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!

Fear Of The Known

They Believe In Their Own Bullshit

What really frightens me about the Liberals and the Nationals is no not just what they will do, but just how much they believe in their own utter bullshit about how they are better managers or that they are better managers of the economy. It's true that they're not going to come out and say "hey the ALP did a great job in riding through the GFC" but instead it's been this huge diatribe about government debt. Well, there are two things bigger and scarier than Federal government debt in Australia and that is local council debt and private sector debt.

Here's the vaunted Economist magazine's Global Debt Clock page. yes, that's Australia in red there, and the thing is Australia's public debt is high. Yes, it's true, but if you look at it, the figure sits at 27.1% of GDP. As of 31 August, the Federal Government component of it is 11.3%. It's not comparable to places where the debt is sitting at 78.3% of GDP (the USA) or for that matter 232% (Japan). You should check out what other countries in red are suffering. It is true that the Federal budget position is worsening as revenue drops, but it is hardly the kind of crisis the Liberal is talking us up into. If after all that spending and all that alleged mismanaging, the debt is 11.3%, then hooray to the ALP.

More to the point, there's something like 16% of GDP sitting on the shoulders of local councils - and nobody really knows how they're going to pay that back. But I guess that's not really a Federal issue to win votes so  you don't see the Libs and Nats running around talking up that even bigger public debt.

Private debt is another matter entirely, and nobody wants to touch this because the economy is a house of cards built on confidence. Nobody wants us to lose the confidence we have in our economy but quite frankly we've not really made it through the property bubble and prices are heating up again in major cities. We're nowhere near digesting the debt tied up in mortgages across the country, and we've started to look at housing as the next engine of growth after the mining boom tapers off. Except you don't hear a peep out of the Libs or Nats about this too because they like the wealth effect of having inflated asset prices on people's ledgers. They won't be repealing negative gearing any time soon. They like inflated property prices, low disposal income. They like being asset-rich cash-poor, even if that ends up hurting growth prospects for the economy.

It's a joke that they're out in front with such shoddy economic thinking that even a novice can see is bullshit, but there they are believing in the self-flung shitstorm of bullshit. Somebody help us out here. We're about to vote in the party of the property bubble again. And they haven't learnt their lessons at all. They're coming at us with the same rhetoric they came at us in the first place. If it's the personal failing of Tony Abbott, that's one thing but it's not - the whole lot of the front-benchers are trotting out this bunkum. Their back-benchers? Staying out of the spotlight as much as they can so as not to put their foot in it.

So this is it. The inevitable moment when the born-to-rule club comes back into power to run their austerity program which will inevitably hurt the economy. Good grief Charlie Brown.

Try Getting Your Head Around This One

$295 billion Bail Out For Citigroup

Not a day goes by without some drastic news. The stock market keeps going down and occasionally perking up in some kind of mad hallucinatory rush that everything might be okay, only to find out it isn't, and plunges further. It's a dog-eat-other-dog-as-sushi kind of world.

The US government is now bailing out Citigroup to the tune of $500b.

The US government has unveiled a bold plan to rescue troubled Citigroup, including taking a stake in the firm as well as guaranteeing $US306 billion ($500 billion) in risky assets.

The banking giant will also get a $US20 billion cash infusion from the Treasury Department, adding to the $US25 billion the bank received last month under the Troubled Asset Relief Program.

In return for the cash and guarantees, the government will get $US27 billion ($43 billion) of preferred shares paying an 8% dividend. That is higher than the 5% the government charges dozens of other lenders under its $US700 billion financial industry rescue package.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp, is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the US economy.

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.

"With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy,'' the three agencies said in a statement issued today.

The decision came after Citigroup's tumbling share price sparked concern that nervous depositors might pull their money and destabilise the company, which has $US2 trillion of assets and operations in more than 100 countries.

"It really was a must-do thing,'' said Nader Naeimi, a strategist at AMP Capital Investors. "If they'd let Citigroup go, that would've been disastrous.''

Citigroup agreed to absorb the first $US29 billion of losses on the $US306 billion portfolio, plus 10% of additional losses, for a maximum total exposure of $US56.7 billion.

The Treasury Department could end up absorbing $US5 billion, the Federal Deposit Insurance Corp $US10 billion, and the Federal Reserve the rest.

Talk about a house of cards! After all the bickering over 700billion, they're simply throwing 500billion at this problem. Now, here's something else to ponder in all this mess:

Naomi Klein Cries Foul

Naomi Klein's one of those thinkers that seem to come out of the far left. I liked her stance when she was doing 'No Brands' as a movement, but as that movement blossomed into a global network of activists that seemed to picket the World Bank and IMF meetings, I kind of lost interest.That's just me, and not her message's fault or her fault. I'm just a little JP Sartre in those moments as I've discovered.


Here she is, saying the way Washington is handling the actual bail out is borderline criminal.

In a moment of high panic in late September, the US Treasury unilaterally pushed through a radical change in how bank mergers are taxed--a change long sought by the industry. Despite the fact that this move will deprive the government of as much as $140 billion in tax revenue, lawmakers found out only after the fact. According to the Washington Post, more than a dozen tax attorneys agree that "Treasury had no authority to issue the [tax change] notice."

Of equally dubious legality are the equity deals Treasury has negotiated with many of the country's banks. According to Congressman Barney Frank, one of the architects of the legislation that enables the deals, "Any use of these funds for any purpose other than lending--for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc.--is a violation of the act." Yet this is exactly how the funds are being used.

Then there is the nearly $2 trillion the Federal Reserve has handed out in emergency loans. Incredibly, the Fed will not reveal which corporations have received these loans or what it has accepted as collateral. Bloomberg News believes that this secrecy violates the law and has filed a federal suit demanding full disclosure.

Despite all of this potential lawlessness, the Democrats are either openly defending the administration or refusing to intervene. "There is only one president at a time," we hear from Barack Obama. That's true. But every sweetheart deal the lame-duck Bush administration makes threatens to hobble Obama's ability to make good on his promise of change. To cite just one example, that $140 billion in missing tax revenue is almost the same sum as Obama's renewable energy program. Obama owes it to the people who elected him to call this what it is: an attempt to undermine the electoral process by stealth.

I definitely agree with all that. If you found all that interesting, then here's more.

Naomi Klein: Well, there's a few elements now that are being described as illegal that we're finding out. First of all, the equity deals that were negotiated with the largest banks and also some smaller banks, representing $250 billion worth of the bailout money, this is the deal to inject capital into the banks in exchange for equity. The idea was to address the so-called credit crunch to get banks lending again. The legislation that enabled this was quite explicit that it had to encourage lending. Barney Frank, who was one of the architects of that legislation, has said that it violates the act if the money is not going to that purpose and is instead going to bonuses, is instead going to dividends, going to salaries, going to mergers. He said that violates the acts, i.e. it's illegal. But what we know is that it's going precisely to those purposes. It is going to bonuses. It is going to shareholders. And it is not going to lending. The banks have been quite explicit about this. Citibank has talked about using the money to buy other banks.

Then there's other aspects of this that are borderline illegal. We found out that in the midst of the crisis, the Bush Treasury Department pushed through a tax windfall for the banks, a piece of legislation that allows the banks to save a huge amount of money when they merge with each other. And the estimate is that this represents a loss of $140 billion worth of tax revenue for the US government. Many tax attorneys who were interviewed by the Washington Post said that they felt that the way in which the Treasury Department went about this by unilaterally changing the tax code was illegal, that this had to include Congress. Congress only found out about it after the fact.

There's another piece of this puzzle that is also borderline illegal, which is that in addition to the $700 billion that we are discussing, the $700 billion bailout, there's another $2 trillion that's been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don't really know who they're handing the money out to, because, apparently, it's a secret. They could be handing it out to a range of other corporations -- I think they are -- but they're saying that they won't disclose who has received these taxpayer loans, because it could cause a run on the banks, it could cause the market to lose confidence in the institutions that have taken these loans. Once again, that represents an additional $2 trillion.

If that doesn't make your blood boil, I don't know what will. These people are losing your net worth to the four winds as they pocket tax dollars as bonuses and service fees. It's insane. Add on top of it the $295.2billion to bail out Citigroup, and the money used to bail out AIG twice, you get the feeling this is all just one big con... but of course, nobody's talking about it too loud.

A Cool Link You Should Bookmark

This one came in the email today. It's a pretty cool blog. I found this link through their blog.

The G-20 came to Washington for the weekend and sucked all the air out of the city before announcing that they were really serious about patching all the leaks in the foundering ship of globalism. Well, they have to at least pretend that they are doing something. Meanwhile, the former bit player known as reality has taken center stage in the ship's main lounge. It is putting on an act even gnarlier than the Kit Kat Klub show in Cabaret.

This reality show is sending some clear signals to the denizens of the real and really crowded world. The main signal is that the trade and financing rackets of recent decades are over. The extravaganza of economic hypergrowth based on cheap resources is over. The promiscuous swapping around of risk and rewards is over. There is no global institutional framework for managing the impairment left in the wake of this binge. It will be up to the individual nations now to figure out their national lives and livings.

Alas, the financial impairment is still on-going world-wide and has quite a ways to run before it's finished working its hoodoo on the so-called advanced economies. The lame duck US economic posse so far has done everything possible except the two things that really matter: allow the fraudulent securities at the heart of the problem to be exposed to the light of day to determine their actual value; and allow those companies who trafficked in them to suffer the full consequences by going out-of-business. For the moment, they're content to shovel cash into the truck-bed of every enterprise in America that shows up at the Treasury loading dock. This can only have the effect of eventually destroying the value of that cash.

Aiyah. The rest of it's pretty intense too, and his message echoes Peter Schiff who I pointed to a several days ago. While he indicates the US economy and its citizens is about to head for a totally different kind fo economic landscape as a result of this crisis, one gets the feeling that nobody can quite imagine how destrictive and transformative this change is going to be. The unravelling of decades-long assumptions and baselines is going to adversely affect everybody across the globe. It's sobering and depressing, not that I was drunk on credit or happy to be in hock before.