burp like a baby and can't seem to keep food down. My joints ache, moving around is a pain, and all the old sports injuries are barking. We grow old, we grow old and all that; but you really get to feel it when the joints hurt. Judging from the symptoms, my best guess is that it's the Norovirus. I've been going to work because it's not like I've got a fever or I'm totally incapacitated, but today I was just overwhelmed by this thing. It's a weird thing wanting to vomit and not wanting to vomit at the same time. There are few bodily functions where you simultaneously want to do it and you don't. Ejaculation comes to mind, but that's about it, and it's worlds apart from vomiting in the unpleasantness stakes.

Anyway. Let's really have a spew!

Markets Are Up!

I guess the predictions for a global meltdown were misplaced after all because share markets are up today. Sydney was up yesterday, defying global trends towards the financial apocalypse. This was possibly because going any lower would have made valuations totally 'under', on too many stocks. Jokes aside, BTFD ("buy-the-fucken-dips") is a legit strategy until you find yourself cresting on a bubble like the markets in China. The ASX on the other hand hadn't bubbled at all in comparison to some of these other changes around the globe, and so had less to fall. For all the screaming headlines of "$60 billion lost in a day!", that was roughly a 2.5% drop or so and much of that has recovered. If you bought in on "the-fucken-dip", then you would've done alright.

A lot of commentators are saying this was no Lehman Moment. Maybe that's true, but having experienced the original Lehman Moment, I don't think anybody wanted to chance it, which explains just how much things got oversold in markets outside of China on Monday. Michael Pascoe even had a column yesterday crowing about how he was going to BTFD. Like I said, if you bought in on "the-fucken-dip" this week, then you would've done alright.

The mid to long term is much, much murkier. I'm not the grizzliest of Market Bears, but China still scares the hell out of me. There's still a lot of drama to be played out in response to the share market bubble popping, especially when the people decide what they need to do is string up the market boss. It might be the case that there aren't that many shareholders in China, it's also true that they would have lost a bundle if they were leveraged up to their eyeballs leading up to the share bubble popping. There's still all that Property Bubble out there in China, with all the empty cities, leveraged shadow banking using commodities as collateral, and the commodity prices have bottomed out so you know there are margin calls going on. None of that has changed. There's no reason to think that we're out of the woods with all this China mess business.

Hockey's CYA Republicanism

Out of the blue, WTE Joe Hockey says he wants Australia to become a Republic. It's kind of weird, but I guess it's one way to rebrand yourself as "I'm not with Tony Abbott, I'm not on that team of suck". Uh, WTE Joe, oh-but-yes-your-are!

The other possibility I thought of was that Joe fears the incompetence of this government so much, he even fears the Governor General sacking Abbott's government. In which case, moving to a republic would kind of cover his ass. Perhaps I shouldn't try to guess the motives of the Worst Treasurer Ever.

The Republican debate is one of those interesting things that bring out all sorts of spurious arguments of identity. Admittedly, when Paul Keating was pushing for it, I thought the notion was totally logical and the conservative forces allayed against an Australian Republic were doing so out of zombie loyalties to a crown of a distant land who cared so little about any of us to the point of mutual irrelevance. And while that may be true, in the years since the referendum was lost I've had some time to read and think about all this.

One of the more disturbing things about a Republic - with a President - separate to the Parliament/Congress assembly is that you have to begin asking who gets to call the shots on the military. In America, this is the President and since some time around Lyndon Johnson, has been able to go to war without the approval of Congress. This is a big issue because hidden in it is the possibility of an exacerbated conflict between the Presidency and Parliament. It hasn't come to blows in the USA, but the track record of Republics around the globe are pretty telling. This problem happens far more often than not, and on a long enough timescale, it seems to happen inevitably.

It is such a woeful record that so many Republics fail, and give rise to military juntas that it is worth reflecting on whether the Republican model of any stripe can forestall this problem. Some argue that Australia's democracy is more mature so it won't happen. Yet I have it on good authority that during the Dismissal crisis in 1975 a trade unionist suggested to Gough Whitlam that he order the Army to remove  the Governor General. Gough laughed off the idea as lacking in common sense - but Australia's maturity as a democracy hinged on Gough Whitlam's good common sense. These things that inform good common sense are razor thin, and hardly robust at all.

As a centre-left-voting-pinko-pseudo-intellectual, it's tempting to remove the Queen, let the ancien regime be damned. Yet the historian and nascent political scientist in me says this is a dreadful risk to be imposing on this nation. I'm not as gung-ho as I used to be in the 90's about a move to a Republic. Maybe I'm getting old, maybe I'm just sick and tired of an abstract debate when we have actual, real-world difficult problems lying ahead of us. Malcolm Turnbull might ride again as the standard-bearer for the movement, putting in the good fight once more but that alone won't do it for me. I'm so leery of this topic, I don't even want to change the flag.

Speaking Of Our Real World Problems...

Former head of treasury Martin Parkinson says the Abbott Government is sleep walking its way into a recession. If things stay the course under this go-slow, do-nothing, collect-the-rorts Government, we would lose 5% of GDP in the next decade, which would be a pretty serious recession.
Pretty sobering, no? He wasn't the only one pointing out the problems we've got. Try this bit:

Economic modeller Janine Dixon from Victoria University had told the summit the Treasury's Intergenerational Report had painted a "rosy" picture of the future, projecting average growth in real income per person of 1.4 per cent, meaning that by 2055 Australians would enjoy real incomes 75 per cent higher. 

Her own modelling had real incomes growing by less than 1 per cent per year, meaning that by 2055 incomes would be only 44 per cent higher.

Put another way, it would take an extra 20 years to reach the income forecast in the Intergenerational Report for 2055," she said. 

Her modelling has productivity growing at only half the pace assumed by the Treasury, whose assumption was based on the unusually high decade of productivity growth that followed the economic reforms of the early 1990s. 

Melbourne University economist Ross Garnaut said if her estimates turned out to be correct, the budget would "never get back to surplus". 

Reserve Bank governor Glenn Stevens said Australia's economic growth rate had mostly started with a "two" instead of a "three", "despite the lowest interest rates in our lifetimes". 

Dr Parkinson said if economic growth remained nearer to 2.5 per cent than 3 per cent, as much as 5 percentage points of gross domestic product would be lost over the next decade. 

"If this is not happening because our population growth is slow, it means willingly accepting the impact of a recession," he said. 

"The loss of GDP from a recession is about 5 or 6 percentage points."
Without acting we would be "sleepwalking into a real mess".

Just as an aside, I don't know what to make of this new trend of one-sentence-pragarphs being written at the Sydney Morning Herald. It's like ADHD Journalism. Complaints about style aside, that's like a who's who of economic boffins saying - nay, shouting - to the government "LIFT YOUR GAME!". And my question to these esteemed boffins is, "WHAT IF THEY ARE SIMPLY INCAPABLE OF LIFTING ANY GAME THEY MIGHT HAVE, WHATSOEVER?!"

I guess we'll be kissing away that 5% in GDP. Still want to talk about Republics? I just want the Governor General we have now to sack this lot, pronto. Maybe it's not Norovirus that's making me want to vomit but simply living under this nauseating excuse for a government.

One More Plea From The RBA

So, at this conference going on, Glenn Stevens, he of the Reserve Bank of Australia had a few choice advice for this government.

Ordinary Australians don't relate to calls for reform emanating from politicians but they do want economic growth to create new jobs, grow prosperity, and provide long-term financial security for their families, Glenn Stevens has told policy makers in Sydney. 

However the Reserve Bank governor acknowledged that focusing on growth was no populist option and would mean squaring up to the kind of hard political challenges that both the current government and the opposition have shown no appetite for.

The call for growth came as Mr Stevens repeated his concerns that the Australian economy had entered a long-term plateau, in which trend growth is significantly lower than Treasury and therefore government forecasts assume.

In arguably the most significant contribution to the National Reform Summit, which has brought together business, union, community, and policy leaders, from around the country, the central banker said for economic restructuring to be embraced by voters it needed to be framed in terms of its end-stream benefits for people. 

To that end, he told the high-powered gathering that "the general public is much more likely to grasp, intuitively, a conversation about growth".

I don't know about you, but I take that to read, "do your jobs properly you stupid intellectual runts". And I think it applies equally to the Opposition as it does to the addled minds that are in power this minute. Collectively, this political caste has to stop playing too much politics, gaming the ideology stakes, and get on with the job of addressing the real issues.

Heydon Hanging On

You get a guy who is biased pretending to be unbiased. He subsequently gets busted for being biased. Yet the same biased guy gets to decide if his bias is a problem. He had last weekend to think it over and said he couldn't. Now that the week's dragged on to Thursday he says he still can't decide whether his bias is a problem in being a Commissioner for a Royal Commission. He says he'll tell us Friday.  In the mean time, the ACTU says not only did the guy biased, he misled everybody. That's being euphemistic - what I think they want to say is that he lied.

It just doesn't look good. So why would he opt to keep twisting the breeze any longer than he needs to? Imaginer's misplaced professional pride, but every minute he stays on runs through whatever professional credibility he has left. So he must be hanging on for some other reason right? Like... money, perhaps?

I guess it's just another thing going on in another ring in Abbott's Three Ring Circus Government.
I think it's time for me to give into this overwhelming desire to go puke. Good night!

The Post Capitalist World

Without The Growth, It's A Zero-Sum World

I cam across an article written by a Japanese economy professor who ran a historic analysis of what it means to be running Zero Interest Rate Policy (ZIRP for short in certain circles). It's a pretty straight forward article that even an economics novice can understand, and it centres round what it means to have ZIRP and why this signals a problem.

Japan is running interest rates lower than 2.0% for a couple of decades now. Germany has been doing the same for some time. The level of low interest has not both seen since the days of the Reformation and by that we mean the days of Genoa during the wars that saw the rise of Protestantism in Europe, thus splitting away the fiefdoms controlled by the Catholic Church, effectively stunting the growth of lending to the Catholic Church by the bankers in Genoa.

The point is, that the extraordinary length of ZIRP in our time is pointing to something extraordinary in the history of capitalism itself, and it essentially comes down to this: Capitalism has ceased to self-replicate at the rate it has done for most of modern history that extends back as far as the Reformation. Economic Growth and Modernity were interchangeable for a very long time, but we've arrived at a point where there is no scope for growth in some of our advanced economies. The growth won't come because in most part we've hit a saturation point for where capital can be applied.

The article goes into some quick schema to paint a picture which can be reduced to a simple formula. If an economic unit produces more, then the quantity of production the increase in production and subsequent sales can be understood to be on this axis which we can call 'X'. Another axis's the rate at which we produce and sell these goods and services, whites essentially the productivity. We can call this Axis 'Y'. Combined, the 'X' and 'Y' axes provide a field which is the GDP of the economic unit. When taken at the national level, what we find in advance economies is that we can't seem to grow quantitatively and we can't seem to grow qualitatively. So our GDP stagnates.  

The only other axis is actually growth in the virtual and cyberspace. And this is why there has been growth in the financial sector and growth in the internet and technology businesses. This is the 'Z' axis which has exploded comparison to the stagnant growth which befell the 'X' and 'Y' axes growth in the first world.

Up until 1980, there was consistent growth in modernity because there was space to grow into. Since 1980, we've pushed for globalisation so that there was more economic space to grow. As of 2008, the first world economies have hit the limit. This also dovetails with the drives for productivity sought by business and governments since 1980 where we've seen offshoring of manufacturing and attendant mass lay offs in the first world. In its place we've seen the greatest growth in the space created by technology, whether it is in advanced financial instruments and high frequency trading or simply high-tech industries that are off-the-charts in valuations as soon as they list.

It's not as if the 'Z' axis opened up because of the limits to growth on the 'X' an 'Y' axes, although there is a partial relationship between the need for growth and the massive rationalisation that high tech brings. Most of the gains in the 'Y' axis have come from the dividends of the 'Z' axis. The 'X'and 'Y' axes can't grow because the world is just about saturated with the economic activity of the first world.

What The RBA's Drop To 2.25% Tells Us

The whole world is experiencing the limits of growth along the 'X' and'Y' axis. The Central Banks in Europe are also running historically outlier low interest rates and even ZIRP in some countries. It's no coincidence then that the RBA has been running the lowest interest rates in its history, and this week set a record low 2.25%. The shenanigans of Federal politics aside, it's interesting to note that it comes at a time when the forecast for growth in Australia keeps dropping.

Combine this with the fact that the automotive industry is pulling out of Australia and myriad manufacturers have had to close their doors in the short time the Coalition Government has been in, and you get the picture of an economy that is quickly running out of ways and places to grow. It's one thing for Joe Hockey to tell the world leaders that what we need is growth. We sure do, Joe; but if there is no room for it in the physical world relative to the G-20, then it's a bit like fish in a crowded fishtanks saying what they need more of is water.

What's become even more stark and obvious with the retreat of commodity prices to their historic norms, is that absent the income from mining, we suddenly are back to being that economy thetas bloated in the service sector. And while this can be roughly divided into to categories like most things - good and bad - the glaring truth is that the manufacturing we lost is never coming back and even if it did, it would have no economic space in which to grow.

In this context, it would have been (and still very much is) imperative to to grow along the 'Z' axis which would entail growing the tech sector, growing businesses that operate in the virtual space, and look to becoming a force in 'Z' space. Odd then, that we have a government fixated on miners, bricks and mortar retail businesses and a degraded numpty version of an NBN. The complete array of policies concerning business and the economy is fundamentally backward looking and fails to take in the evolving problem.

We're not investing in tech or education or for that matter paying for students to learn things that would help them survive the evolving economy. Our government is trying to off-load those costs back on to the people and wipe its handoff the responsibility, exactly at time when a strategic view needs to be taken as to what kind of industries can be imagined and nurtured along the remaining 'Z' axis of growth. Instead the investment money has flooded into real estate - mostly because those investors get to borrow money so cheaply, this forming a positive feedback loop, but also because they have so few alternative options to invest but on bricks and mortar.

The popping of the Australian property bubble may never come - after all the guys at Zero Hedge have been saying China's economy is doomed and somehow the thing keeps going, and if China keeps going there's no reason why Australia's property bubble should collapse. If the GFC didn't pop it, then god only knows what it would take. But the distortions created by the property bubble are here to stay, putting a gigantic brake on growth. Eventually the RBA may well cut interest rates down to the ZIRP. In which case we will have arrived at the end point of capitalism without having made any investments into surviving what comes after traditional capitalism completely matures.  

The Problem With The Stimulus Packages

The greatest irony of Tony Abbott's tenure as Prime Minister is that having promised to be a Infrastructure Prime Minister, he hasn't really done much of any of it, and the infrastructure he did want to build was roads because let's face it, it's about the political donations coming in from general construction companies. You can't accuse them of corruption, but you can sure charge them with crony capitalism as Bernard Keane has done.

Again, we've seen this development in other countries but basically big government contracts are sold as good for jobs, and investors in General Construction companies make out like bandits on these projects. Australia has a peculiar development called Private Public Partnerships whereby the government refuses to go into debt and sucker investors are given the exploding doll sold to them as a good deal. You'll notice that once built, those roads really don't create more jobs or economic activity in of themselves. It's amazing that they get classified under Capital Expenditure. But these tollways Tony Abbott's backers want to build, are simply unlike factories that actually produce things or for that matter a digital workspaces that churns out apps. They don't contribute to the 'X' axis of production and they're only marginal contributors to the 'Y' axis of productivity, not to mention having no impact on the'Z' axis.

Equally stupid then, is the belief that we can have a building-led recovery. I know it flies in the face of the way our economy gets reported, as well as the housing sector making up 25% of our GDP,  but a house that's once built does not contribute to any of the 3 axes. The worst use of capital going around is all the debt piling up on the private sector's ledger as mortgages. It's good for the banks but it has much, much much less of a future than the NBN. In fact we're seeing this very problem unfolding China because they keep building the ghost cities in order to pump up the GDP figures but those ghost cities, once built, are contributing absolutely nothing to the 3 axes of economic space while the fastest expanding and most successful Chinese venture is probably Ali Baba, an internet market.

It's the same in Japan where fro 20years the government has unleashed stimulus package one after the other and still growth and the 2-3% inflation everybody so desires eludes the government of Japan. All those stimulus packages were one-off spends that contributed very little to the'X' and 'Y' axes over the same time span. The most healthy growth in Japan has been the IT sector. This pattern is repeated in the UK, the USA, and other members of the G8 ...except Russia where frankly, nothing makes sense except digging up more oil.

This is why I was banging on about the NBN prior to the September 2013 election. It really is our only hope for a future with a growing economy. Instead we voted in a government that is on the whole insensitive to that reality and hastily knobbled it to help out some backward looking cronies. Unless that gets rectified, in the years ahead, we'll come to see that this Coalition government was responsible for screwing up the future of this country.

China's Looking Scary

Bubble? What Bubble?

It's been a strange year in the world of market-watching. There are as usual, quite a number of ructions that make you wonder about the health of markets or in fact there is any sanity prevailing in markets. Crimea has grabbed headlines and so Australian stocks have followed the lead of the world, up and down, with the news cycle surrounding Ukraine and its coup. Ukraine of course is a basket case waiting to blow up, but it's not like it's even in the top 30 economies of the world. Even if there was a full economic meltdown in the guise of a default, there wouldn't really be too much of a problem short of a shooting war breaking out.

China on the other hand is the world's second largest economy, warts and all. And there are a lot of warts and other nasty lesions that mark the Chinese economy, one of which is the size of the debt it has created since the GFC. If you tally it up, it is larger than the combined debt of the USA, the Euro zone and Japan combined. The criticism has been that much of this debt has been pumped into general construction companies that have built ghost cities of luxury apartments while other parts have gone into a shadow banking system that has blown this easy credit on god-only-knows-what. Of course, this being China, the debts were collateralised with commodities such as copper, rubber, nickel, iron ore silver and of course gold. Which is all well and good if the commodities are going up, but they have instead been falling in value for some months now. This, has logically led to loans being called in, bank runs on minor banks and a general drying up of liquidity.

As I mentioned last week, the Chinese market has experienced a number of defaults this month - something unheard of prior to this leadership group coming to power - and all of a sudden things are turning a little hairy over there.

In that light I'd like to share a few links so you can have think about what this might mean. The first link is here:

After Hong Kong, the UK takes the lead by far. (As a note, banks in several countries, particularly in emerging markets like Russia or Latin America, aren’t listed, because they don’t report to the Bank for International Settlements):


Total-loans-to-Chinese-companies-US-billions_chartbuilder
Some UK banks’ long historical ties with China—HSBC and Standard Chartered, in particular, have roots in Hong Kong—mean they have been lending there for decades, though in recent years, loans to Chinese companies and banks have also grown steadily. Neither will be a good thing if analysts’ worst fears about China come to pass.

Right. Of course Australia is on that list with US$28.7billion which is about AUD$ 30bn right now.

Keep that in mind as we have a quick look at what the AFR is saying about Australian banks, courtesy of Pleiades who gave me the heads up as I was telling him about whats reported as going on in China.

A study by funds management giant AMP Capital presented to the ­superannuation funds at an industry conference this week, showed that a typical fund has more than 12 per cent of total assets invested in the banks, but banks accounted for a quarter of their investment risk.

Industry averages suggest a fund’s value shouldn’t move by more than 8 per cent in a given year. However, more than a quarter of that volatility risk in Australian funds is driven by the banking sector, demonstrating just how sensitive our retirement savings are in the continued health of the big lenders.

“The system is quite exposed to these four banks. From an equity point of view, the weight in financials in ­Australia is at a peak,” AMP Capital’s head of credit markets Jeff Brunton told an audience at the CMSF conference in Queensland this week.

At 30 per cent, Australian’s index exposure to the banks is the highest its ever been – doubling since 1993.

Worryingly, in United States, Japan, Germany and United Kingdom, the weighting of banks had fallen sharply from their peaks.

Yes. That means, it's a bit like we've put all our eggs into the property basket twice. Once through taking out huge mortgages in a property Bubble, but also through our superannuation accounts that own dirty big lots of banking shares which are exposed to real estate., and are also over-priced The scary bit is over here:

AMP also presented controversial findings about the ability of banks to withstand stress. The banks and ­the prudential regulator had conducted stress tests – based on a 40 per cent fall in property values and 4 per cent ­foreclosure costs – which AMP ­replicated. “We get the same number – $17 billion of losses,” Mr Brunton said.

“That’s nothing. That’s why the banks and APRA say our system is safe.

“But the insight we put on the table is that the remaining mortgages, those who haven’t defaulted, will actually be at a very different loan-to-value point than when they took out their ­mortgages. More than half of ­Australians will be in negative equity and a lot of us in significant ­negative equity.

So it seems there's AUD $17bn sitting there on the ledger as potential losses that's separate to the AUD $30billion mentioned above, but linked together by the health of the Chinese economy. All this robust property valuations and auction prices and what have you are sitting on a bubble that is the Chinese economy. When the music stops, there are going to be tears.

Just how exactly is China doing? Here's a glimpse:

Over the past month, we have explained in detail not only how the Chinese credit collapse and massive carry unwind will look like in theory, but shown various instances how, in practice, the world's greatest debt bubble is starting to burst, resulting not only in the first ever corporate default but also in the bursting of the associated biggest ever housing bubble. One thing we have not commented on was how actual trade pathways - far more critical to offshore counterparts than merely credit tremors within the mainland - would be impacted once the nascent liquidity crisis spread.

Today, we find the answer courtesy of the WSJ which reports that for the first time in the current Chinese liquidity crunch, Chinese importers, for now just those of soybeans and rubber but soon most other products, "are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world's second-biggest economy."

While apologists of China's collapse have been quick to point out that China's credit collapse would be largely a domestic issue, with little foreign creditor exposure at either the public debt, or private - corporate - debt levels, one thing nobody can deny is that if and when Chinese trade routes grind to a halt, the downstream impacts would be devastating, and spread like wildfire as the offshore supply chain is Ice 9'ed.

The fact is, it's just starting. The way it's going is that the importers of commodities have run out of liquidity so they're cancelling and tearing up contracts.  The unsold glut of commodities is leading to the collapse in the price of commodities. Because the shadow banking system uses commodities as collateral, a lot of loans are going to get called in as result of this collapse. it's pretty much as people have predicted the collapse of the Chinese credit bubble. When this collapse moves on to property, there's going to be knock on effects to Australia and suddenly that $47bn problem is going to come home to roost. If that doesn't scare you, its probably because you don't have a mortgage and you don't own bank shares.

Just watching the share price movements this week, it appears that twice this week, people bought in hoping for a stimulus package to be announced by the communist party bosses. Except they have made it explicit that they won't be doing any more stimulus packages because it only kicks the can down the road. That means China will test a market downturn and all the people buying up shares this week were exercising what can only be described as irrational exuberance.

That's really not great news.