On the heels of my post yesterday arguing that the equity rally we are seeing is being fed by Chinese loan growth, I came across this interesting research piece by Wells Fargo asking if China would be the next bubble? They are obviously concerned that this loan growth could lead to asset bubbles. The team actually makes a good argument that the lending boom in China is still under historical norms, especially when compared to an over leveraged US.
The report in chart form:
Read the complete report by clicking on this Scribd document link.
Monday, July 20, 2009
Wells Fargo on Chinese loan growth : Is China the next bubble?
Thursday, July 16, 2009
Blockbuster Chinese June loan growth: FINAL stock surge ahead?
It is widely accepted that a big reason for the Chinese equity rally was the massive increase in banking loans and money supply. Thus when the Financial Times reported a blockbuster June loan growth, I wondered if this would lead to a July-August surge in the stock markets, the last one. Looks like we might be getting one.
Here are two charts showing the credit and money supply surge:
An excerpt from the FT
China’s increasingly fretful banking regulator worries that rampant credit growth “poses risks” to the financial system. The warning comes after banks advanced Rmb5,840bn ($855bn) of new loans in the first five months, almost triple the amount a year earlier. As for June’s lending, at $220bn it was a blockbuster as banks pumped up their quarterly loan numbers, just as they did in March (to $280bn).
An unknowable amount of this cash has ended up on the blackjack tables of Macao – or that other casino, the Shanghai Stock Exchange, where daily volumes are currently three times the five-year average. But even assuming that most has gone where intended, there are still many reasons to worry.
Early this year when we had a loan surge, it led to a Chinese equity markets rally, which fed on itself, propagating to the rest of the world. (The Indian elections were of course a factor in sustaining the current emerging markets bubble.) This February Bloomberg article alleged:
Chinese companies may be using record bank lending to invest in stocks, fueling a rally. As much as 660 billion yuan ($97 billion) may have been converted by
companies into term deposits or used to buy equities.
Companies are reluctant to increase production amid a slowdown in demand and some may have diverted funds meant for expansion into the stock market to chase higher returns.
Fast growth and sustainable growth are two DIFFERENT ideas. Growth for growth's sake might not lead to the desired outcome in the long term. The state mandated growth will lead to a huge misallocation of capital, depressing your return on invested capital. Don’t confuse this rally as a beginning of a new bull market. I would argue that what we are seeing is one final bull market gasp led by casino-China. Don’t misread the tea leaves. New lows are ahead of us.
Stay tuned.
Click Here for the full scoop....
Wednesday, July 15, 2009
US Federal receipts.
Interesting chart from Zero Hedge showing past and projected individual and corporate federal receipts. Looks like either the economy is going to boom, or individual taxes are going up, A LOT.
Raising taxes (or interest rates for that matter) will dampen any incipient recovery. Well, looks like we're already headed there. From WSJ: Small Business Faces Big Bite.
The House bill would place new taxes on the wealthiest people to help expand insurance coverage to the nation's 46 million uninsured people. The legislation calls for a 5.4% surtax on those with annual gross incomes exceeding $1 million.
Households with annual income between $500,000 a year and $1 million would be hit with a 1.5% surtax, and those earning between $350,000 and $500,000 would face a 1% surtax. Those rates could eventually increase to 3% and 2%, respectively, if the government doesn't achieve certain health-cost savings.
Greg Mankiw reports that once sales tax is factored in, the top earner would be facing a marginal tax rate of 55%.
Why is this important for markets? The bull market of the 1980s and 1990s coincided with tax reforms and tax cuts. Taxes, instead of being a tailwind, will actually hamper profitability and economic growth going forward. (I'm not suggesting that raising taxes is a wrong idea. I realize higher taxes is the price we have to pay for the excesses of the past few years.) Taxes are a very important determinant of market sentiment and the economy. Apart from healthcare, the cost of cap and trade is effectively a tax. Corporate taxes should be headed higher as well. (For instance, by taxing employer health insurance, removing the deduction of expenses from foreign operations, etc). This Economist article has more.
I don't think the markets have priced this in yet. Definitely not great news going forward. Click Here for the full scoop....
Tuesday, July 14, 2009
Dispatches from Mumbai : 26/11 videos
In November last year, the world stood still and watched in shock as terrorists went on a rampage in the bustling city of Mumbai in India. Came across this excellent but disturbing documentary by Channel 4/BBC on the 26/11 terrorist attacks in Mumbai. Called 'Terror in Mumbai', it basically consists of eyewitness accounts, clips from CCTV cameras, and other never seen before footage.
Video Part 1:
Part 2, Part 3, Part4 and Part 5.
Further food for thought:
The sad thing is even after all these months, it’s business as usual as far as apprehending the culprits are concerned. Pakistan just released the main suspect.
Friday, July 10, 2009
IMF: Initial Lessons of the Crisis
Took a week long hiatus from blogging. Hope everyone had a great July 4th weekend. There are a few emails in my inbox from my readers and I hopefully should get to them this weekend. (Sorry!)
Please do check out the news site of this blog which I’m constantly updating with great articles I like.
Click here to go the news page.
While the recent financial sector reforms get debated at length, IMF released a report with their initial assessment of the crisis, and lessons learned, sometime back. The 2 images below neatly summarizes their recommendations. You can read the complete report here:
Source:
http://www.imf.org/external/np/pp/eng/2009/020609.pdf
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