May 31, 2015

From White To Merely Red Hot

A weekend topic on commodities and the housing bubble. The Williston Herald in North Dakota. “An onslaught of housing is set to hit the booming Williston housing market with more than 2,126 units coming online this year. Amid that crush, the principal investors behind Eagle Crest Apartments are hoping to make not just an entrance, but a grand one. For their opening ceremonies, a professional jazz ensemble being flown in from Seattle performs, and organizers are bringing in vintage automobiles and tractors from a couple of car clubs in Canada. They’re also offering free burgers to what they hope will be 2,000 participants each day. John Sessions, one of the Eagle Crest principals, said the housing market has continued to be strong for multi-family dwellings and single-family homes, despite the downturn in oil prices.”

“‘We get calls all the time about how things are going,’ he said. ‘If this is a bust, I’m not sure we could survive a boom. I’m exhausted as it is.’ While acknowledging the pain for oil-related workers who have been laid off, Sessions said the downturn has allowed some catchup work for others. ‘We’ve gone from white to merely red hot,’ he said.”

The Oklahoman. “We’re No. 15! We’re No. 15! Not No. 1. But coming in 15th among the states when it comes to house price appreciation is nothing to sneeze at. That’s where Oklahoma ended the first quarter, according to the Federal Housing Finance Agency, when considering home purchases only, not mortgage refinancings. The houses tracked by FHFA increased 5.81 percent from March 31 last year to March 31 this year. Those houses are bought with conventional mortgages sold to or backed by Fannie Mae and Freddie Mac, therefore conforming to Fannie’s and Freddie’s underwriting guidelines. That means a loan limit of $417,000 in most of the country, including here.”

“Oklahoma’s appreciation, generally, is tied to two main things: the energy business and a relative shortage of homes on the market: a 3.55-month supply in the Oklahoma City area, according to the Metro Association of Realtors. Housing ramifications of the oil price slide — pretty much nil in Oklahoma City, but felt in some smaller cities in the state — probably hadn’t yet fully materialized. Low inventory is sure to persist as long as oil doesn’t bust and homebuilding continues its slowdown.”

The Calgary Sun in Canada. “The Canada Mortgage and Housing Corp.’s (CMHC) Spring 2015 Calgary Housing Market Outlook forecast says the market is not as bad as some believe. Expect 13,200 new home starts this year, including 5,700 single-family and 7,500 multi-family homes, says Richard Cho, CMHC’s principal, market analyst for Calgary. Last year, builders nailed together a record 10,637 multi-family homes, but the forecasted reduction in the sector his year will be followed by another in 2016.”

“At the end of April, there were 14,614 homes of all kinds under construction in the Calgary census metropolitan area (CMA), including 12,546 inside Calgary city limits. ‘The number of units under construction remains elevated, which will result in upward pressure on inventory levels once they reach completion,’ says Cho. ‘Combined with moderating demand and increased selection in the existing home market, this will reduce multi-family starts to 6,000 in 2016.’”

“Despite a high number of listings, CMHC predicts the average MLS residential price to decline only 2.7% to $448,000 in 2015. The number of new listings is expected to erode in 2016, says Cho. ‘Active listings will follow suit, which will allow a marginal rate of price growth in 2016 as sales are expected to experience a slight uptick,’ he says. ‘In 2016, the average MLS price will increase to $453,000.’”

From Bloomberg. “Teck Resources Ltd., the world’s second-largest exporter of coal used in steelmaking, plans to idle six Canadian operations in response to a four-year slide in prices and demand. The move will cut metallurgical coal production by about 1.5 million metric tons, or 22 percent, in the period. Teck is considering more production cuts for later in the year. ‘The cut in and of itself is still only a drop in the bucket — more cuts are needed,’ Greg Barnes, a Toronto-based analyst at TD Securities, said in a note.”

“Metallurgical coal prices could plunge beneath a seven-year low amid global oversupply and slowing demand from China, the world’s largest consumer of the commodity. The third-quarter benchmark could tumble to $90 to $95 a metric ton, according to Barnes. The $109.50 benchmark is down from a 2011 high of $330.”

“With the temporary shutdowns, Teck joins Glencore Plc as an industry heavyweight proactively curbing production while some competitors struggle to survive. Glencore, the world’s largest exporter of coal for power plants, said in February it’s trimming its Australian output of the fuel by 15 million tons this year.”

“Earlier this month, Patriot Coal Corp. filed for bankruptcy for the second time in three years. This week, U.S. companies Alpha Natural Resources Inc., Arch Coal Inc. and Peabody Energy Corp., which all produce thermal and metallurgical coal, traded at all-time lows.”

ABC on Australia. “Three or four years ago, the influx of miners capitalising on the coal boom caused a real estate bonanza in Moranbah. But now the real estate bubble has burst and people relying on housing and rental returns have been hit hard. Former head of the Moranbah Traders Association, Peter Finlay, says he has been contacted by many people caught out. ‘Some of those people have just been devastated,’ he says. ‘I know of at least one suicide. Last year, house prices fell by almost 40 per cent, trapping investors.’”

“The 100 per cent fly-in, fly-out operations at the two mines owned by BMA were approved by Queensland’s Bligh Labor government in 2011. Diane is an investor from Melbourne, and says she’s angry about what has happened in Moranbah. ‘I have five properties, four in Moranbah and one in Dysart, which are worth probably, I don’t know, 40 per cent of what they were when I bought them,’ she says. ‘Now the mortgage is a lot more than the value of the properties, every single one of them. They’re what they call underwater. The rents are nowhere near covering the mortgage. So I’m working seven days a week in my consultancy business just to pay the interest on those mortgages. I’m not paying the principal, just the interest, to stop the bank coming after me. It’s a pretty awful situation to be in.’”

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Comment by Ben Jones
2015-05-30 06:45:26

‘CMHC predicts the average MLS residential price to decline only 2.7% to $448,000 in 2015. The number of new listings is expected to erode in 2016, says Cho. ‘Active listings will follow suit, which will allow a marginal rate of price growth in 2016 as sales are expected to experience a slight uptick,’ he says. ‘In 2016, the average MLS price will increase to $453,000′

If you say so.

Comment by Ben Jones
2015-05-30 06:49:16

18 Nov 2014

‘Two years after politicians rushed to defend a mining company that was hiring workers from China over locals in Tumbler Ridge, B.C., residents are worried about their town’s future after layoffs at two nearby mines.’

“It’s not nice,” said Clayton Knowles, who lost his job at Wolverine mine seven months ago. “Every day I’m counting the hours I get to make sure I can pay my mortgage.”

‘A local newspaper recently quoted Tumbler Ridge’s deputy mayor as estimating that the unemployment rate in the town of 2,700 was as high as 70 per cent. And some local residents told The Tyee that people are leaving their homes behind as they flee the desperate economic circumstances of the town.’

‘In April, Tumbler Ridge was walloped with news that Walter Energy’s Wolverine coal mine would be idled due to poor coal prices. Months later, Peace River Coal said it would follow suit at the end of the year, also citing low prices and a need for maintenance.’

‘Knowles is one of hundreds of workers who have lost their jobs in the layoffs. On April 15, after arriving at work in a new truck he’d purchased a day before, Knowles said he and his coworkers were handed garbage bags and told to clean out their lockers.’

“Right up until the day before they closed the doors they were telling us ‘Way to go guys’ and patting us on the back,” Knowles said in a phone interview from Tumbler Ridge. “You don’t expect when they tell you that everything’s good… you don’t expect that they’re lying. But that’s what they did.”

‘The local Chamber of Commerce manager, Carmen Drapeau, said that families have been split up as one parent leaves town looking for work elsewhere. Local food bank manager, Shirley Durand, said many people have moved away.’

“There’s a lot of homes empty here, there’s nothing in the windows, no curtains, no furniture — nothing,” Durand said.’

Comment by Mr. Banker
2015-05-30 08:14:01

“Right up until the day before they closed the doors they were telling us ‘Way to go guys’ and patting us on the back,” Knowles said in a phone interview from Tumbler Ridge. “You don’t expect when they tell you that everything’s good… you don’t expect that they’re lying. But that’s what they did.”

Any you - what? - maybe expected them to tell you something different? Maybe tell you that all of you are destined to be let go but nevertheless you should continue give all you’ve got to the company?

Bahahahahaha … people are really, really dumb.

Comment by Ben Jones
2015-05-30 06:52:40

‘Despite concerns that home prices will fall due to the oil slump, projections from Esri, a geographic information systems company, show that the number of Houston homes valued $250,000 and greater will increase by more than 40 percent by 2020.’

‘These increases are a combination of homes appreciating in value by way of market forces as well as homes added or removed due to new construction and developments.’

‘The Houston Business Journal analyzed this data and found that the entire Houston area will add more than 130,000 owner-occupied housing units between 2015 and 2020, an increase of approximately 10 percent. Homes valued above $250,000 will account for nearly all of this increase.’

Comment by Mr. Banker
2015-05-30 08:18:27

“Despite concerns that home prices will fall due to the oil slump, projections from Esri, a geographic information systems company, show that the number of Houston homes valued $250,000 and greater will increase by more than 40 percent by 2020.”

Houston: An ancient Native American term that roughly translates to:

“A city filled with an ample amounts of ignorant twits.”

Comment by Albuquerquedan
2015-05-30 07:07:24

But here is the thing about oil shale, we are drilling out the prime locations right now, soon the rigs are going to need to move to less productive areas, it will take two rigs to produce as much oil as one is producing now. Thus, ND may need more workers soon. Of course, oil will have to go up to justify the additional costs.

Comment by Housing Analyst
2015-05-30 07:25:23

it really doesn’t matter considering collapsing demand falling prices and a global supply glut.

Comment by Ben Jones
2015-05-30 07:25:38

‘Millions of consumers will have to absorb a major hit to their household budget in the coming months. About $265 billion in home equity lines of credit (HELOCs) will enter the repayment period in the next few years, according to a study from Experian, and consumers may see their monthly payments spike — in some cases, triple or quadruple what they previously paid.’

“Instead of using it like a line of credit, borrowing and then repaying the loan to restore the home equity that had been tapped into, most people simply took the maximum amount in cash and never tried to pay down the outstanding amount for the entire 10-year period,” said Charles Phelan, a debt-relief consultant who specializes in HELOC negotiation, in an email. He contributes content on the topic to “In effect, most existing HELOCs are therefore like a huge credit card debt that has been at the maximum limit for years, with only interest expense being paid each month to keep the balance the same and not reduce it.”

‘The HELOCs that are coming due were opened in very different economic times, under the impression that home values would continue to rise. Because that didn’t happen, borrowers may not be prepared to handle this significant change to their finances.’

“A lucky few will be able to absorb the new high monthly payment without defaulting and thereby risking foreclosure, and some will have sufficient equity to obtain a traditional refinance to a new single mortgage,” Phelan wrote. “For a majority of homeowners with HELOCs, however, options are limited due to real estate prices having dropped to the point where the most HELOCs are not covered by equity. This blocks people from refinancing to a single new mortgage at a more reasonable payment level.”

“With more than 10 million of these contracts having been issued during 2005-2008, a tsunami of defaults is likely and will be a downward drag on America’s housing recovery for years to come,” Phelan wrote.’

Comment by Mr. Banker
2015-05-30 08:29:16

I can sum up this post in three simple words:

People are smart.

Comment by Professor Bear
2015-05-30 09:41:08

‘Millions of consumers will have to absorb a major hit to their household budget in the coming months. About $265 billion in home equity lines of credit (HELOCs) will enter the repayment period in the next few years, according to a study from Experian, and consumers may see their monthly payments spike — in some cases, triple or quadruple what they previously paid.’

I’ll believe this is a big deal when and if I see it. Sounds more like a journalistic scaremongering story than anything of real concern to the U.S. economy…

Comment by In Colorado
2015-05-30 14:46:46

What’s to keep them from rolling over the balance into a new HELOC? Especially if they live in a really bubbly market? They could just take out a second HELOC, pay off the first one with it, and then use the unused portion of the new credit line buy a new Beamer or and F-350 (truk nutz optional).

Comment by Professor Bear
2015-05-30 15:17:39

“They could just take out a second HELOC, pay off the first one with it,…”

HELOC kiting?

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Comment by Prime_Is_Contained
2015-05-31 10:50:18

Except that it is legal to do with a HELOC; check-kiting is fraudulent from the get-go. In lending, this is just a refinance.

Comment by Foreigner
2015-05-30 23:58:21

It’s right in front of us and we are refusing to see it. The market is as bad as it was in 2000’s.
$300K mortgages with $10K down?
Holding intetest rate below inflation level? How long will this last?
Seattle’s min. wage @ $15. LA and NY are next.
As soon as other states legalize drugs Colorado’s population growth will end then what?
The market was artificial “lifted” and will not stay there long.
We are on the way to hyperinflation.
For the country with c/c debt @ $60B this will be devastating.

Comment by Housing Analyst
2015-05-31 06:56:52

All true except for hyperinflation.

Let the deflationary spiral rage on.

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Comment by Dman
2015-05-30 12:06:25

Isn’t California in the lead when it comes to the number of HELOC loans, with the usual bubble cities close behind? These resets are going to lead to even more foreclosures, and with higher prices now, the banks might not be nearly as patient to repossess as last time.

Comment by Ben Jones
2015-05-30 07:34:57

I posted this when it came out:

‘What a commodity bust would mean for Canada’s economy’

October 25, 2014

‘Back in the 1980s, Ron Carey was sitting in a Calgary bar with a fellow oilman, reflecting on the great oil bust that had levelled Alberta’s economy, when he came up with the idea for a bumper sticker that would capture the grim mood in the province: “Please God, let there be another oil boom. I promise not to piss it all away next time.” It wasn’t as pithy as that other famous Alberta decal, “Let the eastern bastards freeze in the dark,” but a cultural phenomenon was born as the sticker’s popularity spread. Three decades later, Carey, now 75, has watched another boom grip the province and is ready to print another run of those stickers if need be. That’s because he sees worrying signs of another bust on the horizon: soaring wages, “ridiculous” house prices and people living “high on the hog” because they assume the good times will go on forever. Carey knows better. “You have to keep people mindful that these things can happen,” he warns. “I’ve been forecasting this could happen again for the past two years, and it damn near did last week.”

‘The textbook explanation for this shift is that, during the past decade, the market has responded to the imbalance in supply and demand the way it always has—companies invest in new projects and push the limits of technology to unlock reserves, while high prices force customers to curb demand. But that scarcely captures the paradigm shift now unfolding, as American oil production skyrockets to levels not seen in a generation, even as China’s massive economy shows signs of slipping into a long-term lower-growth funk.’

‘Earlier this month two Asian firms that had paid $1 billion to buy Calgary-based Grande Cache Coal in 2011 ended up unloading the company to a Chinese coal producer in return for assuming the company’s debt. The selling price: a toonie.’

‘In other words, the 15-year commodity boom—which gave Canada its Teflon-like strength during the deep global recession and helped make us the envy of the world—has run its course.’

‘Year in, year out throughout the mid-2000s and then again after the financial crisis, China’s GDP posted double-digit gains as Western analysts outdid each other with stories of the country’s economic achievements. They’re building 20 new cities a year! They’re building more high-speed rail in a year than the rest of the world combined! They’re building 50 airports a year! Instead, China’s investment-driven growth model led to massive waste, overcapacity and dangerously high debt levels.’

“I keep telling people, it’s not boom and boom, it’s boom and bust,” says Michael Lynch, a Massachusetts-based energy analyst who is bearish on the outlook for oil prices. “People complain about short-termism in the private sector, but short-term thinking is also in government. Prices go up, and people think this is how it’s going to stay, that they can keep spending money the way they had. But the good times don’t always last.”

Comment by Albuquerquedan
2015-05-30 07:38:55

Why is a Chinese company buying a coal company if they believe China’s growth is coming to an end?

Comment by Ben Jones
2015-05-30 07:41:26

They just bought that Australian ore debacle too. Must be they’re great investors.

Comment by Albuquerquedan
2015-05-30 07:45:46

Yes. I think they will be shown to be great investors. They are getting these assets for pennies on the dollar and they know that China has a lot of growth in its future so the resources are needed and China is running out of both iron ore and coal.

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Comment by Ben Jones
2015-05-30 08:00:52

‘In the wake of a slowdown in the demand for mined commodities, Australian mining giant Broken Hill Proprietary Billiton Company, or BHP, is being forced to adjust its development prospects. BHP has long been the leader in Australia’s lucrative mining industry, its activities ranging from iron extraction to diamond, uranium, coal, oil and bauxite mining. Founded in 1895 in Australia’s Broken Hill, BHP currently has a physical presence in 25 countries, and employs approximately 36,000 people. The drastic drop in commodity prices coupled with an even larger drop in demand and compounded by ill-timed investments and acquisitions, BHP is being forced to reckon with the 50% drop in the value of iron-ore in a very real way.’

Comment by Ben Jones
2015-05-30 08:04:15

‘SouthGobi Resources Ltd. has become a sad story in Canada’s mining sector. The Vancouver-based company, which operates in Mongolia, is almost entirely out of cash. Its operations are deep in the red. Its CEO recently resigned. And a Mongolian court this year fined the company US$18.2 million in a very dubious tax-fraud case.’

‘SouthGobi had a US$7.9 million interest payment coming due to China Investment Corp. (CIC) on the 19th that it was in no position to pay. State-owned CIC had two options, neither very attractive: call the loan and potentially force SouthGobi into creditor protection, or defer the payment and let the company stagger along for another couple of months trying to seek rescue funding. Not surprisingly, CIC chose the latter.’

‘The mess at SouthGobi is just the latest misfortune among several significant bad calls CIC ended up making in its investments in Canada. Since beginning to stake major capital here six years ago, the corporation’s short experience in Canada is a story of lousy timing, costly miscalculations, and an investment strategy too vulnerable to the allure of speculative ventures talked up by sophisticated stock promoters — and not enough on conservative plays better able to withstand volatile commodity markets.’

‘The Chinese sovereign wealth fund’s involvement with SouthGobi dates back to 2009, when it committed an impressive US$500 million to the company. That same year, it invested $1.7 billion in Teck Resources Ltd. Those deals, which were done shortly after the global financial crisis, when many companies were seeking capital, were the first signs that CIC was interested in Canadian resource companies.’

‘And as it turns out, they were only the start of its Canadian buying binge. Beginning in 2010, CIC made four strategic investments in the oilsands worth about $1.9 billion in total: $500 million in the initial public offering of Athabasca Oil Corp., considered one of the most overpriced IPOs in Canadian history; $1.25 billion in a pair of deals with Penn West Petroleum Ltd., which has been rocked by an accounting scandal and other problems; US$150 million in Sunshine Oil Sands Ltd., a junior oilsands company that at one point had to halt development of its West Ells project because it ran out of money; and MEG Energy Corp., where CIC invested $100 million before the company went public.’

‘MEG shares have plunged 45 per cent since the 2010 IPO. Remarkably, that makes it the fund’s best major oilsands investment over the period. The other transactions were poorly timed near the top of the market, and the companies that received the money are among the very poor performers in the oilpatch.’

‘The investments have led to massive losses and much soul-searching at CIC. Today, the corporation’s big bets on Canadian resources, not counting Teck, are worth less than 20 cents on the dollar. “In hindsight, it’s unfortunate that with Athabasca and MEG and Penn West and Sunshine, they had some of the poorest investment returns we have had in our sector,” Hodge said. “It’s unfortunate that those were the companies they chose to invest in.”

‘But given the role that Canadians played in CIC’s adversities in this country, we have nothing to brag about, either. What started off as a promising match of interests — Chinese cash looking for resource exposure in a stable country, and Canadian resource companies looking for money to boost output — failed miserably to meet expectations.’

“We are blessed with a magnificent resource base and many other attributes that put Canada on the world stage,” said John Zahary, who was CEO of Sunshine Oil Sands after the junior company secured money from CIC and other Chinese entities. But, he said, we “are not decisive enough, we are not fast-moving enough, we are not entrepreneurial enough — though we fancy ourselves as being all of these things.”


Comment by Albuquerquedan
2015-05-30 08:08:40

And the Chinese investments are not just in Canada and Australia:

Comment by Ben Jones
2015-05-30 08:10:06

‘In 2010, CIC paid $817 million for a 45 per cent interest in the Peace River project. The Chinese firm also agreed to pay $435 million for a five per cent interest in Penn West itself, hoping for a long-term relationship with the Canadian company.’

‘Just four years later, however, Penn West would find itself in deep trouble, after the company admitted in 2014 that it had discovered senior finance and accounting personnel had misstated results. Things only got worse after the company grew strained with too much debt when oil prices collapsed that same year. Just this week, Penn West was able to strike a deal with creditors that would buy it more time, agreeing to sell assets to pay back bondholders. One of the assets on the block is the Peace River project. Today, the company’s entire market capitalization is worth barely more than the CIC’s original investment.’

‘But CIC’s investment in another oilsands play, Athabasca Oil’s IPO, would serve as another major letdown from a plan once so full of promise. CIC purchased $500 million of the company’s much-hyped $1.35-billion offering at $18 a share in 2010.’

‘Athabasca’s stock is worth about $2 a share today. The company had a series of setbacks, including problems with oilsands partnerships with PetroChina.’

Comment by Albuquerquedan
2015-05-30 08:43:42

Rising Chinese demand for iron ore, China will make its 7% growth just as I predicted:

Comment by Ben Jones
2015-05-30 08:48:36

I don’t know Dan. It looks like the crow is piling up faster than Chinese losses and coal

Comment by Blue Skye
2015-05-30 09:08:52

The drop from $150 to $60 in iron ore price is not very pretty proof of growth.

Comment by Albuquerquedan
2015-05-30 09:28:43

I don’t know Dan. It looks like the crow is piling up faster than Chinese losses and coal

My prediction was for around 7% growth in 2014 and 2015 and it came in at around 7.3 or 7.4 for 2014 and it looks to be around 6.9 to 7.1 this year seems like I am dead on to me.

Comment by Professor Bear
2015-05-30 09:42:18

I never realized crow was such a popular delicacy. How does it taste, Dan?

Comment by Albuquerquedan
2015-05-30 12:54:51

Only you are eating it because you were and are wrong about China. No collapse 7% growth as I predicted. China was shooting for 7.5% last year but I thought that was high considering how weak we were.

Comment by Professor Bear
2015-05-30 13:14:03

Not everyone is sufficiently gullible to take official GDP growth rate statistics out of a communist government at face value.

Report: ‘Real’ China GDP Shrinks as Demand Collapses

Xinhua/Guo Chen/AFP
by Chriss W. Street
16 Apr 2015
Newport Beach, CA

Lombard Street Research (LSR) has reported that China’s “real” (after-inflation) GDP actually fell -0.2% for the quarter ending March 2015. Despite the official government claim of +1.3 percent growth for the quarter and +7 percent annualized growth. China’s quarterly performance was the worst showing since the Global Financial Crisis as, “real” domestic demand suffered a historic collapse.

LSR’s Diana Choyleva has been the best Western economist at untangling China’s less-than-authentic economic statistics. She reveals that after peaking in 2014 at +2 percent on real domestic demand growth, China has collapsed by over 4 percent and to a -2.1 percent. Choyleva says this is the first negative performance observed since LSR began recasting China’s quarterly economic reports in 2004.

Comment by Professor Bear
2015-05-30 13:18:00

China’s trade collapse raises fears of growth slowdown
Hard landing fears return as exports fall by 15pc and imports by 12.7pc in March
China’s trade collapse raises fears of growth slowdown
Disappointing trade data suggests Beijing’s growth targets are facing a cut Photo: Xinhua /Landov / Barcroft Media
By Mehreen Khan
2:00PM BST 13 Apr 2015

Fears of a slowdown in the world’s second largest economy were revived on Monday as China’s exports collapsed by a spectacular 15pc in March.

Weak foreign demand sent exports plungeing as data also showed imports fell by 12pc, leading to concerns economic growth will register a significant easing when quarterly GDP figures are released on Wednesday.

China’s economy has been in the throes of a managed slowdown in the last few years.

Comment by Professor Bear
2015-05-30 13:40:05

Ore Price Collapse Hits Minnesota’s ‘Iron Range’
By Dan Kraker | MPR
Friday, May 8, 2015
U.S. Steel’s Minntac taconite mine and plant looms over the city of Virginia. The company plans to lay off around 700 employees on June 1.
Dan Kraker / MPR

The price of iron ore has crashed recently — from more than $190 a ton in 2011, to about $60 today. Iron ore is the key ingredient in steel, and global demand for it, especially in China, is way down. That’s being felt far away in northern Minnesota.

Comment by Professor Bear
2015-05-30 13:45:01

Is China’s Economic Crash Coming?
Chinese Economy
Construction workers are seen earlier this month on a building in the new Yujiapu financial district, in Tianjin, in northern China. The massive government project, sometimes described as China’s answer to Manhattan, incorporates dozens of skyscrapers. (Getty Images)
May 26, 2015

It’s time to worry about China.

On any list of calamities threatening the world economy, a China crash ranks at or near the top. Just what would constitute a “crash” is murky. Already, China’s sizzling rate of economic growth has declined from 10 percent annually — the average from the late 1970s until 2011 — to 7 percent, which is still high by historical standards. The question is whether the deceleration continues and growth goes much lower.

A faltering China could tip the world back into recession. Because China is a huge customer for raw materials (grains, metals, fuels), their prices would remain depressed. China’s surplus capacity of basic industrial goods, such as steel, would be increasingly exported, also depressing prices. This would dampen any recovery in global business investment. Confidence would suffer.

What about political fallout? “The Chinese government has maintained its legitimacy by promising economic progress,” says economist Eswar Prasad of Cornell University. If the promise seems broken, it’s hard to know how China’s masses would react. Or China’s leaders. Would they become more nationalistic and aggressive to deflect attention from economic disappointment?

Americans are exposed to all these potential spillovers. Prasad doubts the worst-case scenario will come to pass; plenty of other experts agree. After all, China’s leaders have repeatedly disproved doomsayers. There are many reasons the economy can flourish. The most obvious: Consumption spending was only 37 percent of the economy (gross domestic product) in 2014, the lowest of any major country (the U.S. figure: 68 percent of GDP). If the Chinese become a bit more spendthrift, their economy could thrive.

Still, there is the example of Japan. In the 1980s, it was widely regarded as the world’s most dynamic economy, overtaking the United States. Then, Japan’s prospects collapsed. New Asian competitors (Taiwan, South Korea) and an appreciating currency destroyed its economic model of export-led growth. Unable to build a new model, Japan has foundered ever since.

China is now at a similar juncture. There’s broad agreement that its economic model is outmoded. It also emphasized export-led growth and high investment spending (the counterpart of low consumer spending). The 2008-09 financial crisis showed the limits of both.

Exports fell, as China’s biggest customers — the United States and Europe — went into recession. To bolster its economy, China announced a $586 billion stimulus package, almost 13 percent of GDP, in late 2008. But unlike the U.S. stimulus plan in 2009, which was part of the federal budget, much of China’s extra spending was channeled through state-owned banks and local governments. What ensued was a credit boom that has now left a large overhang of unsold housing, surplus industrial capacity and questionable debt.

Housing looms as the largest drag on China’s growth because it amounts to about 25 percent of the country’s GDP, including major supply industries such as steel, cement and glass, says economist Prasad
. With housing supply exceeding demand, building is already slowing. Housing prices are down roughly 6 percent from their recent peak. The decline will go to 10 percent, says economist Yukon Huang of the Carnegie Endowment for International Peace.

Compounding this weakness is a slackening of local government spending on infrastructure projects (roads, airports, hospitals). To finance these projects, local government debt surged from about 6 percent of GDP in 2008 to 33 percent of GDP in mid-2013, according to the global bank UBS. The central government is now trying to slow the growth of this debt.

With hindsight, argues Huang, the 2008 stimulus package looks excessive. “They overdid it” — lent too much, he says, and “too much money flowed into housing and property [development].

Comment by Professor Bear
2015-05-30 13:56:06

China’s new home prices fall for eighth month
18 May 2015
From the section Business

The average price of new homes in China’s major cities fell more than 6% in April from a year ago

The price of new homes in China fell for the eighth consecutive month in April, showing the property sector continues to be a major drag on the world’s second-largest economy.

The average price in China’s 70 major cities fell 6.1% from a year ago - the same rate of decline as in March.

A large inventory of unsold homes is weighing on the once red-hot market.

The property sector accounts for about 20% of China’s economy, according to economists.

It has been flagged as one of the biggest risks to the Asian giant’s economic growth, which is on track for its slowest growth in a quarter of a century this year.

Comment by Albuquerquedan
2015-05-30 14:47:43

The Economist Magazine puts China’s growth at 6.9% this year, and the IMF, World Bank and almost every bank economist agrees, you just cannot admit when you wrong.

Comment by In Colorado
2015-05-30 14:48:54

She reveals that after peaking in 2014 at +2 percent on real domestic demand growth, China has collapsed by over 4 percent and to a -2.1 percent. Choyleva says this is the first negative performance observed since LSR began recasting China’s quarterly economic reports in 2004.

How do you say “recession” in Mandarin?

Comment by Albuquerquedan
2015-05-30 15:06:46

If you want to believe it outlier go ahead, the U.S. companies that are operating in China and governed by US reporting standards do not see a recession, for instance they are still reporting substantial rises in car sales, oil imports are up over 5% and of course there are energy savings keeping it down.

Comment by Albuquerquedan
2015-05-30 15:15:29

HSBC and other companies are a lot more impressive than Lombard.

Comment by Professor Bear
2015-05-30 15:22:07

“…China’s growth at 6.9% this year, and the IMF, World Bank and almost every bank economist agrees, you just cannot admit when you wrong.”

Your forecasts are slippery.

Comment by Albuquerquedan
2014-07-08 10:57:06

Maybe they have learned since 2005. I agree that after 2008 they did prop up housing to maintain ten per cent growth. However, they seem to be willing to accept slightly above 7% growth to deflate the bubble. But we will see if they maintain their resolve.

Comment by Professor Bear
2015-05-30 15:23:18

Comment by Whac-A-Bubble™
2014-07-08 20:24:20

“However, they seem to be willing to accept slightly above 7% growth to deflate the bubble.”

You persistently miss the problem of massive overbuilding of their housing stock, coupled with an economy that is dependent on continued addition of empty cities to their overbuilt real estate inventory.

This will end badly, and only a blind man could miss it.

Comment by Albuquerquedan
2015-05-30 15:27:33

You miss that most of these ghost cities are not ghost cities long. The 60 Minutes city is now bustling. Only a blind man cannot see that if you predict the imminent collapse of China year after year and it does not happen, you do not understand the situation.

Comment by Professor Bear
2015-05-30 15:36:52

China Focus: Empty compound renews discussions about China’s “ghost cities”
May 22,2015

HEFEI, May 22 (Xinhua) — A magnificent compound stands in eerie silence. Dust rests on the tightly closed doors of empty booths and grass covers unfinished sections of an expansive market.

This huge shell of a trade center in east China’s Anhui Province has, once again, brought the notorious subject of China’s “ghost cities” under the spotlight.

Last week, a Beijing Times article reported that the Daxiong Huadong Food and Farm Product Market, which sprawls more than 2,000 mu (133 hectares) in Chuzhou City, had been dropped by developers due to a lack of investment.

Touted as the biggest of its kind, today the failed project, which was launched in 2009 with expected investment of some 2 billion yuan (322.8 million U.S. dollars), displays nothing but an air of desertion.

The bleak complex is divided into four sections. The C section, complete with some 100 booths, was planned as a tea market, but only two booths are open, eking out an existence among the empty rows. Three people, later identified as the owners of a tea booth, were passing the time playing mahjong.

“The owner rented the booth to us free of charge for two years,” one said, “but there are barely any customers.”

There used to be more than 100 management staff here, but now there is just one dustman,” said another.

Comment by Albuquerquedan
2015-05-30 15:37:57

However, they seem to be willing to accept slightly above 7% growth to deflate the bubble

They had slightly above 7% growth in 2014. But the main point is that was not my prediction of China’s growth that was what China set as a goal. You are comparing apples to oranges. You must have seen me say around 7% growth fifteen times just to find that quote but you are trying to mislead the board. You are wrong and I have been right just wear your dunce cap with some dignity.

Comment by Ben Jones
2015-05-30 15:42:16

‘Despite the signs of life, much of the mall is still vacant. But most of the unoccupied units, along with halls and walkways are under renovation.’

‘Despite its retrofitting program, the problems that have dogged the mall since its start will not disappear instantly. Most of Dongguan’s almost 10 million inhabitants are migrant workers struggling to make ends meet.’

‘The town is also facing difficulties as manufacturing moves elsewhere in China or to Southeast Asia where wages are lower.’

‘China is also haunted by serious problems in its real-estate market, with over investment and large vacancy rates. In March, prices of new homes fell for the twelfth consecutive month.’

‘What’s more, the mall’s latest re-launch is not its first. In 2007, the mall changed name from “South China Mall” to “New South China Mall, Living City” and a revitalization plan was drawn up by current owners the Founders Group, a conglomerate set up by Peking University, and its subsidiary PKU Founder. But the revamp failed and the mall remained empty.’

‘Now, the owners are hoping for third time lucky.’

Bringing in a bunch of broke homeless people is hardly bustling.

Comment by Ben Jones
2015-05-30 15:45:24

A look inside China’s ghost cities

Published on Jan 20, 2015

“If you build it, they will come” doesn’t exactly ring true in China’s ‘ghost cities’. CNN’s Will Ripley reports on the status of housing projects in China.

Comment by Albuquerquedan
2015-05-30 15:50:26

I have been consistent on China and many of this board try to distort my predictions but so far nobody has been more accurate than me on this board about China and this was my comment one time when PB tried to distort my prediction:

Comment by Albuquerquedan

2014-08-02 08:46:10

That would be something you would do. When I make an actual prediction I make it clear. I clearly stated that china would grow around 7% this year and next and housing would at worse drop in the 20 to 30% range over two years. So what are your predictions or do you still want to be like Obama and lie through your teeth but give yourself some room to deny it?

Comment by Ben Jones
2015-05-30 15:51:50
Comment by Albuquerquedan
2015-05-30 15:58:31

As I stated in April:

Comment by Albuquerquedan

2015-04-25 14:49:53

Nothing anyone posted refuted the fact that China is growing at a 7% rate this year, not just the government is saying it outside sources are saying it as stated in the articles. BTW, a few weeks ago, I said that someone should go back and look at the “ghost cities” from a few year years ago and see if they still are ghost cities. Well the Economist Magazine went back to the city showcased by 60 minutes and this is what they said in its April 18, 2015 magazine, first the quote from sixty minutes and then the follow up:

‘We found what they call a ghost city’ said Lesley Stahl, the host. ‘Uninhabited for miles and miles.’ “Two years on, she would not be able to say the same. The empty streets where she stood have a steady stream of cars. Workers saunter out of offices at lunchtime. Laundry hangs in the windows of the subdivisions.”

But hey folks don’t let the facts get in you way and the fact that I am being proved correct and you are widely mistaken bother you.

Comment by Professor Bear
2015-05-30 16:10:53

Apparently the Chinese authorities have decided they could live with slightly below 7% growth?

Comment by Housing Analyst
2015-05-30 16:11:22
Comment by Ben Jones
2015-05-30 16:21:01

‘I am being proved correct’

You’re kidding right?

‘Clearing Beijing’s sky in early November for the Asia-Pacific Economic Cooperation summit was no simple feat. The effort to impress visiting foreign dignitaries gave locals a literal breath of fresh air, as well as the new, sarcastic phrase, “APEC blue,” which means something beautiful and ephemeral.’

‘China Environmental News, the newspaper of China’s Ministry of Environmental Protection, recently published a behind-the-scenes look at how the capital pulled off its temporary smog-disappearance act. The solution was to enlist 434,000 cadres from Beijing and six nearby provinces. (A significant portion of the capital’s air pollution drifts from the emissions of factories and vehicles outside city limits.)’

‘During APEC, special holidays granted to local government officials and other workers in the region helped keep 11.7 million vehicles off the roads, significantly reducing auto emissions. Hundreds of construction sites, which stir up airborne particulate matter, were also shut down.’

‘Further details were obtained by the South China Morning Post: Roughly 10,000 factories in the region surrounding Beijing were shut during APEC; an additional 39,000 ran on reduced schedules to minimize pollution. Inspectors paid frequent visits to these factories, during both day and night, to ensure that the APEC guidelines were followed.’

Oh Leslie saw some rags hanging out a window! These people blatantly lie and pull ridiculous stuff like this blue sky farce all the time. Remember what they did when the mass protests got into the tens of thousands a year? Stop counting them. Problems solved!

Comment by Professor Bear
2015-05-30 16:24:49

It sure takes a lot of writing to explain why AlbuquerqueDan’s downward revisions to last year’s China growth forecasts don’t imply that last year’s forecasts were wrong!

Comment by Blue Skye
2015-05-30 17:55:23

Dan’s forecasts have never been wrong. It is simple, Dan never made a single forecast or prediction. Repeating what the CCP tells him is not the same as predicting something.

He does add a

Me, me, me,
and a my, my, my,
And an I, I, I.

This plagerism makes him wrong, wrong, wrong.

Comment by Blue Skye
2015-05-30 19:34:13

“Nothing anyone posted refuted the fact that China is growing at a 7% rate this year…”

There you are wrong just one more time. There have been many posts to the regard that the Chinese economy is in contraction. Not Growth, not reduced growth. Contraction.

Comment by Professor Bear
2015-05-30 23:40:30

Yep, contraction.

Markets | Thu May 21, 2015 5:44am EDT
China May flash HSBC factory PMI shrinks for third month, more stimulus seen
BEIJING | By Kevin Yao

Chinese factory activity contracted for a third month in May and output shrank at the fastest rate in just over a year, a private survey showed, indicating persistent weakness in the world’s second-largest economy that requires increased policy support.

The poor reading, which followed a raft of downbeat April data, reinforced analysts’ views that Beijing has to take bolder steps to combat a protracted slowdown, as growth threatens to drop below 7 percent for the first time since the global financial crisis.

The subdued flash PMI print suggests there is no clear sign of near-term stabilization in the economy. Risks to the outlook remain to the downside,” Barclays economist Shengzu Wang said in a research note.

The preliminary HSBC/Markit Purchasing Managers’ Index (PMI) fell to 49.1 in May, below the 50-point level that separates growth in activity from a contraction on a monthly basis.

Comment by Professor Bear
2015-05-30 23:44:04

Emerging stocks plunge as Asian shares decline amid volatile China market
Saturday May 30, 2015
08:39 AM GMT
The Shanghai Composite Index slid 0.2 per cent, after a 6.5 per cent plunge Thursday, as volatility climbed to the highest since January. ―

LONDON, May 30 ― Emerging-market stocks slumped for a fifth straight day as Asian shares sank amid volatility in China’s equity market, offsetting economic data that weakened the case for an increase in US interest rates.

The MSCI Emerging Markets Index dropped 0.5 per cent to 1,004.22, bringing its retreat in May to 4.2 per cent. Brazil’s real weakened 0.6 per cent to a two-month low against the dollar as a Bloomberg gauge tracking 20 developing-nation currencies posted a 2.1 per cent monthly decline.

The Shanghai Composite Index slid 0.2 per cent, after a 6.5 per cent plunge Thursday, as volatility climbed to the highest since January. Chinese stocks slid as brokerages tightened lending restrictions and policy makers drained cash from the financial system. Revised data showed the U.S. economy contracted 0.7 per cent in the first quarter, damping speculation that the Federal Reserve will move quickly to raise near-zero interest rates that have bolstered demand for riskier assets.

“We’re seeing increased volatility in China, and this volatility is spreading to other Asian countries and dragging the entire emerging-markets index down,” William Jackson, an analyst at Capital Economics Ltd in London, said by phone. “Europe is down amid concern over the debt talks in Greece, and this is probably overshadowing the revised GDP data from the US.”

Comment by In Colorado
2015-05-31 14:25:19

The bleak complex is divided into four sections. The C section, complete with some 100 booths, was planned as a tea market, but only two booths are open, eking out an existence among the empty rows. Three people, later identified as the owners of a tea booth, were passing the time playing mahjong.

“The owner rented the booth to us free of charge for two years,” one said, “but there are barely any customers.”

Reminds me of that documentary posted here a few years ago, of a giant mall in China that had few tenants and even fewer customers.

Comment by Professor Bear
2015-05-31 17:57:06

Malls in China left empty as shoppers go online
Mainland’s online revolution could see 31 million traditional jobs lost
PUBLISHED : Friday, 06 February, 2015, 6:00am
UPDATED : Friday, 06 February, 2015, 6:00am

Empty stalls and deserted halls at a mall in Zhongguancun, Beijing, victims of the rise of internet shopping. Photo: Imaginechina

Hunched over the counter of his tiny, gadget-filled stall in Beijing’s vast Hailong Electronics City, Wang Ning bemoans a week without a single sale.

“It’s dying,” says Wang, shaking his head as he looks out at abandoned stores and torn promotional posters in what was once the busiest market in the Zhongguancun district, known as China’s Silicon Valley. “There are more sales staff than customers around here. Everyone buys online now.”

The six floors are dotted with shuttered shops, victims of the rise of internet-based businesses like Jack Ma’s Alibaba and billionaire Richard Liu Qiangdong’s which started out in Zhongguancun almost two decades ago.

The online revolution promises to boost productivity and could create 46 million new jobs in China by 2025, many of them higher-skilled, according to a report by New York-based McKinsey & Co. The losers will be as many as 31 million traditional roles, the equivalent of the entire employed population in Britain.

While such creative destruction is a global phenomenon, its speed and scale in China is unparalleled, said Cao Lei, director of the China E-Commerce Research Centre.

“The internet helps improve productivity and efficiency, but it can be quite painful for traditional businesses,” Cao said. “Bookstores fail first, then clothing chains, then consumer electronics stores, then air-ticket booking offices, and in the future, bank branches and other traditional services facilities may fail.”

Comment by Professor Bear
2015-05-31 18:03:07

ft dot com > Markets >
Emerging Markets
EM Squared
May 27, 2015 9:39 am
China: too many malls?
Matthew Plowright
Construction of shopping space dwarfs that of other countries but demand is still strong and growing
People walk through a recently built shopping mall in Beijing on June 26, 2014. After years of boom that have seen prices rocket, the prospect of a bust is looming over China’s vast property sector, with authorities hoping to avoid a meltdown that could send shock waves through the world’s second-biggest economy. AFP PHOTO/Greg BAKER (Photo credit should read GREG BAKER/AFP/Getty Images)

If you want to know what many urban Chinese get up to in their spare time, here’s the answer: they go to the mall.

According to China Confidential, a research service from the Financial Times, two-thirds of urban consumers regularly visit shopping malls, with 40.9 per cent of mall visitors going to malls at least once a week (see chart below). Based on China Confidential’s demographic analysis, that works out at about 54m visitors to Chinese malls each week, more than the population of England. And most of these visitors are not just window shopping. On average, mall visitors made nine purchases or transactions over the past six months, with total annual spending in excess of Rmb700bn ($113bn).

This enormous footfall and spending has unsurprisingly sparked a wave of shopping mall construction across the country in recent years.

China accounted for 44 per cent of total global shopping mall completions in 2014, according to real estate consultancy CBRE, with more mall space added in the central city of Wuhan alone (993,000 square metres) than in the whole of the Americas (800,000 sq m).

While growth in completed mall floorspace in China did moderate slightly on an annual basis last year, the amount of mallspace in the pipeline in China remains enormous. At least 24m sq m of additional mallspace is under construction nationwide, according to CBRE, accounting for over 60 per cent of global mallspace under construction.

All of which has raised concerns about a potential overbuild of malls in China, especially as headline retail sales growth slows. This is a concern that even some industry participants share. Thirty-five per cent of mall managers reported an oversupply of malls in their area, with those in lower-tier cities markedly less positive than their counterparts in first and second-tier cities.

This points to a broader contrast in performance between shopping malls in China’s largest, wealthiest cities, and those in the smaller, mostly inland cities that are the focus of much of the current wave of shopping mall construction. In first-tier cities surveyed by China Confidential, 76.5 per cent of mall managers reported positive revenue growth. By contrast, the proportion was just 62.5 per cent in second-tier cities and 43.8 per cent in third-tier cities.

Indeed, according to China Confidential’s survey, malls in smaller cities are lagging behind their counterparts in larger cities on almost every metric: foot traffic, occupancy rates and rental yields to name a few. And the sheer volume of mallspace expected to hit the market in these cities in coming years points to rising risks for mall developers in these markets, especially should retail sales continue to slow. Some of these mall developments are likely to be lossmaking, while others may prove to be white elephants.

Comment by Ben Jones
2015-05-30 07:39:45

‘a loan limit of $417,000 in most of the country, including here…Oklahoma’s appreciation, generally, is tied to two main things: the energy business and a relative shortage of homes on the market’

$417k, in Oklahoma, and a two legged stool.

Comment by Housing Analyst
2015-05-31 18:17:44

….. with one leg on a banana peel.

Comment by redmondjp
2015-06-01 11:23:32

And under how many feet of water?

Comment by Housing Analyst
2015-06-01 13:34:10

You tell us. You’re the one taking bath.

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Comment by Florida Skeptic
2015-05-30 07:42:47
… Now what? The Fed says they are going to raise rates. The QE spigot has been turned off. The hedge funds are selling their buy and rent hovel investments, cash buyers are dwindling, the flippers who appeared in 2005 are back, Boomers are looking to sell and downsize, young people are already in debt up to their eyeballs thanks to the government doling out student loans like candy, the number of full-time good paying jobs continue to dwindle, and the rigged 37% price increase has priced millions of people out of the market.

The good news is the Wall Street banks have inflated their balance sheets and celebrated by giving themselves $20 billion in bonuses for a job well done. If mortgage rates rise to 4% or God forbid 5%, the entire housing complex would implode faster than a blowfish out of water. If you’ve bought in the last two years you will be underwater sleeping with the fishes like Luca Brasi in the not too distant future.

Comment by Ben Jones
2015-05-30 08:32:50

‘India will probably report on Friday that it’s the world’s fastest growing major economy. Yet unused coal piling up at power plants across the country tells a different story.’

‘Plants monitored by the power ministry had an average stock of 20 days as of 24 May, compared with 12 days last year. Gross domestic product (GDP) expanded 7.3% in January to March, slightly down from the prior quarter but faster than China’s 7% growth, according to the median of 28 economist estimates in a Bloomberg News survey. The power numbers, along with subdued lending and slower consumer sales, signal Asia’s third-largest economy may not be firing on all cylinders.’

“A lot of new generation capacity has come up and still the coal is lying unused,” said Salil Garg, a New Delhi-based director at India Ratings and Research, the local unit of Fitch. “That’s because of lack of industrial activity and financial problems of distribution companies.”

‘Part of the power problem is that state electricity distributors are so burdened with debt that they’re unable to pay for as much electricity as their customers need. That explains how a state like Uttar Pradesh, India’s most populous, has a power deficit of 11.5% even as coal piles up, according to power ministry data. The province witnesses outages of up to 6-8 hours daily during summer months.’

“Capacity utilization remains low in several sectors,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. “Leverage is also very high and the banking sector is not in a very good position to go and fund higher investment.”

‘India is operating with a negative output gap, according to Moody’s Analytics. While growth is seen slowing from 7.5% in October-December, the economy should’ve expanded 9% if it were operating at full capacity, economist Faraz Syed wrote in a report on Wednesday. “We think the new data are dubious,” he wrote. “The revised growth rates don’t align well with partial indicators of demand.”

Comment by Ben Jones
2015-05-30 08:36:07

‘The fall in dry bulk freight rates is attributed, in large part, to the substantial decrease of China’s thermal coal imports, a major commodity trade in the past, combined with the large supply base of dry bulk carriers, in need of employment. At the same time, as shipbroker Allied Shipbroking pointed out in its latest weekly analysis, the rise of new markets for coal, such as India, isn’t happening as fast as the market needs to recover.’

‘Meanwhile, “at the other end of the spectrum you have China, a country which has already cut back on in its imports since 2013, making an immediate effect with its absence which was especially well noted via dry bulk freight rate conditions in the Pacific basin. This trend has shown to continue at an equal magnitude this year, with Chinese imports already set to close at an annual decline of over 23% (or equivalent to 52 million tonnes from the 229 million tonnes imported in 2014 according to the International Energy Agency). This still leaves a market wanting, as the math still indicates to a combined import volume that is notably weaker than that of 2014. At the same time, and although India’s demand is set to strengthen, China’s demand for thermal coal imports is expected to continue its sharp drop over the coming years, leaving the market with an ever increasing gap to fill”, Lazaridis said.’

Comment by Ben Jones
2015-05-30 08:38:56

‘Coal production in China, the world’s largest producer and consumer of the fuel, declined 6.1% in the first four months this year as the impact of the government’s clean air and renewable energy policies began to weigh on the industry.’

‘Production totaled 1.15 billion tonnes between January and April, with the pace of decline accelerating from a 3.5% fall registered in the first three months of the year, according to data released Tuesday by the National Development and Reform Commission (NDRC).’

‘Coal imports also fell during the period, plunging by 37.7% from one year earlier to 69 million tonnes, the NDRC said in a report on its website.’

Comment by Ben Jones
2015-05-30 08:42:25

‘The price of coking coal, the ­nation’s second-biggest export, is crumbling in the face of growing Australian supply and slowing Chinese imports — and the ­dramatic slump could cut more than $600 million of Queensland royalties next financial year and force more mine closures.’

‘As debate rages over West Australian iron ore, on the other side of the country the fall in coking coal prices to a 10-year low is defying industry and analyst predictions that prices should rise, and will have a huge impact on Queensland’s budget if the price does not rebound.’

‘Prices of the steelmaking coal, which traded above $US300 a tonne during the boom and were at $US113 at the start of they year, have slumped to a 10-year low of $US85 a tonne. And there is still more low-cost production at costs of $US50 to $US80 a tonne from Mozambique and Australia to come on to the market.’

‘So while more than half of ­global seaborne export supply is under water and more closures are needed to balance the market, a price rebound does not look ­imminent.’

“In the long-term, prices will need to go up but it’s going to require a rebalancing of supply and demand and I don’t think that will happen any time soon,” a senior industry source told The Australian, adding prices had fallen harder than most miners had expected. “I think we’re in for a sustained period of low prices.”

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Comment by Blue Skye
2015-05-30 09:10:38

Which comes first, the drop in coal consumption, or the CCP’s claim to have done that on purpose to clean the air?

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Comment by Professor Bear
2015-05-30 09:45:26

‘India will probably report on Friday that it’s the world’s fastest growing major economy. Yet unused coal piling up at power plants across the country tells a different story.’

Why is there a growing pile of coal in the rapidly growing Chindian economies?

‘Tis a puzzlement…

Comment by AmazingRuss
2015-05-30 18:32:35

It’s next to the pile of bovine excrement that has Dan fascinated.

Comment by Ben Jones
2015-05-30 14:22:42

This one’s a hoot:

‘On May 4, state mouthpiece People’s Daily tried to deploy just the right dose of cold water with a widely cited opinion piece, titled “Don’t Forget Risk in a Bull Market.” Tall tales “about every type of stock market ‘legend’ are either happening by one’s side, or are being passed around among friends,” the article lamented. About one million domestic brokerage accounts had been opened each of the past six weeks, the article noted, including 4.1 million in the third week of April alone, a historic high and triple the weekly record for new accounts opened during the 2007 bull.’

‘Sober advice like this is standard in every introduction to stock investing. But it was enough to cause an outpouring of emotion in Chinese media. On news portal Sina, commenters argued the Daily lacked the authority or expertise to opine on the ups and downs of equity markets. On social media platform Weibo, web users mostly cursed or mocked the paper’s editorial. “This article has caused so many to shed tears and go bankrupt; when times are sensitive,” one commenter wrote, People’s Daily “just randomly farts.” Another web user sneered the editorial was “very precise,” because “when you say it will rise, it rises; when you say it will fall, it falls.” One commenter observed the seemingly oracular power of state media: “There’s no stock analyst or securities agent, no matter how hard working, who can match one sentence uttered by the People’s Daily.”

‘The outcry was sufficiently fierce that two days later, the Daily felt compelled to walk the editorial back, re-characterizing the dip as “an interlude in the Chinese capital market’s maturation process” and explaining the previous author’s argument as merely having “raised [the issue of] risk, and certainly not disavowing the bull market.”

‘Because platforms for “mobile dissemination” had character limits, the way in which they shared the piece engendered “Internet sensationalism,” ultimately “misleading readers.” The Daily lectured that “a reasonable market is inseparable from reasonable public opinion, and reasonable public opinion is inseparable from a reasonable media.”

‘In a true bubble market, of course, it’s hard for media to make a reasonable choice, given that the options are mostly either alarmist or boosterish. In a May 24 article for news portal Sina, the prominent economist Li Daokui took the first tack when he declared that “a new era of widespread stock speculation has arrived.” Li warned that “dancing aunties,” retired women who enjoy gamboling in public squares—now also cavorting in Chinese equity markets—often made the mistake of “entering a bull market, and dancing away from a bear market.” In other words, they buy high and sell low. On the boosterish end of the spectrum, a May 26 article syndicated by news portal 163 observed that the “unusually hot” market is now “a hot topic on every street and alleyway. When they see each other, friends don’t ask each other, ‘Have you eaten?’ Instead, they ask each other, ‘How much have you made [in the market] today?’”

‘In the wake of the latest plunge, Chinese authorities, at least in the relatively prosperous coastal province of Zhejiang, appear to have decided that boosterism will have to do. In an internal document, the first page of which an anonymous user leaked May 28 on Weibo—which appears authentic, but which Foreign Policyis unable to verify—Zhejiang’s propaganda ministry issued a directive to “news units” reporting on the stock market. “In order to spur the healthy development of the capital markets,” as well as “strengthen … the education of investors” and “support stable economic growth,” media must “increase positive reporting on the capital markets,” with a particular emphasis on government-led stock market reforms.’

Comment by Professor Bear
2015-05-30 15:25:47

‘About one million domestic brokerage accounts had been opened each of the past six weeks, the article noted, including 4.1 million in the third week of April alone, a historic high and triple the weekly record for new accounts opened during the 2007 bull.’

They sure do have their retail investors on the boil! How can this possibly not end in tears?

Comment by Housing Analyst
2015-05-30 16:18:56

Your engagement with enragement is causing your derangement

CraterRage Photo Of The Day

Comment by Housing Analyst
2015-05-31 07:52:31

Coppell, TX Housing Prices Fall 10%

Comment by Ben Jones
2015-05-31 12:46:36

‘State-owned Chinese investment company Central Huijin Investment Ltd said its president has left his post after the company’s share sale of State banks was cited by traders as a factor behind a plunge in China’s stock markets on Thursday.’

‘Xie Zhichun “will no longer serve as president of the company,” Central Huijin, a subsidiary of China’s sovereign wealth fund, said in a statement posted on Friday on its website. The company did not give a reason for Xie’s departure, which came three days after it sold a combined 3.5 billion yuan’s ($564.5 million) worth of mainland-listed shares in China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC).’

‘Traders said the sharp drop in China’s stock markets was partly due to news that Central Huijin had reduced its holdings in CCB and ICBC, both of which are index heavyweights.’

‘China’s stock markets plunged on Thursday, with indexes dropping over 6 percent in record-high turnover as investors rushed to sell after more brokers tightened margin trading requirements for clients and the central bank drained money market liquidity.’

Comment by Professor Bear
2015-05-31 12:56:25

‘China’s stock markets plunged on Thursday, with indexes dropping over 6 percent in record-high turnover as investors rushed to sell after more brokers tightened margin trading requirements for clients and the central bank drained money market liquidity.’

This is a great opportunity to buy the dip, as we have been assured and reassured that 7% GDP growth forever is a certainty.

Comment by Professor Bear
2015-05-31 13:37:09

Bulletin How to stabilize this volatile economy

Need to Know
A ‘tidal wave’ of money is headed to China, so jump in now
Published: May 29, 2015 8:32 a.m. ET
China bungee jumping.
By Shawn Langlois
Markets reporter

The call

The shift toward Chinese assets on the back of the yuan’s emergence as the fifth biggest currency in the world is “the single most important thing happening today” when it comes to the investment landscape, says Louis-Vincent Gave, CEO of GaveKal Research in Hong Kong, in an interview posted on Financial Sense. Even with the Chinese stock market doubling over the past year, Asia has lagged U.S. markets, but that’s about to change, he added. “Over the next few years, China, which is for all intents and purposes completely absent of any international global equity or bond index, will move to be 5, 10, maybe 15 or 20% of global equity and global bond indices, leaving pretty much anyone benchmarked against any kind of global index scrambling to keep up with this reweighting,” Gave explained. Read his entire list of reasons he sees a “tidal wave of flows” into China, including the fact that the government “is underwriting currency, bonds and equities.”

Comment by In Colorado
2015-05-31 14:22:02

Better buy a few flats in those ghost cities before they’re gone! It’s not like they’re gonna build more, right?

(Comments wont nest below this level)
Comment by Professor Bear
2015-05-31 14:09:53

Slow payments force more firms to fold
Mainland Chinese insolvency figures to rise 5 per cent this year after four years of decline, while bankruptcies in HK the highest since 2010
PUBLISHED : Sunday, 31 May, 2015, 10:16pm
UPDATED : Sunday, 31 May, 2015, 10:16pm
Jing Yang
Eight out of 10 mainland Chinese firms last year reported payments delinquency by customers, higher than the Asia average of 70 per cent. Photo: AFP

Corporate insolvency is expected to rise this year in China, with an increasing number of companies struggling to protect margins from late payments by customers.

Even as the economy continues to grow at a relatively good pace, Chinese firms are grappling with a state-driven shift in economic structure. This would inevitably lead to shrinking business opportunities in sectors such as construction, cement and steel, pushing up defaults in these areas, said Dutch trade credit insurer Atradius.

In a recent report, it forecast a “moderate increase” in China’s insolvency rate this year.

Atradius’ warning follows similar projections by competitors Euler Hermes and Coface, whose research shows a high level of receivables in arrears and rising bankruptcies.

The three companies command more than 80 per cent of the trade credit insurance market. Trade credit insurers protect sellers from payment defaults and other risks.

Euler Hermes, part of Allianz, Europe’s biggest insurer, said it expected the official insolvency numbers to rise 5 per cent this year after four years of steady decline. The causes range from the clampdown on shadow banking and an oversupplied property market to tighter fiscal discipline among local governments.

The official bankruptcy figure of 2,630 last year masks the true picture of corporate health in China, it says. “Insolvency procedures in PRC jurisdiction are complicated and expensive, so a significant number of Chinese enterprises find alternative solutions to avoid filing for bankruptcy. The [insolvency] trend may be worse in reality.”

Comment by Ben Jones
2015-05-31 18:43:37

‘MOUNTAIN PASS, Calif.—In the dusty mountains of the California-Nevada border, 4,800 feet above sea level, the U.S.’s only miner and processor of rare-earths elements is struggling to squeeze a profit out of its small open-pit mine and plant.’

‘On Monday, Molycorp Inc. is expected to announce it will skip a $32.5 million loan payment, triggering a 30-day grace period that could lead to a bankruptcy filing before the end of June, according to people familiar with the matter.’

‘The company is trying to survive one of the biggest commodity bubbles in economic history. Five years ago, export restrictions by China, the world’s dominant supplier, and a global political spat inflated the value of rare earths—15 elements used as niche ingredients in magnets, batteries, catalytic converters and other high-tech products—and propelled Molycorp’s stock-market value to over $6 billion.’

‘Since then, rare-earths prices have been on a long slide downward. Now with a market capitalization of around $150 million, Molycorp is indebted and unprofitable. Customers are putting in orders, but the company hasn’t met production targets at Mountain Pass, and is in restructuring talks with firms representing its creditors.’

‘The rise and fall of rare earths, and that of Molycorp, illustrate the fragility of betting on materials, which, unlike the core industrial materials—copper, iron ore and aluminum—are essential but required in minuscule quantities and can often be replaced. It also echoes risks for investors that have lurked beneath any buildup of artificial demand, from tulips in the 1630s to railways in the 1840s to Internet firms in the 1990s.’

“The Japanese were buying everything in sight,” said Constantine Karayannopoulos, current chairman and former interim CEO. “It was a bubble.”

“Mark Smith, who was CEO at the time, was treated like a rock star at investor roadshows. “I was used to there being a dozen people at these events,” he said in a recent interview. “And suddenly there were hundreds and hundreds.” Mr. Smith said he knew it was a bubble at the time, but there was nothing he could do about it.’

‘In late 2011, the bubble popped, along with Molycorp’s share price. China relaxed restrictions on exports, oversupplying a market of only up to 140,000 tons a year. The iron-ore market, by comparison, is two billion tons a year. Molycorp says the problem has been exacerbated by illegal mining in China, which has further stoked production, artificially dropping prices. Chinese officials have made no secret of the fact that the industry has long been plagued by illegal production and trade.’

Comment by Professor Bear
2015-05-31 19:34:52

“The iron-ore market, by comparison, is two billion tons a year.”

If this is supposed to be a relevant contrast, then I am wondering why the iron ore price went down the same toilet as the rare-earths elements prices?

Comment by Professor Bear
2015-05-31 19:37:55

Commodity Prices Are Cliff-Diving Due To The Fracturing Monetary Supernova—The Case Of Iron Ore
by David Stockman • December 31, 2014

Crude oil is not the only commodity that is crashing. Iron ore is on a similar trajectory and for a common reason. Namely, the two-decade-long economic boom fueled by the money printing rampage of the world’s central banks is beginning to cool rapidly. What the old-time Austrians called “malinvestment” and what Warren Buffet once referred to as the “naked swimmers” exposed by a receding tide is now becoming all too apparent.

This cooling phase is graphically evident in the cliff-diving movement of most industrial commodities. But it is important to recognize that these are not indicative of some timeless and repetitive cycle—–or an example merely of the old adage that high prices are their own best cure.

Instead, today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking.

Stated differently, the worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.

For that reason, the radical swings in commodity prices during the last two decades mark the path of a central bank generated macro-economic bubble, not merely the unique local supply and demand factors which pertain to crude oil, copper, iron ore, or the rest. Accordingly, the chart below which shows that iron ore prices have plunged from $150 per ton in early 2013 to about $65 per ton at present only captures the tail end of the cycle.

Comment by Professor Bear
2015-05-31 19:41:01

Iron ore miners in for a ‘very, very tough time’
Date May 28, 2015
Chinese steel industry heavyweight Xinchuang Li expects iron ore to remain below $US65 per tonne for the coming two years. Photo: Joe Armao

The president of China’s peak metallurgical industry has warned iron ore mining companies are in for a “very, very tough time” in coming years as the fierce competition between local steel producers will keep the commodity’s price below $US65 a tonne.

Speaking at the Stockbrokers Association of Australia’s annual conference, China Metallurgical Industry Planning and Research Institute President Xinchuang Li said many underestimate the breadth and number of Chinese steel companies and their impact on the price of iron ore.

“Mining companies are in for a very, very tough time because of our competition,” Mr Li said. “Because of it, the price of steel will stay low, which pushes the iron ore price to a low level.”

China consumes more than 60 per cent of the world’s iron ore production. In 2014, the country purchased 933 million tonnes of iron ore, of which 58 per cent came from Australia.

Mr Li said the organisation’s understanding of the buyer side of the market meant it was forecasting iron ore prices to remain within $US55 to $US65 per tonne for at least two years.

Comment by redmondjp
2015-06-01 11:28:17

OK - define ‘illegal’ mining in China! I guess that is mining which isn’t state-sanctioned? That sentence made me chuckle.

Comment by Professor Bear
2015-05-31 20:26:32

Dumb question of the day: Is it safe to assume that housing prices are immune from the 50%+ drop in commodities prices that we have seen over the past 12 months?

Comment by Ben Jones
2015-05-31 18:54:21

‘As Greece’s drop-dead moment with the ECB creeps closer, the catalyst for the next global financial crash could well be the meltdown in China’s stock market bubble. The Politburo triggered Shanghai’s 125 per cent run since last summer by ordering the Beijing central bank to slash interest rates, cut bank reserves ratios, inject untold billions in high-powered liquidity as the property market deflated and GDP growth fell to 25-year lows below seven per cent.’

‘Casino capitalism became state policy in the People’s Republic as brokerage house margin loans rose 500 per cent to two trillion yuan in a mere 12 months. This financial Ponzi scheme makes pro-Lehman subprime mortgage credit bubble-era seem like a Sunday school picnic in comparison. If the Chinese stock market bubble bursts, its shockwaves will be felt all over the world.’

‘A rise in broker margin debt, sovereign wealth fund sale of Big Four bank shares, 23 new liquidity sucking IPOs, profit-taking after the Comp index traded 50 per cent above its 2015 lows at a seven-year high all played a role in Shanghai’s flameout. The Shanghai A shares market is the world’s least transparent, most opaque index, dominated by state-owned companies run by the Communist Party’s nomenklatura vulnerable to Xi’s political witch hunts.’

‘The danger is that China’s meltdown is happening at a time when Europe/US are overvalued and liquidity shocks could well follow as Greek exit or the Fed rate hike. The Politburo tried to use the Shanghai/Shenzhen stock market bubble to reflate the world’s most overleveraged economy, with total debt now 250 per cent of GDP and epic overcapacity in property and the industrial base.’

‘A retail mania rally driven by a tsunami of margin debt contains the seeds of its own destruction. A Chinese friend in Hong Kong tells me he knows people who borrowed money against their homes to speculate in the stock market. This will end in tears. Something is dangerously wrong in a world where the ultra-speculative Shenzhen exchange is worth $4.3 trillion, almost equal to Hong Kong. Shenzhen trades at an absurd surreal valuation of 61 times earnings, up from 20 just a years ago. As China’s economy slows, corporate earnings will contract. A Chinese stock market crash is inevitable.’

Comment by Ben Jones
2015-05-31 18:56:43

‘CLUTCHING shopping bags and in their workaday clothes, the investors behind the world’s wildest stock market rally crowded in front of screens in retail brokerages across China, watching their shares swing to and fro.’

‘In a dated tribute to Communist party ideology, red numbers mean the price is up and green ones mean down. The screens flashed like traffic lights as extreme volatility gripped the exchanges in Shanghai and Shenzhen last week.’

‘To the people sitting on plastic chairs, mobile phones to ears and eyes on the indexes, the happy phenom- enon of soaring small stocks is known as “stir-frying”.’

‘The world watched, foreign institutions threw in cash and the Chinese government intervened to calm a craze for equities gripping a nation with more than £5 trillion in household deposits.’

Comment by Professor Bear
2015-05-31 19:43:24

‘Casino capitalism became state policy in the People’s Republic as brokerage house margin loans rose 500 per cent to two trillion yuan in a mere 12 months. This financial Ponzi scheme makes pro-Lehman subprime mortgage credit bubble-era seem like a Sunday school picnic in comparison. If the Chinese stock market bubble bursts, its shockwaves will be felt all over the world.’

Quite obviously, the Chinese stock market is too-big-to-fail, as a burst of the Chinese stock market bubble could bring down the entire global financial system.

Hence financial regulators will take all necessary measures to ensure the Chinese stock market bubble does not burst.

Comment by Ben Jones
2015-05-31 19:01:47

‘Call it status anxiety, call it greed or just call it clever momentum trading, but the fear of missing out is an under-appreciated force in financial markets. No one likes to miss out on a good thing, especially when they see their friends, neighbors and rivals cashing in, a phenomenon three-card-monte dealers have long understood.’

‘There are (at least) two markets right now which show meaningful signs of attracting capital in substantial part because of this fear: China’s stock market and Silicon Valley’s unicorn factory. In China, which is enjoying a vertiginous market ride upwards, money is flowing into stocks in part because investors believe the authorities ‘want’ a bull market and in part because of media and social media attention fanning the flames.’

Bill Janeway, a veteran venture capitalist, sees fear of missing out, or FOMO, as part of the motive force behind the rush of private capital into early-stage and more ma’ture but often still unprofitable tech companies. “We are in an environment of extraordinary low interest rates, of enormous quantities of liquidity looking for a return,” Janeway said in a podcast interview with venture capital company Andreessen Horowitz. “There is the phenomenon of FOMO, fear of missing out on the next Facebook, the next Twitter.”

Comment by Professor Bear
2015-05-31 19:44:41


Comment by Ben Jones
2015-05-31 19:04:32

‘In the report “No risk of hard landing for China, says Bernanke” (May 28), former Federal Reserve chairman Ben Bernanke said China’s economic slowdown should not worry markets, as there is no risk of a hard landing. I disagree.’

‘Some of the leading indicators are flagging a hard landing caused by a real estate bubble bursting.’

‘Land prices rose sharply by nearly 800 per cent between 2003 and 2010, pushed up too much by land speculation. This has resulted in an unsustainable increase in home prices. Such an event — seen in United States economic history since the 1800s — has always been followed by a decline in economic activity, then a recession. Land prices have already peaked and, with construction stalling, continue to fall, affecting the wider economy.’

‘The yield curve is an excellent predictor of recessions. All recessions in the US since 1960 have been preceded by an inverted yield curve, caused by short-term interest rates rising above the level of long-term bonds. China’s inverted yield curve has occurred.’

‘It is a consistent trend that the world’s tallest buildings are completed right at the top of the real estate cycle. A few of these skyscrapers are now completed or will be completed within the next couple of years in various Chinese cities.’

Comment by Professor Bear
2015-05-31 19:45:45

‘The yield curve is an excellent predictor of recessions. All recessions in the US since 1960 have been preceded by an inverted yield curve, caused by short-term interest rates rising above the level of long-term bonds. China’s inverted yield curve has occurred.’

Haven’t something like 13 of the last 9 recessions been predicted by an inverted yield curve?

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