I would argue that looking at a govt’s balance sheet is misleading. You need to judge a govt’s effectiveness by the prosperity of its citizenry. Govt doesn’t exist for its own benefit. It is not a profit generating entity. So it shouldn’t be run like one.

The ratings agencies need to be more precise in their ratings. If they are going to measure a revenue constrained country like Greece then their normal MO would apply. If they are going to rate a country like the USA, which is not revenue constrained, they should focus on the risk of hyperinflation.

http://pragcap.com/the-new-normal-era-of-debt

Buffett’s – BYD = chinese fraud

http://www.grist.org/list/2011-07-22-warren-buffets-crazy-like-a-fox-plan-to-revive-americas-auto-ind

By ANDY XIE

http://mpettis.com/2011/07/incentives-and-debt/

want to start this newsletter with a story that may be fairly illustrative of one of the problems within the Chinese economy that I worry about.  There was anarticle in last Sunday’s edition of the South China Morning Post about a real estate project in Guangdong.  (WC Fields’ was supposed to have once called Mae West “a plumber’s idea of Cleopatra”, and for some reason that story popped into my mind when I read the article.)

It says that a real estate developer is attempting to build a replica of a beautiful Austrian village in Guangdong province not too far from Shenzhen:

It is a scenic jewel, a hamlet of hill-hugging chalets, elegant church spires and ancient inns all reflected in the deep still waters of an alpine lake. Hallstatt’s beauty has earned it a listing as a Unesco World Heritage site but some villagers are less happy about a more recent distinction: plans to copy their hamlet in China.

After taking photos and collecting other data on the village while mingling with the tourists, a Chinese firm has started to rebuild much of Hallstatt in Guangdong province, just 60 kilometres away from the Hong Kong border, hoping to attract wealthy mainlanders, “homesick” expatriates in Hong Kong and tourists. The project had drawn a mixed response from residents in the original village.

The article goes on to discuss the anger many of the residents of Hallstatt feel about having their town copied and replicated without permission.

That this sort of building project seems a tad over the top is not why I bring up the article.  Those of us who live here are quite used to the many sometimes-bizarre projects aimed at attracting new wealth and signaling status.  Of course if it makes the residents of Hallstatt feel any better, I am absolutely certain that the Guangdong replica will not be a perfect copy of Hallstatt.  I have no doubt that there will be hundreds of architectural and cultural “improvements” that will ensure that no one confuses the shiny replica with its dowdy original.  Excessive restraint typically isn’t one of the sins afflicting real estate developers that cater to the local rich.

What interested me about the article was something else altogether.  According to the article, the project is being developed by “Minmetals Land, the real estate development arm of China Minmetals, China’s largest metals trader.”

I’m sure MinMetals is no slouch when it comes to trading metals, but it wouldn’t have occurred to me that a metals trading background would have made anyone particularly good at real estate development, and especially at developing such an undoubtedly classy project.  This kind of thing, however, is actually not an anomaly in China.  A surprisingly large number of SOEs and other large companies in China have real estate development subsidiaries.

In fact a lot of Chinese SOEs are involved in a very wide variety of business activities, and are especially fond of activities in which cheap capital is the comparative advantage, or in which there is political advantage to be gained.  That makes real estate development and “high tech” two of the most popular ancillary businesses.

Does it matter?  Perhaps.  This type of business diversification is not new and it doesn’t have a very encouraging history.  For example the 1960s in the US was a period which saw an explosion in the growth of what were then called “conglomerates”, and as is always the case, there seemed to be a plausible reason for their growth: good managers are good managers, and can generate growth from many types of companies, and their ability to generate growth is magnified by the lower cost of capital associated with substantial diversification.

But after the initial enthusiasm, conglomerates performed awfully, and in the 1970s in the US a consensus developed that large conglomerates involved in very different lines of business tended to be value destroying.  The reason often given was that managers who might be successful in one line of business – say coal extraction – might not necessarily be especially good in another line of business – say children’s retailing, or movie production.  By forcing senior management to disperse their expertise across a wide range of very different businesses, conglomerates were very good at mismanaging many if not all of the businesses they controlled.

Incentives affect behavior

I am not sure if I am totally satisfied with that explanation, although I am sure there is some truth to it.  To me the main reason why conglomerates tend to be weak at creating value has to do with the distorted incentive structures involved in their creation.

In many cases – especially when skeptical investors aren’t monitoring their every move and threatening to punish them when they fail – senior managers had no great incentive to manage shareholder money very carefully.  They do, however, have strong incentives to build their assets and to diversify – the former because the larger the company the more important and more highly remunerated the managers, and the latter because highly diversified businesses are more likely to be involved in whatever business is hot today and, because they are diversified and large, are less likely to fail.

In that case, as long as there were no constraints to managers’ ability to raise money and invest in other businesses, managers naturally did just that.  The problem is that what is in the best interests of the shareholder – creating economic value to be captured by shareholders – is not necessarily in the interest of managers, who might find it totally rational to overpay for assets and to pile into “hot” markets.

This distorted incentive structure ended up encouraging capital misallocation, and after a few exciting years, the profitability of conglomerates plummeted. Incentive structures, in other words, determine behavior in the aggregate, and if the incentive is to ignore value creation in favor of some other objective, value creation tends not to occur.  In fact the opposite occurs.  Value tends to be destroyed if those other objectives can be met by deploying capital.

It is hard to imagine that in China today the incentive structure for top managers of SOEs is aligned with that of creating economic value.  Like anywhere else, the bigger your company, the more important you tend to be as CEO, the more preciously your bankers and investment bankers will treat you, the more time you will spend with senior political leaders, and the more highly remunerated you, your family and friends tend to be.  What’s more, as Beijing tries to consolidate smaller companies into larger ones, the bigger you are the most likely you are to be the head of the surviving company.  In that case companies will want to grow.

There is an additional and very important distortion.  The most important comparative advantage that large Chinese companies have is access to cheap credit, and so from a P&L point of view the best policy is always to borrow as much as you can and buy or build assets.  Even if you overpay or if your projects are actually value destroying, it doesn’t matter too much because artificially low interest rates are the equivalent of debt forgiveness, and after several years of hidden debt forgiveness, even the worst investments start to seem profitable.

Under those circumstances, I would not be confident that every large SOE investment or every move to diversify is likely to create economic value.  The fact that nearly every important SOE, and many not-so-important ones too, have real estate development subsidiaries probably has a lot more to do with access to cheap capital and the opportunity to share in the real estate bonanza than with any real ability to add to the underlying wealth of China.

Everything is debt financed

And of course if it is true that SOEs are investing unnecessarily for reasons that have nothing to do with value creation, one consequence is likely to be an increase in debt, as SOEs borrow and invest.  I have written a lot about unsustainable increases in debt in China, and on that note let me append below something that I wrote this week for the New York Times.

I was asked by the newspaper to identify some of the difficulties facing China with an especial emphasis on the worries that have surged in the past year over the large debt levels run up by local government financing vehicles.  My response was that the focus on this kind of debt might be at least partially misplaced.

For the past decade China-focused analysts have been able to describe static economic conditions with some accuracy but have failed generally to understand the underlying growth dynamics.  We’ve done a great job, in other words, of describing the landscape through which the train is passing, but because we don’t understand where the train is headed we are constantly shocked when the landscape changes.

It should have been clear for many years that China’s investment-driven growth model was leading to unsustainable increases in debt. As recently as two years ago most analysts were ecstatically – and mistakenly – praising the country’s incredibly strong balance sheet, but when Victor Shih shocked the market last year with his analysis of local government borrowing, the mood began to change.  Now the market has become obsessed with municipal debt levels.

But dangerously high levels of municipal debt are only a manifestation of the underlying problem, not the problem itself.  Even if the financial authorities intervene, unless they change the economy’s underlying dependence on accelerating investment, it won’t matter.  They will simply force the debt problem elsewhere.  In all previous cases of countries following similar growth models, the dangerous combination of repressed pricing signals, distorted investment incentives, and excessive reliance on accelerating investment to generate growth has always eventually pushed growth past the point where it is sustainable, leading always to capital misallocation and waste.  At this point – which China may have reached a decade ago – debt begins to rise unsustainably.

China’s problem now is that the authorities can continue to get rapid growth only at the expense of ever-riskier increases in debt.  Eventually either they will choose sharply to curtail investment, or excessive debt will force them to do so.  Either way we should expect many years of growth well below even the most pessimistic current forecasts.  But not yet.  High, investment-driven growth is likely to continue for at least another two years.

I want to stress this point.  Right now everyone is worried about municipal debt levels and wondering if Beijing’s plans to resolve the problem will work or not to clean up the municipalities.  But this is the wrong focus.  The problem is not whether or not the municipalities will be able to repay.  Repayment simply means shifting the debt servicing to another entity, and we should be worrying not about the debt-servicing ability of specific borrowers but rather about the whole system.  The problem, as I see it, is that the system has reached the point at which unsustainable increases in debt are necessary to sustain growth.

When is an increase in debt unsustainable?

As I see it there are three things that make increases in debt unsustainable.  The first, obviously, is borrowing for consumption.  This is what happened in the US and in the peripheral countries of Europe until the 2007-08 crisis, and it is pretty clear that this kind of borrowing cannot go on forever.  Why not?  Simply because with consumer financing the value of liabilities rises more quickly than the value of assets, and this cannot go on forever unless the borrower has an infinite amount of excess assets.

But it is a testament to how US-centric the whole world is that we cannot seem to separate underlying problems from the US manifestation of that problem.  Since the US spent much of the past decade experiencing an unsustainable increase in debt to finance consumption, most of the market assumes that this is the only way it can happen.  Since we aren’t seeing consumer financing in China, then there cannot be an unsustainable debt rise in China.

But consumer financing isn’t the only way it can happen.  The second way we can experience an unsustainable increase in debt is when borrowing is used to fund investment that is misallocated or wasted.  Whenever the value of liabilities rises more quickly than the value of assets, the increase in debt is by definition unsustainable unless, of course, the borrower has an unlimited amount of excess assets.  This is a little more complicated to explain, but the process is just as definitive.

Assume, for example, that a local mayor borrows $100 dollars to build a subway system.  The subway creates economic value, directly because businesses can grow more quickly thanks to lower transportation costs, and indirectly because consumers can spend more of the time and they have money left over,

If the economic value of the subway exceeds $100 dollars, the mayor can service the loan by taxing (directly or indirectly) the increased economic value.  In that case net assets rise because there is more than enough to repay the cost of the investment.

If the economic value created is less than $100, however, the loan cannot be fully serviced without forcing someone – usually the taxpayer – to step in a make up the difference.  This is what we mean by an unsustainable increase in debt – it will result either in a default or in a rescue.

We need to be careful about how we define the loan servicing cost.  What matters is not the interest rate actually paid, but rather the theoretically “correct” interest rate.  Why?  Because that is the true servicing cost to the economy as a whole.  Imagine if the US government passed a law saying that the interest rate on all of its debt is now set at 0%.  Would it have any trouble servicing its debt?  Of course not.  So why not do it if it solves the debt servicing problem?  Because artificially lowering the interest rate is simply a way of transferring the borrowing cost to the lenders.  It does not reduce the true cost, it simply turns it into something else.

So if we want to know what the debt-servicing cost in China really is, it doesn’t help to look at the financial statements of the borrowers to determine whether revenues exceed the interest expense, even if you trust the financial statements.  You would have conceptually to raise the interest rate for local and municipal governments, SOEs, real estate developers, etc. substantially – probably by at least 5 or 6 full percentage points or more – to eliminate the impact of artificially suppressing the rates.  It is only then that you can calculate the true debt-servicing cost

Forget about consumer financing

The third kind of unsustainable debt increase is caused by a sudden explosion in contingent liabilities.  When balance sheets are structured in risky or mismatched ways, an unexpected change in circumstances can cause a sharp change in the relationship between the values of assets and liabilities, and so result in a net surge in indebtedness.

There are many examples of this kind of mismatch.  Financing companies that lend against assets, including copper or land, run the risk of a surge in net indebtedness when asset prices fall.  Banks that borrow short and lend long are mismatched, and can see assets fall relative to liabilities when interest rates surge.  The PBoC has a huge currency mismatch on its balance sheet.  Because it borrows in RMB and lends in foreign currency, mostly dollars, as the value of the RMB rises against the dollar, its net indebtedness automatically rises too.

Mismatched balance sheets are not always a problem.  When the surge in contingent liabilities occurs under “good” conditions, it can actually be stabilizing for the economy because there will usually be a corresponding reduction in net liabilities when things are going badly.  For example central banks usually like their currency mismatches because they only lose money when their economies are doing very well and there is pressure for their currency to appreciate.  When their economies are doing badly, of course, the pressure is for depreciation and they actually make a profit on their mismatch just when they need it.

They are hedged in that case.  To be hedged means to make money when things are otherwise going badly for you and to lose money when things are otherwise going well.  It is only when the balance sheet is what I called “inverted” in my book that you have a problem.

Take copper financing by lenders in China.  This is an example of an inverted balance sheet.  As the biggest consumer of copper, China largely sets global copper prices.  If China is growing quickly, this tends to push up the price of copper, and lenders who are secured by copper see the value of their loans increase – they become more secure.  The lenders of course are delighted.  They are probably making good money because China is growing, and on top of it their loans are becoming more secure than ever.

Of course this changes if the Chinese economy were suddenly to slow, especially if it slows sharply.  In that case the lenders would probably see their revenues decline at the same time as the value of the collateral supporting their loans declines.  If their borrowers are then forced to liquidate the collateral in order to repay the loans (which is likely to happen if the economy slows sharply), the liquidation value could easily be less than the value of the loans.  In that case China would see an unsustainable rise in its debt – and notice this always happens at exactly the wrong time.

It is important to remember this when thinking about financing risks in China.  We often hear analysts argue that because China has little consumer financing and because mortgage margins are high, they don’t have a debt problem.  This argument is about as useless as the claim that because China has large reserves it is unlikely to have a financial problem.  The limited consumer and mortgage financing in China means that china will not have a US-style financing problem, and the large amount of reserves means that China won’t have a Korean-style financing problem, but no one has ever seriously argued that those are the kinds of risks China faces.  What matters is the level of debt, whether or not its growth is sustainable, and the kinds of contingent structures that are embedded.  I would argue that all three measures are worrying.

Industrial commodity bulls may be advised to steer clear of the latest quarterly commodities update by Global Tactical Asset Allocation’s Damien Cleusix whose conclusion is that “Most commodities remain deeply overvalued.” Specifically, “As with other assets it does not really matter in the short-term (as long as the trend is positive) but it is paramount for longer-term projections. We have little doubts that commodity long-only who buy to hold are going to experience a > 50% drawdown (from current levels) on their industrial metals, crude oil and agricultural positions sometimes in the next 12-18 months.” The catalyst: China. “Demand has been artificially boosted by China strategic reserve building, infrastructure intensive fiscal stimulus, booming demand from the rest of emerging economies and, as the trend persisted, by trend followers and money managers new attraction to the sector (you know it is not correlated so you should buy them to diversify your portfolio… sorry it WAS not correlated…). The introduction of physically-based ETFs is not helping in this matter as it represents a big short-term increase in marginal demand especially when the Fed was still busy implementing QE2.” Agree or not, the cases for both the up and downside are compelling and well researched, with lots of supporting facts. Much more in the full presentation.

http://www.zerohedge.com/article/global-tactical-asset-allocation-q3-update-commodities

sure. everyone in my opinion is pretty much undercapitalized (everyone meaning public sector)

and banks…

how long can public entities continue to print themselves into impossible to cover deficits to the point that people start withdrawling from banks and exporting their wealth?

lol.. and then where do you put your wealth when this is happening all over the place? that’s the question..

i dunno…  i’m just thinking about how … why is this situation unsustainable just because it is impossible? perhaps governments can continue to perpetually make fiscally unsound decisions…. without consequences?

north korea has been screwing its inhabitants for decades… just sayin’

The Big Fat Greek Gravy Train: A special investigation into the EU-funded culture of greed, tax evasion and scandalous waste

By ANDREW MALONE

Last updated at 9:09 AM on 25th June 2011

Even on a stiflingly hot summer’s day, the Athens underground is a pleasure. It is air-conditioned, with plasma screens to entertain passengers relaxing in cool, cavernous departure halls – and the trains even run on time.

There is another bonus for users of this state-of-the-art rapid transport system: it is, in effect, free for the five million people of the Greek capital.

With no barriers to prevent free entry or exit to this impressive tube network, the good citizens of Athens are instead asked to ‘validate’ their tickets at honesty machines before boarding. Few bother.

Cracking up: The Euro is at risk of collapse because of the Greek financial crisis

This is not surprising: fiddling on a Herculean scale — from the owner of the smallest shop to the most powerful figures in business and politics — has become as much a part of Greek life as ouzo and olives.

Indeed, as well as not paying for their metro tickets, the people of Greece barely paid a penny of the underground’s £1.5 billion cost — a ‘sweetener’ from Brussels (and, therefore, the UK taxpayer) to help the country put on an impressive 2004 Olympics free of the city’s notorious traffic jams.

The transport perks are not confined to the customers. Incredibly, the average salary on Greece’s railways is £60,000, which includes cleaners and track workers – treble the earnings of the average private sector employee here.

The overground rail network is as big a racket as the EU-funded underground. While its annual income is only £80 million from ticket sales, the wage bill is more than £500m a year — prompting one Greek politician to famously remark that it would be cheaper to put all the commuters into private taxis.

‘We have a railroad company which is bankrupt beyond comprehension,’ says Stefans Manos, a former Greek finance minister. ‘And yet, there isn’t a single private company in Greece with that kind of average pay.’

Significantly, since entering Europe as part of an ill-fated dream by politicians of creating a European super-state, the wage bill of the Greek public sector has doubled in a decade. At the same time, perks and fiddles reminiscent of Britain in the union-controlled 1970s have flourished.

Greek farce: Living it up in swanky harbour-side restaurants

Ridiculously, Greek pastry chefs, radio announcers, hairdressers and masseurs in steam baths are among more than 600 professions allowed to retire at 50 (with a state pension of 95 per cent of their last working year’s earnings) — on account of the ‘arduous and perilous’ nature of their work.

This week, it was reported that every family in Britain could face a £14,000 bill to pay for Greece’s self-inflicted financial crisis. Such fears were denied yesterday after Brussels voted a massive new £100bn rescue package which, it insisted, would not need a contribution from Britain.

Even if this is true — and many British MPs have their doubts — we will still have to stump up £1billion to the bailout through the International Monetary Fund.

In return for this loan, European leaders want the Greeks’ free-spending ways to end immediately if the country is to be prevented from ‘infecting’ the world’s financial system. Naturally, the Greek people are not happy about this.

In Constitution Square this week, opposite the parliament, I witnessed thousands gathering to campaign against government cuts designed to save the country from bankruptcy.

After running battles with riot police, who used tear gas to disperse protesters, thousands are still camped out in the square ahead of a vote by Greek politicians next week on whether to accept Europe-imposed austerity measures.

Yet these protesters should direct their anger closer to home — to those Greeks who have for many years done their damndest to deny their country the dues they owe it.

Clash: Protesters continue to riot in Athens

Take a short trip on the metro  to the city’s cooler northern suburbs, and you will find an enclave of staggering opulence.

Here, in the suburb of Kifissia, amid clean, tree-lined streets full of designer boutiques and car showrooms selling luxury marques such as Porsche and Ferrari, live some of the richest men and women in the world.

With its streets paved with marble, and dotted with charming parks and cafes, this suburb is home to shipping tycoons such as Spiros Latsis, a billionaire and friend of Prince Charles, as well as countless other wealthy industrialists and politicians.

One of the reasons they are so rich is that rather than paying millions in tax to the Greek state, as they rightfully should, many of these residents are living entirely tax-free.

Along street after street of opulent mansions and villas, surrounded by high walls and with their own pools, most of the millionaires living here are, officially, virtually paupers.

How so? Simple: they are allowed to state their own earnings for tax purposes, figures which are rarely challenged. And rich Greeks take full advantage.

Astonishingly, only 5,000 people in a country of 12 million admit to earning more than £90,000 a year — a salary that would not be enough to buy a garden shed in Kifissia.

Yet studies have shown that more than 60,000 Greek homes each have investments worth more than £1m, let alone unknown quantities in overseas banks, prompting one economist to describe Greece as a ‘poor country full of rich people’.

Running battles: The riots are threatening to destabilise the Euro

Manipulating a corrupt tax system, many of the residents simply say that they earn below the basic tax threshold of around £10,000 a year, even though they own boats, second homes on Greek islands and properties overseas.

And, should the taxman rumble this common ruse, it can be dealt with using a ‘fakelaki’ — an envelope stuffed with cash. There is even a semi-official rate for bribes: passing a false tax return requires a payment of up to 10,000 euros (the average Greek family is reckoned to pay out £2,000 a year in fakelaki.)

Even more incredibly, Greek shipping magnates — the king of kings among the wealthy of Kifissia — are automatically exempt from tax, supposedly on account of the great benefits they bring the country.

Yet the shipyards are empty; once employing 15,000, they now have less than 500 to service the once-mighty Greek shipping lines which, like the rest of the country, are in terminal decline.

With Greek President George Papandreou calling for a crackdown on these tax dodgers — who are believed to cost the economy as much as £40bn a year — he is now resorting to bizarre means to identify the cheats. After issuing warnings last year, government officials say he is set to deploy helicopter snoopers, along with scrutiny of Google Earth satellite pictures, to show who has a swimming pool in the northern suburbs — an indicator, officials say, of the owner’s wealth.

Officially, just over 300 Kifissia residents admitted to having a pool. The true figure is believed to be 20,000. There is even a boom in sales of tarpaulins to cover pools and make them invisible to the aerial tax inspectors.

‘The most popular and effective measure used by owners is to camouflage their pool with a khaki military mesh to make it look like natural undergrowth,’ says Vasilis Logothetis, director of a major swimming pool construction company. ‘That way, neither helicopters nor Google Earth can spot them.’

But faced with the threat of a crackdown, money is now pouring out of the country into overseas tax havens such as Liechtenstein, the Bahamas and Cyprus.

Parliament: It could be all over for Greece, which is effectively bust from relying on EU cash from richer northern European countries

‘Other popular alternatives include setting up offshore companies in Cyprus or the British Virgin Islands, or the purchase of real estate abroad,’ says one doctor, who declares an income of less than £90,000 yet earns five times that amount.

There has also been a boom in London property purchases by Athens-based Greeks in an attempt to hide their true worth from their domestic tax authorities.

‘These anti-tax evasion measures by the government force us to resort to even more detailed tax evasion ploys,’ admits Petros Iliopoulos, a civil engineer.

Hotlines have been set up offering rewards for people who inform on tax dodgers. Last month, to show the government is serious, it named and shamed 68 high-earning doctors found guilty of tax evasion.

‘We will spare no effort to collect what is due to the state,’ said Evangelos Venizelos, the new Greek finance minister of the socialist  ruling party. ‘We promise to draft and apply a new and honest tax  system, one that has been needed for decades, so that taxes are duly paid by those who should pay.’

Yet, already, it is too late. Greece is effectively bust — relying on EU cash from richer northern European countries, but this has been the case ever since the country finally joined the euro in 2001.

Two years earlier, the country was barred from entering because it did not meet the financial criteria.

No matter: the Greeks simply cooked the books. Two years later, having falsely claimed to have met standards relating to manufacturing and industrial production and low inflation, the Greeks were allowed in.

Funds poured into the country from across Europe and the Greeks started spending like there was no tomorrow.

Money flowed into all areas of public life. As a result, for example, the Greek school system is now an over-staffed shambles, employing four times more teachers per pupil than Finland, the country with the highest-rated education system in Europe. ‘But we still have to pay for tutors for our two children,’ says Helena, an Athens mother. ‘The teachers are hopeless — they seem to spend their time off sick.’

Although Brussels has now agreed to provide the next stage of its debt payment programme to safeguard the count  ry’s immediate economic future, the Greek media still carries ominous warnings that the military may be forced to step in should the country’s foray into Europe end in ignominy, bankruptcy and rising violence.

For now, the crisis has simply been delayed. With European taxpayers facing the prospect of saving Greece from bankruptcy for the second year in a row, some say even the £100bn on offer will pay off only the interest on the country’s debts — meaning it will be broke again within two years.

Meanwhile, there are doom-laden warnings that the collapse of the Greek economy could be the catalyst for another global recession.

Perhaps if the Greeks themselves had shown more willingness to tighten their belts and pay taxes due to the state, voters across Europe might not now be feeling such anger towards them.

But having strolled the streets of Kifissia, and watched the Greek hordes stream past the honesty boxes on the underground, it does not take a degree in European economics to know when somebody is taking advantage — at our expense.

Read more: http://www.dailymail.co.uk/news/article-2007949/The-Big-Fat-Greek-Gravy-Train-A-special-investigation-EU-funded-culture-greed-tax-evasion-scandalous-waste.html#ixzz1QctgBLo8

China Conducts Emergency Reverse Repos To Calm Money Market Liquidity, Fails, As 2 Week SHIBOR Hits 8.6%

Submitted by Tyler Durden on 06/20/2011 23:24 -0400

• People’s Bank Of China
• Reverse Repo

Yesterday, when we pointed out the surge in the overnight SHIBOR, many were quick to dismiss this dramatic contraction in liquidity, because it happened to be a replica of a comparable such move before the Lunar New Year which did not end result in an end of the world type event. And while many ignored this very disturbing interbank lending lock up sign, there was someone who did not: the PBoC. According to Market News, “The People’s Bank of China has conducted reserve bond repurchase agreements with at least one bank in a bid to ease liquidity conditions, local media reports said Tuesday. The National Business Daily cited an interbank market trader as saying the central bank injected at least CNY50 billion into the China Construction Bank on Monday via a 14-day reverse repo at 7.5%.” Which incidentally is how it should be done: want to get emergency funding from your central bank? Sure. But it will cost you a whopping 7.5%. Now the question of whether CNY50 billion is enough (and in related news, the USDCNY parity just dropped to a fresh all time record low of 6.4690) is a different matter altogether: we expect to get today’s updated SHIBOR fixing any second, and have a feeling more reverse repos will have to be injected before this is over.

More:

http://georgewashington2.blogspot.com/2011/06/yastrow-we-are-on-verge-of-great-great.html

But this is not news to anyone who has been paying attention.

As I pointed out Tuesday, billion dollar fund managers agree: the government never fixed the underlying economic problems, so we’ll have another crash.

I provided details last month:

As I noted in January, the housing slump is worse than during the Great Depression. [Confirmed here]
As CNN Money points out today:

Wal-Mart’s core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.

“We’re seeing core consumers under a lot of pressure,” Duke said at an event in New York. “There’s no doubt that rising fuel prices are having an impact.”

Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in.

Lately, they’re “running out of money” at a faster clip, he said.

“Purchases are really dropping off by the end of the month even more than last year,” Duke said. “This end-of-month [purchases] cycle is growing to be a concern.

And – in case you still think that the 29% of Americans who think we’re in a depression are unduly pessimistic – take a look at what I wrote last December:

 

The following experts have – at some point during the last 2 years – said that the economic crisis could be worse than the Great Depression:

• Fed Chairman Ben Bernanke

• Former Fed Chairman Alan Greenspan (and see this andthis)

• Former Fed Chairman Paul Volcker

• Economics scholar and former Federal Reserve GovernorFrederic Mishkin

• The head of the Bank of England Mervyn King

• Nobel prize winning economist Joseph Stiglitz

• Nobel prize winning economist Paul Krugman

• Former Goldman Sachs chairman John Whitehead

• Economics professors Barry Eichengreen and and Kevin H. O’Rourke (updated here)

• Investment advisor, risk expert and “Black Swan” authorNassim Nicholas Taleb

• Well-known PhD economist Marc Faber

• Morgan Stanley’s UK equity strategist Graham Secker

• Former chief credit officer at Fannie Mae Edward J. Pinto

• Billionaire investor George Soros

• Senior British minister Ed Balls

***

States and Cities In Worst Shape Since the Great Depression

States and cities are in dire financial straits, and many may default in 2011.

California is issuing IOUs for only the second time since the Great Depression.

Things haven’t been this bad for state and local governments since the 30s.

Loan Loss Rate Higher than During the Great Depression

In October 2009, I reported:

In May, analyst Mike Mayo predicted that the bank loan loss rate would be higher than during the Great Depression.

In a new report, Moody’s has just confirmed (as summarized by Zero Hedge):

The most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.

And see this.

Here’s a chart summarizing the findings:

(click here for full chart).

Indeed, top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out that while banks faced aliquidity crisis during the Great Depression, today they are wholly insolvent. See this, this, this and this. Insolvency is much more severethan a shortage of liquidity.
 

Unemployment at or Near Depression Levels

USA Today reports today:

So many Americans have been jobless for so long that the government is changing how it records long-term unemployment.

Citing what it calls “an unprecedented rise” in long-term unemployment, the federal Bureau of Labor Statistics (BLS), beginning Saturday, will raise from two years to five years the upper limit on how long someone can be listed as having been jobless.

***

The change is a sign that bureau officials “are afraid that a cap of two years may be ‘understating the true average duration’ — but they won’t know by how much until they raise the upper limit,” says Linda Barrington, an economist who directs the Institute for Compensation Studies at Cornell University’s School of Industrial and Labor Relations.

***

“The BLS doesn’t make such changes lightly,” Barrington says. Stacey Standish, a bureau assistant press officer, says the two-year limit has been used for 33 years.

***

Although ”this feels like something we’ve not experienced” since the Great Depression, she says, economists need more information to be sure.

The following chart from Calculated Risk shows that this is not a normal spike in unemployment:

As does this chart from Clusterstock:

As I noted in October:

It is difficult to compare current unemployment with that during the Great Depression. In the Depression, unemployment numbers weren’t tracked very consistently, and the U-3 and U-6 statistics we use today weren’t used back then. And statistical “adjustments” such as the “birth-death model” are being used today that weren’t used in the 1930s.

But let’s discuss the facts we do know.

The Wall Street Journal noted in July 2009:

The average length of unemployment is higher than it’s been since government began tracking the data in 1948.

***

The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The Christian Science Monitor wrote an article in June entitled, “Length of unemployment reaches Great Depression levels“.

60 Minutes – in a must-watch segment – notes that our current situation tops the Great Depression in one respect: never have we had a recession this deep with a recovery

yep … the euro is probably going to rally.. in my opinion greece technically defaulted just now.. but it doesnt matter, perception is reality and perception is dicated by billionaires who think that this is a short term win.

this default just postpones the inevitable.  i like american companies with lots of cash… honestly. cash is soon to be king. sure valuations will drop, but if you own companies with a lot of cash.. and they’re smart.. you win