What Do Emerging Markets Have In Common?
A reader asked, “Does the stock market’s futures worry you?”
From USA Today. “Wall Street is a world away from Turkey and Argentina and the other developing economies dotting the globe. But recent news of financial tumult and plunging currencies in some emerging markets, coupled with bad memories of past crises over the past 20 years that began in Mexico, Asia and Russia, has imported a boatload of financial angst back to the United States.”
“Hot money can turn cold. Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.”
“A crisis in confidence could surface. Financial stability is built on confidence, and sentiment can shift quickly if confidence erodes, says Joe Quinlan, chief market strategist at U.S. Trust. ‘A declining currency is the clearest sign of investors bolting for the door; it’s a vote of no confidence that usually sparks sell offs in other assets, both credit and equity,’ says Quinlan. ‘And because investors still view emerging market assets as homogeneous, a swooning currency or asset class in one emerging market usually prompts sell offs in other emerging markets, raising the odds of contagion.’”
The China Money Network. “The author is Standard & Poor’s Ratings Services’ director of financial institutions ratings, Liao Qiang: The potential failure of a collective trust program distributed by Industrial and Commercial Bank of China Ltd. (ICBC) could expose the vulnerability of China’s banking industry. We are inclined to believe that the RMB3 billion collective trust program will fail, because Chinese policymakers have long recognized the moral hazard stemming from “make-whole” practices and the detrimental impact to economic balance. We do not expect ICBC to bail out the program.”
“If the collective trust program is bailed out by some stakeholders other than ICBC, the moral hazard and potential problems in the system will still continue to grow. While our BICRA on China is unlikely to face immediate downward pressure, a good opportunity of instilling market discipline will have been missed.”
“We expect Chinese banks to take differentiated positions toward distressed wealth management products they have distributed. Chinese banks are unlikely to bail out high-yield wealth management products unless the banks happen to be the originator of the products.”
“In China, trust companies or unregulated non-bank entities originate most high-yield wealth management products. We view mass-market wealth management products as term deposits in disguise. We expect timely and sufficient liquidity support from the banks from which these products originate.”
“We continue to view China’s shadow banking more as a symptom than a cause of some emerging systemic risks to the banking sector and the wider economy. In our view, Chinese banks have already accumulated high credit risks on their balance sheets. But distorted growth in shadow banking could lead to further unintended buildup of credit risks that banks may not fully appreciate. Certain parts of the shadow banking sector, notably trust companies, may prove to be the weak link of China’s financial system.”
I was thinking this morning about 2005, and what followed. The first “official” reports that trouble was ahead were the Fitch, S&P and Moodys reports. And it wasn’t in the newspapers; I had to go through their PDF’s. And I remembered that the GSE’s, all the big and small banks, the subprime lenders, none of them bought a single house. It was the lending that got hit. The paper, or whatever you want to call it. And the flimsiest paper turned out to be obscure derivatives of the mortgages.
If China has a problem here, it isn’t going to be from a coal mine trust. It’s the bubbles.
“Financial stability is built on confidence,
Translation: A hollowed out economy founded on debt is founded on micromanaged press releases, copious amounts of lies and a steady supply of suckers to enslave.
When there is nothing left, implement fractional reserve banking.
“Financial stability is built on confidence,…”
Maybe the newfangled psychological variant. Back in the day it depended on jobs, infrastructure, machines, etc etc etc.
Almost forgot: Prices in line with the value of underlying assets is also a huge factor in financial stability. When homes are suddenly selling at much higher multiples of incomes or rents than they traditionally sold for, you can pretty much bet your bottom dollar that financial stability is out the window, replaced by a ginormous bubble.
In all seriousness, when was “back in the day”? The 50s? The 80s? the 1880s? Do we want those years again?
I don’t know. How about you identify when fundamentals were in play and we’ll discuss.
I think one could say the 50s-early 60s, but the world was such a different place back then. Most of modernized world was still recovering from the war, the third world wasn’t even close to being a factor, so we were quite the top dog. High tax rate back then, though, right?
Just for fun, in 1960, total fed spending was 97 billion. 53.3 billion was for defense…
short answer is I don’t know. Perhaps the fundamentals haven’t been around since the 1st caveman traded a hand axe to his cousin.
Well… after all this is The Housing Bubble Blog so let’s begin with housing.
Housing fundamentals began deviating slightly through out the 1980’s as mini-bubbles developed and imploded in the oil patch and the northeast. Mostly regional, the damage was contained to those regions as I recall. The fundamentals were re-established in the early 1990’s so it’s accurate and precise to say that post Iraq War #1 was the last time that housing mirrored fundamentals.
Be prepared for BlueSkye to suggest it was the early 1980’s. He may be right.
FPSS used to often opine here that U.S. housing prices would eventually revert to 1983 levels. Not sure whether he meant real or nominal prices, or whether this prediction reflected a belief that decoupling of housing prices from fundamental dated to 1983.
Not sure whether he meant real or nominal prices
Re: FPSS’ forecast: I’m pretty sure that he meant real; he also never would explain why 1983 was the magic year that decoupling began, even though I asked. I guess he thought it was too obvious to explain.
FPSS meant nominal. And so do I.
To be sure, 1983 was a bottom of sorts. Lots of folks were wiped out by the huge spike in interest rates over the 1979-1982. I don’t know off the top of my head how high mortgage rates went. I vaguely recall the 30-year Treasury bond yield peaked at a level north of 14%, and the 30-year mortgage rate would have been higher.
I can’t imagine too many folks were trying to buy in 1983, as mortgage rates were crushingly high and lots of folks had recently seen their jobs or businesses go up in smoke.
Here is a figure that shows 30-year mortgage rates peaking around 18% in 1982 or so, then dropping to maybe 12.5% by 1983. After that, rates stayed above 10% for most of the time through 1990.
“Lots of folks were wiped out by the huge spike in interest rates over the 1979-1982.”
Anybody involved in the construction trades, which involves many people in a variety of industries, were dead or near death. It was an awful time of bouncing checks, fraudulent performance bonds, voided contracts, outright lies, etc., you couldn’t trust anyone.
1984 Our first home- ARM 17.5%
Almost the whole mortgage market was ARMS. (Volcker days)
Adjustable 5 basis points either way
Perfect credit\no debt-jumped over hoops
10% down payment
Eventually refi’d into a 8%-9%APR fixed, iirc, and that was a bargain w/ perfect credit!
Now homemoaners whine over 4.5%. Insane.
I’d rather be on the hook for 30 years of payments and walk away than be you with your personal losses as high as they are.
“The Justice and Development Party (AKP) era is remembered and will be remembered with construction. Rapid rises in construction investments were a reality, both in the public and the private sector. Whether the construction processes that particularly “boomed” in Istanbul were in accordance with development plan laws or urbanization codes, whether the urban profits were channeled to particular capital groups that have been a significant leg in the corruption investigations launched at the end of 2013.”
“After 2002, as a result of both the favorable domestic and international climates, the influx of external resources increased, and each year there was a flow of external resources exceeding an average of 40 billion dollars.”
“The incoming external resource has been in the form of foreign direct investment, short term investments in the stock market and mostly as foreign loans.”
“The Turkish lira fell to new record lows on Friday. Many of Turkey’s current problem relate to risks that even novice emerging market investors should know about. So in many ways, Turkey is arguably the epitome of what can go wrong in an emerging market.”
“The country had long been one of the most exciting emerging markets in the world thanks to favorable demographics and attractive interest rates for bond investors. But now growth is slowing and investors are worried about the country’s wide current account deficit, which stands at around 7% of GDP.”
“In a note written earlier this month, Morgan Stanley’s Tevfik Aksoy writes that he has been approaching Turkey with caution “due to its sizable external funding need and its dependence on low-quality funding simply because of the anticipation of Fed tapering.”
“And of course there are concerns that Turkey’s central bank could move to raise interest rates to shore up the lira even as economic growth is slowing.”
Shouldn’t a slump in the Argentine Peso increase their exports?
And as India found out recently, it increases food prices and makes it harder to attract capital. So India hiked interest rates to defend the currency.
No doubt currency devaluation is a double-edged sword which creates winners and losers, just like almost every other top-down macroeconomic intervention under the sun (albeit this is almost never mentioned by macroeconomic policy makers!).
I’m president of a fraternity’s house corporation. We are responsible for a 115 year old 12-bedroom house. Every time we fix something, something else breaks. Roof, eavestroughs, deck, brickwork, floors, windows, sinnks, pipes, wiring, basement, furnace, stairs, etc.
Repairs are never-ending. Young guys are pretty useless when it comes to fixing anything by themselves.
I used to like the idea of buying an old house. Not any more.
I used to like the idea of buying an old house. Not any more ??
I have owned and moderately restored three 100+ year old homes…They are black-hole-pits for money….
And it always costs more than anticipated.
The best thing to do with a 100+ old house is to gut it completely and redo it. Get it all fixed and up to code.
Nothing worse than fixing up something and have a 50 year old pipe burst…
It costs more to retrofit than to demo and come back out of the ground again.
Better yet, rent it until it’s uninhabitable and then donate it.
SEAN countries are different from EU and US- the folks have to work
no bama phone no excuses - chop chop
I’m buying if they come down some more
ETFs : dem.dgs.ews.ewm
In Asia the saying is:
No Work…..No Rice
“No Work…..No Rice”
And if a family shuns one of their own the hamlet will consider that individual ostracized.
There are probably more deadbeats in Asia, than in all of your boot-strappin west, partner. Try actually living here for a while, and maybe running a business… you’ll soon see through the myths that you were indoctrinated to, in ‘mericuh.’
23 January 2014 Last updated at 16:12 ET
Ukraine protests spread beyond Kiev amid crisis talks
Daniel Sandford in Kiev: ”Nobody knows how long [Kiev's truce] will hold”
Continue reading the main story
Ukraine’s protests
Torture allegations
Q&A: What’s behind protests?
Protest deaths shake media
First deaths in Kiev
Violent protests in Ukraine have spread beyond the capital, Kiev, as President Viktor Yanukovych held crisis talks with three key opposition leaders.
…
What a real OWS should like.
But no American 18 year old is going to have his head bashed in so that firemen can continue to get their $100,000 pensions or so that illegals can get more and more welfare.
The Tea Party focus was never on violent demonstrations. They have focused on getting their members elected (with some success).
How is the news from Thailand today?
One of the best ways to stop worrying about your own problems is to focus attention on the problems of others.
Bangkok Post
Three killed in mall shooting outside Washington: police
Published: 26 Jan 2014 at 00.49
Online news: World
Three people were killed in a shooting at a popular shopping mall in a suburb of the US capital on Saturday, authorities said.
Shoppers leave the Columbia Mall after a fatal shooting on January 25, 2014, in Columbia, Maryland
Police in the state of Maryland, confirming the fatalities via Twitter, said the suspected shooter at the Columbia Mall was among the dead.
“Police are in mall to clear people out safely,” it tweeted. “Mall is believed to be secure, but people inside should wait for police.”
First responders were alerted by an emergency police call at 1615 GMT indicating shots were fired at the two-story shopping center, it said.
“Police made entry and found three dead, one found near a gun and ammunition,” it tweeted.
Authorities did not immediately provide more details on other victims or the motive of the shooting.
Earlier news reports had said that the mall, located in Columbia, Maryland, about 45 minutes outside Washington, was on “lockdown” because of an “active shooter situation.”
The mall of about 200 stores, which has an indoor carousel and play area, is a favored weekend destination for families and young children.
The Baltimore Sun newspaper said shoppers reported hearing gunfire before fleeing the upscale mall, home to several department stores such as Lord & Taylor, Macy’s and Nordstrom.
NBC television spoke to one man who said he was in phone contact with his daughter, who was taking shelter in a Bank of America branch inside the shopping center, along with dozens of others.
The young woman described a chaotic scene as shoppers were told to evacuate or quickly take shelter.
“People were panicking,” the man said.
…
Protesters ready to cripple advance voting
COMMISSION FEARS VIOLENCE AT BOOTHS IN BANGKOK, SOUTH
Published: 26 Jan 2014
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Meltdown: The men who crashed the world
The first of a four-part investigation into the world of greed and recklessness that led to financial collapse.
Meltdown Last updated: 25 Jan 2014 13:11
In the first episode of Meltdown, we hear about four men who brought down the global economy: a billionaire mortgage-seller who fooled millions; a high-rolling banker with a fatal weakness; a ferocious Wall Street predator; and the power behind the throne.
The crash of September 2008 brought the largest bankruptcies in world history, pushing more than 30 million people into unemployment and bringing many countries to the edge of insolvency. Wall Street turned back the clock to 1929.
But how did it all go so wrong?
Lack of government regulation; easy lending in the US housing market meant anyone could qualify for a home loan with no government regulations in place.
Also, London was competing with New York as the banking capital of the world. Gordon Brown, the British finance minister at the time, introduced ‘light touch regulation’ - giving bankers a free hand in the marketplace.
All this, and with key players making the wrong financial decisions, saw the world’s biggest financial collapse.
Meltdown, a four-part series on the secret history of the global financial collapse, can be seen each week from January 24, 2014, at the following times GMT: Friday: 2000; Saturday: 1200; Sunday: 0100; Monday: 0600
What’s Behind the Emerging-Market Meltdown
By the Editors Jan 24, 2014 3:06 PM PT
Emerging-market economies had a brutal week. For years, during the crash and its aftermath, they did well as the advanced economies slumped. Recently, not so much. Many developing countries are seeing their currencies drop and their bonds and equities hammered. Just as the global recovery appeared to be strengthening, a fresh source of instability has presented itself.
The issue now is how to keep the turmoil from derailing the global expansion. In a way, this was not an unexpected development: The recession in the advanced economies caused central banks to push short-term interest rates to zero and buy assets to drive long-term rates down as well. Capital flowed to the developing world in search of better returns. As investors prepare for a resumption of normal monetary policy, demand for emerging-market assets is bound to fall. The question has always been whether this adjustment would be smooth or abrupt.
The problem is that two things are amplifying the adjustment of capital flows: first, the dependence of global capital markets on the dollar, and hence on the policies of the U.S. Federal Reserve; and second, policy mistakes in some of the most-watched developing economies. In the short term, there’s little to be done about the dollar’s destabilizing pre-eminence. But economic reform in some of the main emerging-market economies, desirable in its own right, would help calm nerves.
Paradoxically, the U.S. market crash of 2007 and 2008 entrenched the dollar’s global dominance. Investors sought safety, and U.S. government debt remains the world’s safest asset. Despite tremendous federal borrowing, U.S. debt was soon in short supply. The Fed’s quantitative easing took trillions out of the market, and emerging-market governments bought dollars as a cushion against bad news and to hold their currencies (and export prices) down.
As a result, the emerging markets are unduly sensitive to fluctuations — real or imagined — in U.S. monetary policy. The Fed has recently begun to pivot away from quantitative easing, signaling that the era of extraordinarily loose U.S. monetary policy will come to an end. This is making investors think twice about putting their money in developing countries.
The Fed has begun to taper QE too soon — inflation in the U.S. is still low, and the labor market is still slack. On the other hand, the reduction in the pace of asset purchases is gentle (some would say to a fault), and at some point winding down the Fed’s unorthodox measures was going to be necessary.
The remedy for undue global sensitivity to U.S. monetary policy isn’t a different approach by the Fed; rather, it’s burden-sharing. Eventually, other currencies, such as the euro and the renminbi, need to function alongside the dollar as reserve currencies. In the meantime, better U.S. fiscal policy - - less budget contraction now, when the economy needs stimulus, and more later — would also lighten the Fed’s load.
…
ByAnthony Mirhaydari MoneyWatch
January 24, 2014, 5:28 PM
How global currency woes sparked a U.S. market meltdown
NEW YORK, NY - Traders on the floor of the New York Stock Exchange on January 24, 2014 in New York City. Spencer Platt, Getty Images
Stocks collapsed on Friday, capping the worst week for U.S. stocks in 19 months in a day of brutal, relentless selling. The Dow Jones industrial average lost 318 points, or nearly two percent, as it dropped below the 16,000 level with all the grace and finesse of a piano falling from a third-story balcony.
A toxic brew of catalysts are to blame, including slowing factory activity in China, trouble in the Chinese banking system, a reversal in the Japanese yen, and currency value collapses throughout the emerging world from Thailand to Argentina.
All have a common thread: We’ve apparently reached the limit of what cheap money stimulus can do, at least in its current form. And that’s causing ripples to spread through the global currency markets.
Every bull market features, at the terminal stage, a raison d’être for the suspension of disbelief. In the late 1800s, it was that you couldn’t lose in the railroads. In the 1920s, is was that the Fed’s bond purchases would continue to bolster stocks (sound familiar?). Then anything with a dot-com in the name was a surefire hit. Then it was about how home prices could never go down.
Each and every time, the cold chill of reality breaks the speculative fever.
After a historic market performance in 2013 fueled by the belief the Fed’s cheap money could solve all — when investors ignored realities on the ground like growing inequality, stagnant wages, swollen rolls of food stamp recipients, and overreliance on credit to bolster earnings per share and lift stocks — that seems to be happening again.
This time, the ever-so-slight withdrawal of monetary policy stimulus by the four major central banks is causing shockwaves in the foreign exchange market.
The Federal Reserve, after months of warning, trimmed the monthly run rate of its ongoing “QE3″ bond purchase stimulus by $10 billion to $75 billion. After a drop in the unemployment rate to 6.7 percent (driven mainly by folks dropping out of the labor force), Fed officials have been banging the drum that another $10 billion taper is likely at its next policy announcement on Wednesday.
…
“After a historic market performance in 2013 fueled by the belief the Fed’s cheap money could solve all — when investors ignored realities on the ground like growing inequality, stagnant wages, swollen rolls of food stamp recipients, and overreliance on credit to bolster earnings per share and lift stocks — that seems to be happening again.”
Our nation is in a state of rapid decline. Bestowing financial gifts upon the wealthy elite so they can run up the prices of all asset classes is only accelerating the decline. The idea that increasing the prices of necessities will somehow enrich the masses would be hysterical if it weren’t so sick and twisted.
“Our nation is in a state of rapid decline. Bestowing financial gifts upon the wealthy elite so they can run up the prices of all asset classes is only accelerating the decline.”
+1 Sort of like the movie, “Enemy At The Gates.” The wealthy enjoy a caviar and champagne party a short distance from Stalingrad’s front lines where the conscripts are being ground up like hamburger.
ups and downs. Emerging Markets.
Since inception in 1994 VEIEX had an annual gain of over 7%.
Since inception in 1990 PRASX had an annual gain of over 9%.
Even two year dips are just a drop in the bucket compared to the average annual gains.
Emerging markets are, to me, kind of like physical precious metals - insurance against American stock market drops.
The USA has dropped out of The Heritage Foundation’s top ten freest economies. How long are people going to continue to beat the old drum that the USA drives the world economy? There are nations that do not have the demographic worries of an aging populace. The important nations of the future have young productive populations and long lifespans. I’m not sure which nations feature that right now, but unless the USA returns to its roots of liberty and freedom, we will be left in the dust.
who needs freedom
we have free phones and hc and can live foe FREE in parents basments
never thought , or wanted to see this again
10yr 2.73%
Looks as though mortgage rates will go down and home prices will rise somore, too!
Flight to safety. And gold up to $1270. Up 5% from one month ago.
Yep. Anyone who still owns gold or long-term Treasurys in their investment portfolio must feel somewhat vindicated at this point for having kept the faith.
And precious metal mining stocks do go the opposite of the general stock market
http://blogs.barrons.com/focusonfunds/2014/01/22/owning-junior-gold-and-silver-miners-just-in-case/?mod=yahoobarrons&ru=yahoo
Note that gold and Treasurys decoupled from the U.S. stock market last year. Now that the flight-to-quality is underway, the same decoupling is still in play, though gold and Treasurys are now going up while stocks drop like a rock.
This could be a false drop on the stock markets though. But after a 5 year run I think the stock boom is long in the tooth. It’s why I moved 10% of my 401k into a conservative income fund with average of 30 month maturities.
I was reading the blog of the Wishful Acres Farm in NorthWest Illinois. They bought the 10 acre foreclosed farm in 2011. The tax rate was 10.87% in 2013. Their farm with a 134 year old house was reassessed and now that it is no longer in distress the tax is being raised 27%. However; the farmers say the state online database says the property value is being increased by 45%. The farmers have concluded this means their tax bill will be $6000 for the year. They are looking to sell and move to a more small business friendly state. According to what the farmers wrote, the farmhouse and land are valued at a higher value now, than at any time in history.
The tax is now more than the mortgage.
“The tax is now more than the mortgage.”
+1 Obama’s dream come true.
1. You never really own your house/land - you just rent it from the state.
2. In a closed shop public union goon controlled state - your property taxes will go to infinity before one public union goon pension is touched.
3. There is only one solution. Leave and take you assets (except the house) and productivity. Let the place rot. Nothing will change politically (see the long term democrat ruled ruined/bankrupted cities of Detroit, Chicago, Newark, Cleveland, Buffalo, Camden, Philly, etc. for examples). It will only get worse. Much worse.
4. Find a right-to-work state where democrats lose as much as they win. Where voter fraud is not yet a high art.
The US spends more on weapons/war than the next top 10 spending countries combined. Do any of you ever wonder how we’re able to pull this off?
You should.
With A Little Help From My Friends
Considering that the US military is 19% of the US Budget
And
Entitlement/Welfare spending is 58% of the US Budget.
The US must spend more on buying the votes of the free sh*t army than the next top 50 spending countries combined.
Do any of you ever wonder how we’re able to pull this off?
“Do any of you ever wonder how we’re able to pull this off?”
Answer up.
“The US spends more on weapons/war than the next top 10 spending countries combined.”
And today Israel’s survival depends on this huge war machine.
You’re quite right but that’s another hideous story.
The US spends more on weapons/war than the next top 10 spending countries combined. Do any of you ever wonder how we’re able to pull this off?
You should.
And from here it appears the China threat is significantly overstated just to keep us on board with it. You see way less evidence of a military presence here than you do in the USA. If they’re trying to fight a war it’s economic. And we’re morons for focusing where they’re not.
“You see way less evidence of a military presence here…”
In case you are still in China, could you offer a front row report on the halt in cash transfers at commercial banks?
I am here for two more days…but have zero visibility into that. We do have BBC but that gets blacked out when they talk about anything negative involving China.
Can you see the posts below? Sounds like meltdown city, especially given that the news has leaked into the Western MSM.
I see the posts. But I have no visibility here.
Carl, if you VPN in you can likely view all the links.
That’s a separate issue…the expats have been telling me I need to go with StrongVPN or something like that so I can get to all the usual stuff.
But in this case I just meant I see less bank news here than I’d see in the US. People are busy with other stuff.
And so it begins.
Gordon G. Chang, Contributor
I write primarily on China, Asia, and nuclear proliferation.
Op/Ed | 1/26/2014 @ 4:19PM |23,261 views
China Halts Bank Cash Transfers
The People’s Bank of China , the central bank, has just ordered commercial banks to halt cash transfers.
This notice, for instance, appears on the online portal for Citigroup’s (C -2.74%) Citibank unit for its China customers:
In short, there will be a three-day suspension of domestic renminbi transfers. There will also be a suspension, spanning nine calendar days, of conversions of renminbi to foreign currency.
The specific reason given—“system maintenance” at the central bank—is preposterous. It is not credible that during the highest usage period in the year—the weeklong Lunar New Year holiday beginning January 31—the central bank would schedule an upgrade and shut down cash transfers.
A better explanation is that the country’s banking system is running dry.
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Justin Beiber got deported?
Nothing that important; just a nerve wracking disruption in China’s banking system.
Thank gawd. Back to watching the Grammys!
Here is another yawner of a story…I wonder if there is more or less truth to it than the tale of Kim Jung Un’s execution of his uncle by feeding him to starving dogs?
Oman Daily Observer
Major default looms in China’s banking system
Sunday 26th, January 2014 / 21:15
Written by Oman Observer
in Business
A shockwave is looming in China’s multi-trillion dollar “shadow banking” system, with an unprecedented default only days away on a $500 million investment product sold to hundreds of people. Staff at China’s biggest bank ICBC pushed the “Credit Equals Gold #1 Trust Product” by promising returns of 10 per cent a year, far more than traditional deposits, investors say. But the coal company it was supposed to fund never obtained key licences for its activities, state media reported, and now the firm that structured it, China Credit Trust, says it may not be able to repay 3.0 billion yuan ($492 million) due on Friday. The situation is a test case for cleaning up the risky “shadow banking” system in the world’s second-largest economy. Analysts said the government could use a default to send a message about the danger of speculative investments, while showing Beijing’s commitment to reining in the vast pools of capital threatening financial stability.
But at the same time authorities must walk a fine balance between cracking down and preventing protests by angry investors — as well as setting off a chain reaction that sharply tightens credit in an economy where growth is already slowing. Chinese “shadow banking” is a massive network of lending outside formal channels and beyond the reach of regulators, including activities by online finance platforms, credit guarantee companies and microcredit firms. It was as large as $4.8 trillion in 2012, more than half the country’s gross domestic product, according to an estimate by ratings agency Moody’s. China’s powerful State Council, or cabinet, reportedly issued internal guidelines in December to crack down on the sector. But ratings agency Fitch said in a report: “The reforms may seem like a good beginning, but they have a long way to run.”
China Credit Trust sold the investment product from 2010 through branches of the Industrial and Commercial Bank of China (ICBC), to around 700 of the bank’s high net worth clients. The trust channelled the funds to Zhenfu Energy in the country’s mining heartland of Shanxi province. But the company’s owner was detained by authorities in 2012, state media reported, raising questions over the viability of the firm. “ICBC and China Credit Trust dug a hole, covered it with a straw mat and told us to jump in,” said Gao Yiyang, an investor who spent almost $500,000 of his family’s money on the product. “It now appears our money was not used for any of the company’s actual operations. It was purely fraud to get our money to fill a huge deficit hole,” he said.
In a letter sent to investors earlier this month, a copy of which was seen by AFP, China Credit Trust said: “Currently, there is still uncertainty over whether the trust can be converted to cash before January 31.” Products sold by China’s roughly 65 trusts offer high returns and big risk, drawing comparisons to the West’s “junk bonds” of the 1980s. “Some central government-level policymakers could be open to seeing a default, as it would encourage more careful risk assessment,” Goldman Sachs economist Andrew Tilton said in a recent research report. — AFP
Looming $500 million default to test China’s banking system
By Charles Riley @CRriley
CNN January 24, 2014: 3:53 AM ET
A trust product marketed by mega-bank ICBC is facing default.
HONG KONG (CNNMoney)
A high-yield investment product offered by China’s largest bank is facing imminent default, an event that will cost investors millions and raise questions about the country’s banking system.
The doomed 3 billion yuan ($500 million) trust — cheerfully named Credit Equals Gold #1 Collective Trust Product — is expected to go belly up at the end of January, the victim of a soured loan to a troubled coal mining company.
The trust, which promised investors a 10% return, was issued by China Credit Trust Company and marketed by Industrial and Commercial Bank of China, a state-owned enterprise that is among the largest and most profitable banks in the world.
Investors are now scrambling to figure out whether a bailout from the issuer, bank or government will materialize. Meanwhile, outside observers are watching to see how China handles the potential default of an investment product generated by the country’s shadow banking system — a rapidly growing but opaque part of the financial system.
In recent years, shadow banks have carved out a niche trade in China. These firms offer loans to companies or individuals that may have trouble securing traditional bank financing. Often, the loans are then packaged and sold to investors looking for higher returns. The sector’s exact reach is unknown, but some estimates put its size at roughly 60% of China’s GDP.
Some analysts say that a default would demonstrate Beijing’s commitment to allow market forces to play a larger role in the economy and reinforce to investors that high-yield investments carry legitimate risk.
Yet others are predicting a bailout for investors. Where the bailout funds would come from remains an open question.
I’ll ask this question again first thing tomorrow, but:
WHAT ARE THE CHANCES THE FED WILL BAIL OUT COMMUNIST CHINA’S BANKING SYSTEM?
Anyone who bought the dip last week may later decide they were early.
Asia Markets live blog: Wall Street sell-down weighs on markets
January 26, 2014, 7:12 PM
Welcome to the Asia Markets live blog, a running account of what the region’s stock markets are doing, along with other news. Today, stocks are trading broadly lower after sharp losses Friday in the U.S.
5:03 pm
Japan stocks jolted
by Carla Mozée
It looks like Japan’s Nikkei Stock Average is well on its way toward a third consecutive loss, declining by 2.7% an hour into Monday’s session. See more here.
Among the most actives on the index, which tracks 225 issues, Mizuho Financial and Mitsubishi UFJ Financial each fell 2.6%, and Mazda Motor sank 4%.
Advantest was logging the largest percentage fall as its shares sagged 5%. Only two stocks managed to eke out gains: Fish company Maruha Nichiro Holdings rose 2.3%, and construction services firm Obayashi Corp. rose 1.7%.
4:57 pm
Ominous report on China bank-transfer shutdown
by Mike Kitchen
In what may be big news (or, possibly, a big misunderstanding), China has halted all bank cash transfers for three days and all forex conversions out of yuan for nine days, according to a Forbes item out Sunday.
Given that this comes just ahead of the Lunar New Year — basically China’s equivalent of Christmas, when cash needs are at their highest —this is troubling (that is, if it’s true… we’re trying to confirm this now).
The Forbes contributor, who reported the closure citing a notice issued by Citi on its Chinese portal, described the official excuse (system maintenance at the central bank) as “preposterous.”
“Something is very wrong in China at the moment. Banks’ apparent need to conserve cash, coming just weeks after the last incident, looks ominous,” the Forbes contributor writes.
We’ll see how this shakes out, though can’t imagine it having a positive effect on the Hong Kong open, due in about 35 minutes.
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Is China’s version of the Lehman Brother’s collapse now in play?
Weil on Finance: China’s Shadow-Banking Bomb
By Jonathan Weil Jan 24, 2014 4:13 AM PT
Happy Friday, View fans. Here are your morning links. Have a great weekend.
What’s up with these crazy Chinese trust products going kaput?
Bloomberg News has a good explainer about the $496 million “Credit Equals Gold No. 1” product on the brink of default that suddenly has investors nervous again about China’s $4.8 trillion shadow-banking debt. It would be nice if credit equaled gold. But the only way the investors in this piece of garbage will get paid is if they get a rescue. Industrial & Commercial Bank of China, which distributed the product, is balking at demands that it pony up. But given the choice for China’s largest bank and the Chinese government –- bailout, or risking a full-blown credit crunch –- bailout seems the more expedient route.
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TOKYO (Reuters) - Asian shares took a beating and the yen raced to a seven-week high against the dollar on Monday, as emerging markets remained under pressure with the U.S. Federal Reserve poised to continue tapering its stimulus and tighter credit conditions in China raising fears of a slowdown.
MSCI’s broadest index of Asia-Pacific shares outside Japan tumbled 1.6 percent to nearly a five-month low, on track for its worst one-day performance since August after losing more than 1.0 percent on Friday. Japan’s Nikkei share average (NIK:^9452) gave up the 15,000-level and dropped 2.7 percent.
I’m hoping this is the start of a correction. But that means at least a 20% drop. I have a few more years of investing new money into my 401ks and IRAs, even though I’m eligible for distributions within 5 years. A correction at this time would be healthy for the market and justify further advances in the indices.
We have to shake the weak hands out of the market. But to tell you the truth, based on talking with my colleagues the last couple of years, the stock market is not interesting. These are engineers. This is nothing compared to the dot com days of the 90s when everyone was buying every software company going public and drove up prices of stocks of companies that did not produce anything of substance. We are not in the mania like the 90s - yet. I think because people’s finances were hurt from their gambling in real estate in the 00’s decade.
Business Day
In Asia, Stock Sell-Off Continues as Markets Sink
By BETTINA WASSENER
JAN. 26, 2014
HONG KONG — The sell-off that sent stocks around the world lower last Friday continued in Asia on Monday, as investors fretted about slowing growth in China and the prospect that the Federal Reserve would scale back its support of the United States economy.
Markets slumped across the Asia-Pacific region, with declines of more than 1 percent in Singapore, South Korea and Taiwan, and drops of more than 2 percent in both Japan and Hong Kong.
The Nikkei 225 index was 2.5 percent lower by midday in Tokyo, extending a slide of 1.9 percent on Friday and hitting its lowest level since November. Investors in Japan were reacting to the additional concern of a stronger yen, which they fear may eat into earnings of Japanese exporters as it makes goods more expensive for customers overseas and less competitive globally.
The Japanese currency, which tends to rise amid times of uncertainty because it is considered a relatively safe asset, has climbed sharply against the American dollar over the past few trading sessions. On Monday, it was trading at about 102.30 per dollar, compared with 104.71 yen per dollar on Thursday morning.
The global sell-off started to gather pace on Thursday after weak data from the Chinese manufacturing sector reinforced concerns about the strength of the Chinese economy. Although China is still delivering robust growth — many analysts believe its economy will manage to expand more than 7 percent this year — its expansion is far less energetic than it once was, and is overshadowed by considerable risks and uncertainties as the authorities in Beijing seek to engineer a far-reaching shift in the economy.
“Our baseline remains that China can avoid a hard landing, but the risk will remain for the foreseeable future,” analysts at Société Générale wrote in a note on Monday. “Moreover, other emerging economies are likely to see a further slowing of growth momentum, and in some cases painful recession could prove hard to avoid.”
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Asia Markets
Asia Shares Fall Sharply
Tokyo Stocks Hit Two-Month Low as Global Selloff Continues
By Daniel Inman
Updated Jan. 26, 2014 9:40 p.m. ET
A selloff in global markets turned to Asia with stocks across the region plunging in trading on Monday morning as worries grow over slowing growth in China and signs the U.S. will ease back on stimulus.
Investors are instead racing into assets considered safe in times of turmoil, with the yen trading near a seven-week high and gold rising 0.3%, taking gains this year to 5.5%. Japan’s Nikkei slumped 2.7%, falling below 15,000 for the first time since mid-November, and was last trading at 14975.77.
The global selloff started last Thursday triggered by a report showing China’s vast manufacturing sector had contracted, exacerbating worries about how the global economy will fare as the U.S. pulls back from aggressive monetary easing.
Markets in Asia fall sharply on fears over China’s growth and uncertainty about the impact of the Fed’s tapering on emerging markets. The WSJ’s Jake Lee tells us why things may get worse in Asian markets.
The declines first hit developing economies with currencies in Argentina and Turkey falling especially rapidly, plagued also by troubles at home. But the selloff has since spread to more advanced economies with the U.S. tumbling Friday, and Japan now down 8.1% this year as the stronger yen hurts exporters.
“A number of issues have all come together,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital in Sydney. Problems “have been bubbling away for a while now, but when they hit the screen at the same time, it appears like there is a problem in emerging markets.”
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Is it too early to come out of winter hibernation?
The Sydney Morning Herald
Bears ready to take control on Wall Street
January 27, 2014 - 10:13AM
Stock Market Bubble
10 Reasons the Stock Market Bubble is About to Burst. Watch Video Now.
US stocks could be hit by more selling this week as the Federal Reserve updates its economic stimulus plans. Photo: Bloomberg
Wall Street managed to avoid major selloffs in 2013, but bears look ready - and anxious - to take command.
US stocks could be set for another selloff this week as the Federal Reserve is expected to announce it will keep withdrawing its economic stimulus, further pressuring equities already roiled by a flight from emerging markets.
Investor sentiment turned strongly bearish last week as emerging markets were hit by both country-specific problems and the realization that the Fed’s trimmed bond-buying program reduces the liquidity that has boosted higher-yielding emerging market assets and put a floor under US stock prices.
The Fed’s plan to gradually withdraw its stimulus has long been expected to lead to a pullout from emerging markets. But the prospect of an economic slowdown in China added to concerns on Friday that emerging markets, particularly those with large current account deficits, may struggle to support their currencies this year.
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The Fed’s policy-setting committee meets on Tuesday and Wednesday, with the announcement due after the meeting ends. Another cut to the central bank’s monthly purchase of Treasuries and mortgage-backed securities - to $US65 billion from $US75 billion - is all but certain, based on policymakers’ recent comments.
“Is the Fed going to zigzag with the taper, based on what we already knew, that emerging markets were vulnerable to liquidity being taken out of the system in the US?” said Quincy Krosby, market strategist at Prudential Financial in Newark.
“It’s a moral hazard,” she said, adding that regardless of when the Fed withdraws further, the expected market reaction will be roughly the same.
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Asia Markets live blog: Wall Street sell-down weighs on stocks
January 26, 2014, 7:12 PM
Welcome to the Asia Markets live blog, a running account of what the region’s stock markets are doing, along with other news. Today, stocks are trading broadly lower after sharp losses Friday in the U.S.
9:34 pm
Markets check — 1:34 p.m. in Hong Kong
Japan (Nikkei Average) down 2.3% late
Hong Kong (Hang Seng Index) down 2%
Shanghai (Shanghai Composite Index) down 0.7%
Sydney (S&P/ASX 200) closed
Seoul (Kospi) down 1.4% late
Mumbai (Sensex) down 1.5%
Taipei (Taiex) down 1.7% late
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Alameda, CA Housing Prices Crumble 29% Year Over Year
http://www.movoto.com/alameda-ca/market-trends/