Yes Virginia...It's a Bubble...

[jk]

Re: Yes Virginia...It's a Bubble...

just read a piece by gary shilling saying that china climbed the developmental S curve and has come to the end of its period of rapid development - i.e. it's nearing a plateau for gdp/capita. meanwhile the whole commodities bubble was predicated on endless high consumption of commodities by china for capital investment - now it's over. all the manufacturing outsourcing and globalization that could be done has been done. the chinese miracle of accelerated growth in the 1990's-2000's will go the way of the japanese miracle of the 1950's-1980's.

The next chart indicates the average growth rates of real GDP during those same periods.

[GRG55]

Re: Yes Virginia...It's a Bubble...

IMF Urges China to Tackle ‘High’ Corporate Debt Immediately

June 10, 2016 — 8:00 PM MDT

The International Monetary Fund’s No. 2 official urged China to take immediate steps to tackle rising corporate debt or risk “dangerous detours” during the country’s transition to a consumption-oriented economy.

“Corporate debt remains a serious -- and growing -- problem that must be addressed immediately and with a commitment to serious reforms,” David Lipton, the IMF’s first deputy managing director, said in a speech to an economics conference on Saturday in Shenzhen, China.

The comments build on other recent warnings from the global crisis lender about China’s debt, including an estimate of a possible $1.3 trillion in loans extended to borrowers that don’t have sufficient income to cover interest payments. China has accumulated debt faster than any Group of 20 nation over the past decade, climbing to 247 percent of gross domestic product, according to Tom Orlik, an economist for Bloomberg Intelligence...

[Southernguy]

Re: Yes Virginia...It's a Bubble...

"Yet this year the China bears may get their revenge, if they have any money left to play with."
LOL

[GRG55]

Re: Yes Virginia...It's a Bubble...

Are Chinese authorities finally about to end "the dilemma"? Will they stay the course and replace ballooning off-balance-sheet debt with structured municipal bonds? Or will they once again get cold feet in the face of a potential drop in property markets and reverse course "temporarily"? Only time will tell.

China Tightening Curbs on Opaque Local Debt Spurs Market Tumble

Dec 9, 2014 6:46 AM MT

Bloomberg News


China stepped up efforts to curb the expansion of opaque local-government debt, sparking a tumble in riskier bonds and fueling the stock market’s biggest retreat in five years...

Rinse and repeat. Rinse and repeat. These things seem to go on forever.

http://www.telegraph.co.uk/business/...debt-hits-lim/

[lektrode]

Re: Yes Virginia...It's a Bubble...

...we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific technological elite.

could become?
this quote must be from the pre-facebook era
(seems downright hilarious, now - how 'the left' got all up in arms about the patriot act?)

[Woodsman]

Re: Yes Virginia...It's a Bubble...

The issue is fairly easy to assess. I think Eisenhower was the first to warn about this.

Ike gave a tepid warning, yes, but took pains not to seem too alarmed lest the bags of cash and sweetheart land deals stop and threaten his time on the links.

Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

In this revolution, research has become central; it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.

Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present and is gravely to be regarded. Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific technological elite.

[santafe2]

Re: Yes Virginia...It's a Bubble...

I find this work, which seems pretty objective and well researched...
Plenty of economic implications, IMO

http://www.counterpunch.org/2016/05/...ality-science/

The issue is fairly easy to assess. I think Eisenhower was the first to warn about this.

According to OMB the military consumed 55% of the federal discretionary budget in 2015 whereas science got 3%!!

[Southernguy]

Re: Yes Virginia...It's a Bubble...

I find this work, which seems pretty objective and well researched...
Plenty of economic implications, IMO

http://www.counterpunch.org/2016/05/...ality-science/

[touchring]

Re: Yes Virginia...It's a Bubble...

I think you have it right, jk.
China has been pretending that it's SOE business are sound and successful and not like the communist charade we saw in the old Soviet Union.
China has also been pretending that it's big banks are just as good as any other, running on the same sensible business practices as any other bank in the world.

The term SOE is a dangerous one to use because it usually assumes that all companies that are affiliated to the Chinese government are state owned. Trying to decipher the real ownership of SOE is like trying to determine who owns the FED.

Then there's the issue of ownership vs control. You can own only 1% of it, but have total control.

https://next.ft.com/content/469bde20...3-00144feab7de

[GRG55]

Re: Yes Virginia...It's a Bubble...

The "unimaginable" outcome. What a surprise:

http://www.bloomberg.com/news/articl...on-bond-market

http://www.bloombergview.com/article...an-style-slump

[GRG55]

Re: Yes Virginia...It's a Bubble...

is what i've written below an oversimplification? and if so would someone educate me?

the soe's are owned by the gov't. the banks are owned by the gov't. the bank loans to the soe's are one branch of the gov't "lending" to another branch of the gov't, essentially just an accounting gimmick. swapping the "loans" for "equity" means that the govt is shuffling paper to make the "loans" disappear. magic!

That's the way I see it, and what I meant by "world's biggest perpetual motion machine"

[Southernguy]

Re: Yes Virginia...It's a Bubble...

Stockman's I find interesting respect his analysis on real stuff China production (steel, ships, etc.). I see, however his scenario too doomish.
For your opinions I paste some other work I find relevant as to general economic views:
March 10, 2016 A Warning From the B.I.S.: the Calm Before the Storm?

by Mike Whitney

The Bank for International Settlements (BIS) is worried that recent ructions in the equities markets could be a sign that another financial crisis is brewing. In a sobering report titled “Uneasy calm gives way to turbulence” the BIS states grimly: “We may not be seeing isolated bolts from the blue but the signs of a gathering storm that has been building for a long time.”
The authors of the report are particularly concerned that the plunge in stock prices and the slowdown in global growth are taking place at the same time that investor confidence in central banks is waning. The Bank Of Japan’s announcement that it planned to introduce negative interest rates (aka–NIRP or negative interest rate policy) in late January illustrates this point. The BOJ hoped that by surprising the market, the policy would have greater impact on borrowing thus generating more growth. But, instead, the announcement set off a “second phase of turbulence” in stock and currency markets as nervous investors sold off risk assets and moved into safe haven bonds. The BOJ’s action was seen by many as act of desperation by a policymaker that is rapidly losing control of the system. According to the BIS:

“Underlying some of the turbulence of the past few months was a growing perception in financial markets that central banks might be running out of effective policy options.”

This is a recurrent theme in the BIS report, the notion that global CBs have already used their most powerful weapons and are currently trying to muddle-by with untested, experimental policies like negative rates that slash bank profitability while having little impact on lending.
While the BIS report provides a good rundown of recent events in the financial markets, it fails to blame central banks for any of the problems for which they alone are responsible. The sluggish performance of the global economy, the massive debt overhang, and the erratic behavior of the stock market are all directly attributable to the cheap money policies coordinated and implemented by central banks following the Great Recession in 2008. It’s hard to believe that the BIS’s failure to insert this fact into its narrative was purely accidental.
But the real problem with the BIS report is not that it refuses to assign blame for the current condition of the markets and the economy, but that it deliberately misleads its readers about the facts. While it’s true that China is facing slower growth, oil prices are plunging, emerging markets have been battered by capital flight, and yields on junk bonds are relentlessly rising, it’s also true that central bank policy is not primarily designed to address these problems, but to ensure the continued profitability of its main constituents, the big banks and mega-corporations. Keep in mind, the global economy has been sputtering for the last 6 years, but the BIS has only expressed alarm just recently. Why? What’s changed?
What’s changed is profits are down, and when profits are down, Wall Street and its corporate allies lean on the central banks to work the levers to improve conditions. Here’s more on the so called “earnings recession” from an article in the Wall Street Journal titled “S&P 500 Earnings: Far Worse Than Advertised”:

“There’s a big difference between companies’ advertised performance in 2015 and how they actually did.
How big? ….S&P earnings per share fell by 12.7%, according to S&P Dow Jones Indices. That is the sharpest decline since the financial crisis year of 2008. Plus, the reported earnings were 25% lower than the pro forma figures—the widest difference since 2008 when companies took a record amount of charges.
The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem. Even worse, investors may be paying for earnings and growth that aren’t anywhere near what they think. The result could be that share prices have even further to fall before they entice true value investors.” ( “S&P 500 Earnings: Far Worse Than Advertised“, Wall Street Journal)

Profits are down and stocks are in trouble. Is it any wonder why the BIS is running around with its hair on fire?
Also, corporate earnings have dropped for two straight quarters which is a sign that the economy is headed for a slump. Take a look at this clip from CNBC:

“Recessions have followed consecutive quarters of earnings declines 81 percent of the time, according to an analysis from JPMorgan Chase strategists, who said they combed through 115 years of records for their findings.”(CNBC)

“81 percent” chance of a recession?
Yep.
This is what the BIS is worried about. They could are less about China or the instability they’ve created with their zero rates and cheap money policies. Those things simply don’t factor into their decision-making. It’s all just fluff for the sheeple. Here’s more from Jim Quinn at Burning Platform:

“The increasing desperation of corporate CEOs is clear, as accounting gimmicks and attempts to manipulate earnings in 2015 has resulted in the 2nd largest discrepancy between reported results and GAAP results in history, only surpassed in 2008…..Based on fake reported earnings per share, the profits of the S&P 500 mega-corporations were essentially flat between 2014 and 2015…..earnings per share plunged by 12.7%, the largest decline since the memorable year of 2008….

With approximately $270 billion of “one time” add-backs to income used to deceive the public, the true valuation of the median S&P 500 stock is now the highest in history – higher than 1929, 2000, and 2007. Wall Street’s latest con game, with the active participation of corporate CEO co-conspirators, is a last ditch effort to fend off the inevitable stock market crash….All economic indicators are flashing red for recession. Stocks are poised for a 40% decline faster than you can say Wall Street criminal banks.” (“The Great Corporate Earnings Fraud“, Burning Platform)
Get it? When the profitability of the world’s biggest corporations are at stake, the central banks will move heaven and earth to lend a hand. This was the basic subtext of the discussions at the recent G-20 summit in Shanghai, China. The finance ministers and central bankers wracked their brains for two days to see if they could settle on new strategies for boosting earnings. In fact, the austerity-minded IMF even called on the G-20 to support a coordinated plan for fiscal stimulus to boost activity and decrease the risks to the equities markets. Unfortunately, finance ministers balked because fiscal stimulus puts upward pressure on wages and shifts more wealth to working stiffs. That’s why the idea was shelved, because the oligarchs can’t stand the idea that workers are getting a leg-up. What they want is a workforce that scrapes by on minimum wage and lives in constant fear of losing their job. The class war continues to be a top priority among the nations voracious CEOs and corporate bigwigs.
The “failed” G-20 summit was clearly a turning point for the markets. Now that the central banks are out of ammo, the only hope to keep stock prices artificially high rested on Keynesian fiscal stimulus injected directly into the real economy. That hope was extinguished at the meetings. The prospect that equities can continue to climb higher in the face of shrinking profits, tighter credit, slower growth and bigger corporate debtloads is unrealistic to say the least. Just check out this excerpt from a recent article at Bloomberg:

“Companies still have a little time before they must pay down the bulk of $9.5 trillion of debt maturing in the next five years….But it’s not getting any easier for these corporations to borrow, at least not in the U.S. In fact, many of these obligations are becoming harder and more expensive to repay at a time when companies face a historic pile of bonds and loans coming due.
It’s not terribly surprising that companies have a bigger debt load to pay down. They borrowed trillions of dollars on the heels of unprecedented stimulus efforts started by the Federal Reserve at the end of 2008 during the worst financial crisis since the Depression. They kept piling on the leverage as central banks around the world doubled down on low-rate policies and kept purchasing assets to encourage investors to buy riskier securities….”(“Scaling the $9.5 trillion debt wall, Bloomberg)

Chart: macronomy.blogspot.com

What the author is saying is that central bank policy seduced corporations into borrowing tons of money that they frittered-away on stock buybacks and dividends, neither of which create the revenue streams necessary to repay their debts. So rather than build their companies for the future, (Business investment is at record lows) corporations have been behaving the same way the Wall Street banks acted before the Crash of ’08. They’ve been borrowing trillions from Mom and Pop investors via the bond market, goosing their share prices through stock buybacks, increasing executive compensation, and dumping the money in offshore accounts. Now the bill is coming due, and they don’t have the money to repay the debt or the earnings-potential to avoid default. Something’s gotta give.

Chart: Burning Platform

Corporate red ink is one of many reasons why the BIS thinks “We may not be seeing isolated bolts from the blue but the signs of a gathering storm that has been building for a long time.” Like the gigantic asset-price bubble in stocks, it’s a sign that the economy and the markets are headed for a long and painful period of adjustment.

[thriftyandboringinohio]

Re: Yes Virginia...It's a Bubble...

is what i've written below an oversimplification? and if so would someone educate me?

the soe's are owned by the gov't. the banks are owned by the gov't. the bank loans to the soe's are one branch of the gov't "lending" to another branch of the gov't, essentially just an accounting gimmick. swapping the "loans" for "equity" means that the govt is shuffling paper to make the "loans" disappear. magic!

I think you have it right, jk.
China has been pretending that it's SOE business are sound and successful and not like the communist charade we saw in the old Soviet Union.
China has also been pretending that it's big banks are just as good as any other, running on the same sensible business practices as any other bank in the world.

Of course, neither thing is true.
This maneuver lets them keep up appearances for a while longer.
Instead of big insolvent Chinese banks holding big piles of non-performing loans, they can instead claim to be big banks with NO non-performing loans, but holding worthless equity in worthless companies on their books at the same face value as the old worthless loans. Problem solved. A zillion yuan of bad loans becomes a zillion yuan of worthless stocks.

Over on zerocred this was discussed, and I liked the authors comment here:

....What this grand equitization does not do, is make the underlying business any more profitable or viable: after all the loans are bad because the companies no longer can generate even the required cash interest payment - as a result of China's unprecedented excess capacity and low commodity prices which prevent corporate viability...

Here is a link to a David Stockman article that relates directly to this. http://davidstockmanscontracorner.co...rs-of-beijing/

[jk]

Re: Yes Virginia...It's a Bubble...

is what i've written below an oversimplification? and if so would someone educate me?

the soe's are owned by the gov't. the banks are owned by the gov't. the bank loans to the soe's are one branch of the gov't "lending" to another branch of the gov't, essentially just an accounting gimmick. swapping the "loans" for "equity" means that the govt is shuffling paper to make the "loans" disappear. magic!

[GRG55]

Re: Yes Virginia...It's a Bubble...

Wasn't difficult to see this one coming. Government lending to government and then government swapping the unpayable loans for equity in the non-performing government entity. World's biggest perpetual motion machine.

Thu Mar 10, 2016 7:08am EST

Exclusive: China to ease commercial banks' bad debt burden via equity swaps - sources

China's central bank is preparing regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms, two people with direct knowledge of the new policy told Reuters.

The new rules would reduce commercial banks' non-performing loan (NPL) ratios, and free up cash for fresh lending for investment in a new wave of infrastructure products and factory upgrades that the government hopes will rejuvenate the world's second-largest economy.NPLs surged to a decade-high last year as China's economy grew at its slowest pace in a quarter of a century. Official data showed banks held more than 4 trillion yuan ($614 billion) in NPLs and "special mention" loans, or debts that could sour, at the year-end...

..."Such a rule change shows banks' bad loans have risen to such a level that this issue has to be tackled now before it's too late," said Wu Kan, Shanghai-based head of equity trading at investment firm Shanshan Finance.State banks have extended loans to government financing vehicles and state-owned coal and steel producers, so this policy can help give lenders time to deal with non-performing assets as China pushes supply-side reforms, Wu added.

The quality of assets held by banks is worse than it looks, analysts have said. To avoid stumping up capital and to protect their balance sheets, some banks have under-reported bad loans and under-recognized overdue debt.The top banking regulator has warned commercial lenders to pay special attention to risks...

...Previously, Chinese commercial banks usually dealt with NPLs by selling them at a discount to state-designated asset management companies which, in turn, would try to recover the debt or re-sell at a profit to distressed debt investors.

The sources had no further detail on how banks would value the new equity stakes, which would represent assets on their balance sheets, or what ratio or amount of NPLs they would be able to convert this way.

On paper, the move would also represent a way for indebted companies to reduce their leverage, cutting the cost of servicing debt and making them more worthy of fresh credit....