August 30, 2015

A Problem With The Great Monetary Experiment

A weekend topic on recent financial markets and the housing bubble. The Los Angeles Times. “Seven years ago when the housing bubble burst, it nearly took down Wall Street and the entire U.S. economy. This week, the concern was the reverse: That the prospect of an extended dive in the stock market, or even continued volatility, might spook buyers and sellers in Southern California’s housing market. Christian Lander put an offer on a Glendale house last week, before the stock market started falling. He’s proceeding as planned, because he’s investing for the long term and doesn’t want to react to fluctuations in the market. But Lander worries that other buyers may take a different view — because he’s a seller too, looking to unload his two-bedroom condo in Koreatown.”

“‘I am just hoping it won’t freak people out that this is a bad time to buy,’ he said.”

“George Pagano, a real estate agent with Immel Team Luxury Real Estate who specializes in coastal south Orange County, said his buyers are assuming that the stock drop-off is temporary and are not changing their intentions. But some sellers have been more willing to trim their asking prices from levels he considered unrealistic. This week, the owners of a five-bedroom house in Laguna Niguel reduced their asking price by $505,000, down to $3.9 million. ‘They are taking our advice to lower their expectations,’ he said.”

“Tom Berge Jr., president of the West San Gabriel Valley Assn. of Realtors, has had a different experience. He said three or four Chinese business owners looking to invest in homes have raised concerns to him over economic turmoil in China. But it wasn’t because they might no longer be able to afford local real estate. ‘Their fear is the government is going to limit the money that can freely move out of China,’ he said.”

Interest in New Zealand. “Last week I gave a presentation about the ‘big picture’ to a gathering of government officials in Wellington. I talked about China’s economy and financial market volatility, rather on-the-money topics given this week’s global stock-market meltdown! What’s unusual about this situation is that in the past large developing countries – and China is the largest – grew quickly and steadily. They provided a buffer during the business cycles of the developed world. The news out of China suggests that buffer is not as robust as it once was. It can’t keep acting as a sponge for the rest of the world’s economic over-spill.”

“New Zealand doesn’t seem particularly well-equipped to understand, prepare for and benefit from developments in China. Economists could do a much better job than they seem to be doing. We lack a good understanding of China. And that leads on to a second problem. We don’t understand how China affects us. There is a common pattern to the capital flows from China – the capital isn’t just flowing into stock markets and bank deposits in other countries (these are usually popular because they’re well regulated and it’s easy to cash up again) but into property.”

“As a country, we’ve been caught napping. We need to move beyond a focus on dairy prices and exports. What about unprecedented capital flows from China? Are the flows permanent or just hot money? Are we making the best use of the money? What are the social consequences of escalating house prices and how can we mitigate those?”

From Reuters. “The venerable Wall Street firm of Lehman Brothers went belly-up seven years ago. Since then, the Federal Reserve has engaged in an extensive monetary campaign involving near-zero interest rates combined with the central bank’s large-scale purchases of bonds. This experiment has delivered the weakest U.S. rebound on record while spreading what author Brendan Brown calls a ‘monetary plague’ into the furthest reaches of the global economy.”

“A recent study of historical periods of deflation by the Bank for International Settlements from 1870 to the present day finds only a weak connection between deflation and economic output. The BIS makes another important point: there appears to be a much stronger connection between a collapse in asset prices, in particular real estate busts, and economic growth than between deflation and output. The BIS argues that a bursting bubble produces a large immediate loss of wealth, albeit wealth of an illusory nature, while deflation simply redistributes a much smaller amount of wealth from debtors to creditors.”

“This points to a key problem with the Fed’s ‘Great Monetary Experiment,’ namely that it has inflated asset prices to unsustainable levels. Bernanke hoped that by making people feel richer, higher asset prices would induce them to spend more. After a run of good years, however, U.S. stocks have approached bubble valuation levels. Given the dollar’s role as the global reserve currency, Fed policy has also pushed down interest rates around the world, thus stoking real estate booms from Beijing to Vancouver.”

“In the wake of the global financial crisis, low U.S. rates also fueled a global carry trade, as yield-hungry investors poured into emerging market debt. At the same time, corporate borrowers in these developing nations availed themselves of low U.S. rates by borrowing in dollars, thus creating a potentially dangerous asset-liability mismatch.”

“The trouble is that asset prices – whether stocks, bonds or property, both in the United States and abroad – are now vulnerable to any future normalization of interest rates – just as the housing bubble and the subprime mortgage crisis followed from the Fed’s attempt to exit the Alan Greenspan easy-money era.”

The Indian Express. “Global markets were surprised by China’s devaluation of its currency, the renminbi, but they shouldn’t be. This is one of the inevitable outcomes of the bursting of its stockmarket bubble and Beijing’s lacklustre efforts to save the bubble as an engine of growth for a slacking economy. Besides losing face and wasting Chinese taxpayers’ money, the government has paid dearly for its misplaced faith in the power of the state.”

“It is unclear whether Chinese leaders realise this, but their expensive attempt to support a bubble has been a huge distraction from their real top priority — implementing difficult structural reforms to sustain Chinese economic growth. Instead of investing their time and energy in financial de-leveraging, squeezing out excess manufacturing capacity and reorienting the economy away from investment to consumption, Chinese leaders now find themselves helplessly watching the erratic gyrations of stock prices.”

“While the scale, timing and haste of Beijing’s operation may shock many, it does not come as a surprise to sceptics who have always doubted the CPC’s commitment to reforms. They have watched this bad movie many times before. Every time the party has to choose between wielding the power of the state or relying on market forces, it has consistently opted for the former. In this light, China’s decision to devalue its currency should not come as a surprise at all. As strong believers in the power of the state, Chinese leaders firmly believe they can fight the invisible hand. All it takes is strong political will. We can only hope that they will be proven wrong this time.”

RSS feed


Comment by Ben Jones
2015-08-29 06:53:35

A comment at the LAT:

‘Now is a great to sell, walk away with up to 500K in tax free gains (250K for single) and leave CA in favor of a less expensive area. Moved to Colorado in 2004, took 405K in tax free housing bubble booty from the bought in ‘95 CA with me and have lived with no mortgage ever since.’

Fun fun fun til Daddy takes the T-Bird away.

Comment by rms
2015-08-29 08:20:03

“Christopher Thornberg, founding partner of Beacon Economics, believes that slowing growth abroad won’t slow investment because Chinese residents will become more inclined to move money into what they consider a safe investment.”

Like our “” buttressed real estate bubble?

Comment by Professor Bear
2015-08-29 08:29:54

How can you “move money” when you owe it on your underwater stock market margin loan.

P.S. Our moody Chinese neighbor has been yelling a lot at his wife and kids lately. One night last week he bordered on disturbing the peace by starting one of these shouting rants around 10:30am at night, after our kids were already in bed trying to sleep. I’m really tempted to ask him whether he has any money invested in the Chinese stock market, but haven’t yet mustered the courage.

Comment by GuillotineRenovator
2015-08-29 15:27:56

You should tell him there are medications available. What a nutcase.

(Comments wont nest below this level)
Comment by Professor Bear
2015-08-29 16:42:29

I am not sure what medication is available to treat people who suffered massive losses in China’s recent stock market meltdown.

Comment by MD
2015-08-29 10:01:47

I know Trump is whipping up anti-Latino immigration sentiment, but isn’t it only a matter of time before there’s widespread anti-Chinese immigration sentiment as well?

Comment by Ben Jones
2015-08-29 10:25:59

You must not read this blog much or you’d know that there is outrage at Chinese, Singapore, Hong Kong (etc) buyers leaving houses empty in Canada, Australia and New Zealand. In Australia they have a law that foreigners can only buy new houses. But when examined it was discovered that it wasn’t being enforced. Recently I’ve posted reports from official sources identifying substantial money-laundering via real estate in Canada and the UK.

Who knows how much is going on? Remember the Canadian scandal where a brokerage had fake Chinese investors feign interest in a condo project? The implication was that the scheme was to motivate Canadians to buy the condos. But I haven’t seen much in the way of anti-Chinese immigration, probably because it isn’t happening.

(Comments wont nest below this level)
Comment by GuillotineRenovator
2015-08-29 15:29:58

Well, you can sign me up as one of the anti-Chinese money-laundering people. I don’t like these crooks showing up on our shores and pumping up the price of houses with their ill-gotten gains.

Comment by Florida Skeptic
2015-08-29 14:21:15

One group is bringing crime and poverty and lowering wages and the other is bringing money and inflating housing prices. The illegal immigration issue and what is probably 50 million people, basically invading the country, is a different problem than the Chinese issue.

How are those Chinese going to view their money pits here the next time the housing market collapses?

Hey, do you think they have homeowners insurance on those cash houses? It is hurricane season here in Florida.

(Comments wont nest below this level)
Comment by The Selfish Hoarder
2015-08-29 20:16:09

The idea is to move to the places the Chinese hate: Places with low or no taxes and that are gun-friendly. Arizona and Texas are examples.

Comment by Mafia Blocks
2015-08-29 16:46:05

Thornberg turned into a real beaut didn’t he…

Comment by GuillotineRenovator
2015-08-29 17:31:42

“I see your true colors shining through…”

(Comments wont nest below this level)
Comment by Maldonash
2015-08-30 11:19:57

Thornberg is a friend of mine and must say he is often correct in his analysis. His only missed call I can remember was in 2005 when we had a lunch together and he said the bubble was too big for the government to intervene or keep propped up … well he was a bit correct since it corrected but then the government propped it up.

Comment by Prime_Is_Contained
2015-08-30 11:24:53

Yeah, back in 2005/2006 he was outspokenly bearish on housing (which was rare for those days), and he got a lot of respect for it here.

After he changed jobs, he did seem to change his tune, though.

But I think he may be right on this Chinese-investment prediction; when things really go into the cr@pper there, that may make it more difficult but also more desirable for the “haves” to stash their cash off-shore.

Comment by Mafia Blocks
2015-08-30 11:27:16

Interesting how remuneration changes ones perspective.

Comment by rms
2015-08-30 21:17:02

“Interesting how remuneration changes ones perspective.”

“It is difficult to get a man to understand something when his salary depends on him not understanding it.” —Upton Sinclaire

Comment by Ben Jones
2015-08-29 07:13:21

‘The appetite of Chinese buyers for Australian property has been greatly underestimated with demand stronger and deeper than ever before, according to the Brian White, the chairman of real estate agency Ray White.’

‘The gyrations in China’s sharemarket had made no difference to developers’ and investors’ intentions either within China, or overseas, said Mr White, who oversees the company’s 1000 office-strong network. “We had a team in China last week, including Dan (Mr White’s son and head of Ray White’s commercial business),” Mr White told The Weekend Australian. “Nowhere did he see a lack of interest. The strength of ­demand is astonishing.”

‘Steve McCann, the chief executive of Lend Lease, Australia’s largest apartment developer that this week reported a $619 million profit, said the group had sale contracts for $4.7 billion worth of new apartment projects around the world, with about 35-40 per cent of buyers — whether for projects in Australia, Britain or the US — coming from overseas. Of the pre-sales, $3.4bn was Australian apartments, with most of the offshore buyers coming from Asia including China.’

“We have really good visibility and based on the prices and demand for apartments globally, there’s a very deep pool from Asia. I don’t know what the catalyst will be to slow that down … but we’re not seeing any signs of that happening yet,” Mr McCann said. ‘‘Our most recent launch was in Darling Harbour and we sold out about $600m worth of apartments in five hours. That’s a record for Australia,” he said.’

‘Mr McCann said he did not see a housing bubble in the overall residential market, but acknowledged that booms did not last forever. “I can’t imagine the price increases being maintainable, so I would ­imagine in the next 12 to 18 months price growth will probably stop,” he said.’

Comment by Ben Jones
2015-08-29 07:18:42

‘There’s one developed economy that’s so dependent on China that it’s been jokingly referred to as an overseas Chinese province. I am, of course, talking about Australia. Slowdown, hard landing or crash – we don’t know yet, but the point is China has been slowing for a while. And it will keep growing more slowly in the future.’

‘Australia is sometimes described as the ‘lucky’ country. But now, its luck has run out. Miners are getting clobbered as the Chinese boom turns to bust. Nearly 40,000 jobs have been lost in the last three years, and 80% of mining companies plan more layoffs in the coming year. And if mines aren’t closing, they’re being sold off.’

‘This is all having a knock-on effect, of course. The Australian dollar has collapsed. At its peak, an Aussie dollar would have bought you US $1.10. Now it’s only going to fetch you about US$0.70. Then there’s the legendary housing market bubble. Australia is one of those few markets – like Canada – that just kept going up, even through the financial crisis.’

‘The reality is that – like all other housing bubbles – it’s been driven by the availability of easy credit. Australian household debt now stands at a total of more than A$1.9trn. But with the economy turning down, banks are closing the credit taps, fearful they’ve already lent too much. As a result, house prices are starting to fall.’

Comment by rms
2015-08-29 08:58:55

“And it will keep growing more slowly in the future.”

Fosters will announce their 64oz beer… for homeowners.

Comment by Ben Jones
2015-08-29 07:22:54

‘Two years after the taper tantrum, this was the week of the Chimerican chill. Economist Moritz Schularick and I coined the word Chimerica in these pages in 2007, combining China and America, to describe the symbiotic relationship increasingly dominating the world economy. That is even truer now, as the past several days have shown. For the first time in financial history, a sneeze in Shanghai gave Wall Street—and almost every other stock market in the world—a cold.’

‘Before the 2008 financial crisis, Chimerica was a marriage of opposites. China saved, exported and lent. America consumed, imported and borrowed. For a few heady years, the odd couple were happy together. Not only did the glut of Chinese savings lower the cost of capital, the glut of Chinese workers reduced the cost of labor. Every asset class on the planet rallied.’

‘But the unbalanced economic relationship between China and America posed a threat to global financial stability. That was our point in 2007: Chimerica was a chimera. Without the flow of Chinese savings into U.S. dollars back then, a result of Beijing’s large-scale intervention to keep its currency weak, American interest rates would surely have been higher and the U.S. housing bubble less inflated. Surprisingly, the 2008 financial crisis didn’t lead to a Sino-American divorce, despite mutual accusations of monetary manipulation. Instead, like any couple who spend long enough in each other’s company, the Chimericans grew ever more alike.’

‘The good news is that, if its authority is firmly established, the PBOC has the capacity to repair the damage. The bad news is that the future of Chimerica—and the world economy—is now more dependent than ever on the expedients of central bankers.’

Comment by Professor Bear
2015-08-29 08:31:15


Crony capitalistic communism is the way forward!

Comment by Blue Skye
2015-08-30 06:18:47

“the flow of Chinese savings into U.S. dollars back then…”

Yeah sure, the Chinese printed fiat to buy USD. Now they are selling USD to support their fiat.

Comment by Ben Jones
2015-08-29 07:27:06

“The Federal Reserve has done, and will continue to do everything possible…to assist in restoring our nation to financial stability and economic prosperity,” asserted former Fed Chairman Ben Bernanke in announcing the extraordinary money expansion program known as “quantitative easing” in 2009.’

‘Three years later, European Central Bank President Mario Draghi assured a nervous public that he “is ready to do whatever it takes to preserve the euro.” Besides the Fed and the ECB, the Bank of Japan and Bank of England are engaging in similarly aggressive monetary measures. And, for the most part, their actions have worked — at least for the short term.’

‘Nothing personifies the tug-of-war between proponents of intervention and believers in free markets than the recent behavior of stocks in Shanghai. Chinese households save nearly 40 percent of their income, or roughly half of their nation’s GDP, and have few saving and investment options. Over the last six years, a tsunami of capital flooded into real estate and the last year saw the stock market take off.’

‘However, since mid-June the Shanghai market has plunged by a third, suggesting that the Chinese government is either pulling back its support or that its machinations are no longer effective.’

‘Heavy-handed government involvement in economies and markets carries risks. Former Federal Reserve Chairman Alan Greenspan’s aggressive interest-rate easing policy helped fuel both the 1990s tech bubble and the housing bubble a few years later. His successor, Ben Bernanke, followed up with quantitative easing programs and the proverbial “Bernanke put,” which implied that the Fed was placing a floor under the market.’

‘QE programs in Europe are fueling housing bubbles on the Continent. Since 2010, the average house price in Norway has surged 30 percent, while Germany and the UK have seen appreciation of 25 percent and 15 percent, respectively, according to a recent Moody’s Analytics study. Faced with low interest rates and tepid investment opportunities, investors are having a difficult time finding suitable places to stash their capital.’

‘Some of it is showing up at the art houses. Sales at Christie’s hit a new half-year high of $4.5 billion, helped by a new $180 million art record set by Pablo Picasso’s Les Femmes d’Alger in May. Meantime, Sotheby’s sold a van Gogh, “The Allée of Alyscamps,” for $66.3 million. The longer central banks stay involved, the more we will see this type of speculation.’

‘Wednesday’s market action offered investors a first-hand view of the impact of Fed policy on financial risk taking. New York Federal Reserve Chief, Bill Dudley’s assertion that a September rate hike looked “less compelling” sent the S&P up more than four percent, its largest percentage gain since 2011.’

Comment by Professor Bear
2015-08-29 08:35:58

Do MIT students get special training in Quantitative Easing policy?

Bernanke-Draghi Policies MIT Lessons Fischer Says of His Pupils

Simon Kennedy and Alisa Odenheimer
June 30, 2013 — 2:00 PM PDT
“When I first entered the job market, our professor said to us never accept an offer that you haven’t been given,” Stanley Fischer, former governor of the Bank of Israel, told Bloomberg Television on June 13. “I haven’t been given any offer. I’m not about to accept it. I’m certainly not about to reject it because it doesn’t exist.”
Photographer: Jason Alden/Bloomberg

July 1 (Bloomberg) — When it comes to economics, the professor has become the pupil as far as Stanley Fischer is concerned.

Fischer stepped down yesterday as governor of the Bank of Israel after eight years. His mark on global policy-making will endure through onetime students Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Mario Draghi.

Having taught both as an academic at the Massachusetts Institute of Technology, Fischer credits each with helping to rescue the world economy and says future students will study their policies. His only lament is the policy community he’s just departed has been unable to deliver as strong a recovery in global growth as he once anticipated.

“I’d like to be able to say all the things they are doing were from what they learned in lectures at MIT, but it wouldn’t be true,” Fischer said in a recent interview in London. “From now on when we teach these courses, we’ll teach the lessons we’ve learned from Bernanke and Draghi.”

Comment by Can Bubble
Comment by scdave
2015-08-29 08:02:39

Their fear is the government is going to limit the money that can freely move out of China,’ he said.” ??

The Elephant money left a long time ago….Its the little mice money thats going to get restricted….

Comment by Ben Jones
2015-08-29 08:25:23

‘On Saturday a Yellen ally and former adviser at the Fed delivered a provocative retort: the economic models underpinning those simple rules don’t work that well, and the best policy decisions come when central bankers look beyond those models to the unexpected forces shaping the economy.’

‘Former Fed Chair Alan Greenspan famously did it in the 1990s when he argued against a rate hike at a time when rising productivity was holding down inflation, and arguably failed to do it when he ignored the impact of the tech and housing bubbles, Johns Hopkins University economics professor Jon Faust said in a paper presented at an annual Fed conference here.’

‘In each case the point is the same: it was the extraordinary events outside of the basic inflation and output models used by central bankers that ultimately mattered most, argued Faust, who served as a special adviser to the Fed’s board of governors until September 2014.’

‘That approach “brings fears of ’seat-of-the-pants’ policymaking and, for the more excitable, of barbarians at the central bank gates,” Faust wrote.’

“Understanding … confounding dynamics has always been the key to good policymaking and failure to understand those dynamics has played a key role in major policy mistakes.” Sophisticated econometric models of inflation, for example, may include “extra wiggles” in the forecast as inflation moves from its current rate to a long-run average, but on the whole do no better than a “mindless” line drawn between the two points, he said.’

Lots of chin tugging I’m sure. Yet I can’t help but remember that round after round of money printing, in reaction to one “crisis” after another, has resulted in lower interest rates and lower inflation. Money creation is supposed to the the definition of inflation. We should have double digit inflation and interest rates too. That is, if your sophisticated models work. Check out this chart:

‘3000 B.C. – 500 A.D.. The Ancient Economy
Part I of IV—A Brief History of World Credit & Interest Rates’

‘Credit has existed from the very dawn of civilization. Man has always attempted to borrow from his neighbor if not cold hard cash, then at least a cup of sugar now and then. Some say that prostitution is the oldest profession; history actually suggests that the oldest profession may indeed be that of the moneylender.’

‘As history has shown time and time again, every great speculative boom has been inevitably followed by the proverbial bust. A severe credit crisis had materialized in Athens in 594 B.C. that had prompted major reforms in credit prescribed by the Laws of Solon.’

‘The Laws of Solon were the first major reform to the legal code of Hammurabi. Although the Greeks lifted all maximum limitations on the legal rate of interest a moneylender might charge, personal slavery was completely banned. All those who had been enslaved for debt were freed and those sold into slavery in foreign lands were brought back at the expense of the state.’

‘Many debts were cancelled and others were secured by land when possible. The issue of inflation was dealt with by devaluing the drachma by 25% and weights and measures were increased in size. Political power had shifted from landowners to capitalists and this was reappointed once again back in the hands of the property owners. Citizenship was also granted to immigrants who were skilled. The speculations had indeed prompted stories throughout the Aegean that must have been similar to those concerning the United States with its streets paved in gold. You might say that this was perhaps one of the worst debt crises in ancient history.’

I don’t know Janet, you might be up a tree on this one. Look at how markets reacted recently with no upward move in interest rates. It even has house sellers spooked in California.

Comment by Professor Bear
2015-08-29 08:41:24

Alan Greenspan’s warning remains even more valid today than when he gave it a decade ago:

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

There seems to be one element missing here, which is any mention of the role of a deluge of electronic printing press money in driving risk premiums into the ground.

Comment by Professor Bear
2015-08-29 23:31:37

“Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices.”

This is exactly the lesson millions of Chinese investors who used margin loans to buy stocks recently learned in life’s dear school for fools.

Comment by Blue Skye
2015-08-30 06:21:26

What about the legions before them who borrowed to buy empty apartments?

(Comments wont nest below this level)
Comment by scdave
2015-08-29 09:00:32

It even has house sellers spooked in California ??

SFR Inventory has tripled in 95050-54 in the last month or so…With that said it has tripled off a historically low number but tripled none the less…Its also entering the time of year that inventory typically does increase so the next few months will be interesting to watch to see where it goes…

Comment by Ben Jones
2015-08-29 10:53:06

‘U.S. inflation will likely rebound as pressure from the dollar and other factors fade, allowing the Federal Reserve to raise interest rates gradually, Fed Vice Chairman Stanley Fischer said on Saturday. “At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual,” said Fischer, who on Friday said it was too early to decide whether September was the time to hike rates for the first time in nearly a decade.’

Mr. Fisher, Ben Jones, barbarian at the gates from The Housing Bubble Blog. There’s a rumor that the FOMC is going to flip a coin at the last minute. Any truth to that?

Fisher: There is a committee looking into that and possibly rock-paper-scissors, yes.

Comment by Ben Jones
2015-08-29 09:30:54

‘The BIS makes another important point: there appears to be a much stronger connection between a collapse in asset prices, in particular real estate busts, and economic growth than between deflation and output. The BIS argues that a bursting bubble produces a large immediate loss of wealth, albeit wealth of an illusory nature.’

I was thinking about something lately. Yellen bucks go looking for a place to die. But money doesn’t go poof when one oil trader loses to another. Money goes poof when a debt is defaulted on that can’t be redeemed. And all the Yellen bucks and Xi bucks have a corresponding debt tied to their existence. If you believe that wealth can’t be printed, it goes along that we should expect many trillion$ in debt defaults. I’m reminded of that guy in China who said there were 1,000 Greece’s there.

Comment by Ben Jones
2015-08-29 09:47:44

‘You know how it is with buses? You wait ages for one, far longer than seems reasonable — and then three arrive all at once. Financial crises are a bit like that too.’

‘The financial crisis everybody in the business has really been waiting for is a “hard landing” of the Chinese economy, now one of the two motors of the global economy. (The other is still the United States.) Everybody thought it was bound to come eventually — well, everybody who was not too heavily invested in the Chinese market — and it now appears to be here, although the Chinese government is still denying it.’

‘The second crisis, less widely anticipated, is a credit crunch that is sabotaging economic growth in almost all the developing countries except India. In many cases their currencies have fallen to historic lows against the dollar, making it harder for them to repay the dollars they borrowed. Moreover, it’s getting harder for them to earn dollars from their exports because commodity prices have collapsed.’

‘And a third crisis is looming in the developed economies of Europe, North America and Japan, which can see another recession looming on the horizon before they have even fully recovered from the effects of the banking crash of 2007-2008. And it’s hard to pull out of a new recession when your interest rates are still down near zero because of the last one.’

‘These crises are all arriving at once because they are all connected.’

‘China avoided the low growth and high unemployment that hurt Western countries by flooding its economy with cheap credit. But that only postponed the pain, and between 2007 and 2014 total debt in China increased fourfold. The huge amount of cheap credit sloshing around the Chinese economy mostly went into building unnecessary infrastructure, and above all into housing. That did preserve employment, but property values soared and a huge “housing bubble” was created.’

‘There was nobody to buy all those houses and apartments, and there are now brand-new “ghost towns” all over China, so property values are falling fast.’

‘Chinese exports have fallen 8 percent in the past year, and even the regime admits that the economy is growing at the lowest rate in three decades. Nobody outside the regime knows for certain, but it may scarcely be growing at all. The “hard landing” is now close to inevitable.’

‘Now for the second crisis. While China’s artificial boom was rolling along, its appetite for commodities of every sort, from iron to soy beans, was insatiable, so commodity prices went up. The collapse of Chinese demand ends this party too. From Brazil to Turkey to South Africa to Indonesia, exports are falling, the value of the local currencies is tumbling, and foreign investors are fleeing. Capital flight from the 19 largest emerging market economies has reached almost one trillion dollars in the past 13 months, and the outflow is still accelerating.’

‘And the third crisis, in the West? The problems that caused the crash of 2007-2008 have not really been addressed, just papered over. What limited growth there has been in Western economies is due almost entirely to absurdly low interest rates and”quantitative easing” (governments printing money).’

‘The average time between recessions in the West is seven to 10 years, so one is due around now anyway. The likeliest trigger for that is a collapse of demand in China and in the other emerging economies, which is now practically certain. And when it hits the West, neither of the traditional tools for pulling out of a recession will be available.’

Comment by Ben Jones
2015-08-29 09:53:26

‘In China, investment spending as a percentage of GDP is unprecedented in history, creating massive overcapacity. Despite vacancy rates of more than 20 per cent and inventories equivalent to five years’ demand in some cities, new housing starts are around 12 per cent above sales.’

‘The accompanying credit bubble is an immediate concern. By 2014, total Chinese debt was $28trn (£18trn), or 282 per cent of GDP – up from $7trn (158 per cent of GDP) in 2007 and $2trn (121 per cent) in 2000. The $20trn-plus increase since 2007 represents one-third of the rise in global debt over the period.’

‘The stock market falls raise the risk of significant problems within the financial system…A liquid and well-functioning stock market is essential for appropriate pricing of capital and reducing excessive reliance on bank loans. It is important in any possible privatisation of state-owned enterprises, and attracting foreign investors and long-term, stable capital inflows. The fear is that China’s proposals are rhetoric, primarily for foreign consumption.’

‘But the market crash and the response suggest that the Chinese authorities are likely to rely more on Communist dogma than market forces when events develop in an unwanted way. The crash has drawn attention to the underlying repressive economic processes. China’s financial system is predicated on directing the savings of ordinary Chinese people into areas suiting policy purposes, especially maintaining economic growth.’

‘The engineered boom was designed to reward elites and ensure support for the President’s agenda and consolidation of power. Instead, the bust has undermined the new regime. President Xi is viewed by Western commentators as perhaps the most powerful Chinese leader since Deng Xiaoping. But history demonstrates that the grasp on power in China is fragile.’

Comment by Ben Jones
2015-08-29 11:17:36

‘One of the dangers of artificially low interest rates is malinvestment: money put into certain projects is misplaced because demand in that area is unsustainable or overestimated. Do data centers fall into that category?’

‘Malinvestment goes hand in hand with booms and busts. For instance, suppressed mortgage rates can lead consumers to buy more housing than they can afford, resulting in a surge in construction. That’s the boom. But when those mortgage rates rise to normal levels, demand shrinks leaving an excess supply. Prices must drop to clear the market. That’s the bust.’

‘The Effective Federal Funds Rate, which guides interest rates throughout the market, has been essentially zero for more than half a decade. Assuming an inflation rate of about 2%, that leaves plenty of room for borrowing at what amounts to a negative interest rate.’

‘Overall, energy consumption in the U.S. has remained roughly stagnant since about 2000, and may even be on a slight downward trend. Per-capita consumption has certainly fallen. Yet investment in energy production (particularly shale oil) has vastly increased since the last recession.’

‘The question, then, is whether data centers are like oil: is there too much supply for the demand? Two matters complicate this question. First, as mentioned above, the low interest rates mean malinvestment could be almost anywhere. Second, many bubbles are difficult to identify until they pop.’

‘What, then, might indicate potential malinvestment in data centers? One indicator is overzealous expectations. In 2013, a T5 Data Centers blog by Pete Marin lists a number of predictions that supposedly back the notion that data center supply is all but impossible. Among them are the preposterous (a commercial quantum computer and a $1,000 PC with the same compute power as a human brain by 2020) to the dubious (various predictions about the amount of data that will be created without any consideration for whether that data has any value). Some of these predictions are not unlike the notion that housing prices will always go up just because that’s the way it is.’

‘Another indicator is investment in big data center consumers that offer dubious value in return. To illustrate that situation, we need only look at our old pal Twitter, which I have covered on numerous occasions with regard to its inability to turn a profit and the overall dubious nature of the social-media business model. In this case, data centers are basically just big data-collection engines for advertisers; if the advertisers aren’t getting value in return, they will eventually jump ship. In fact, the entire big data phenomenon may be losing the steam that it never really had in the first place. Unless storing gobs of data can really yield beneficial insights (more likely, good customer service provides a far better return than pie-in-the-sky golden nuggets of information), companies won’t continue to invest in storage capacity and may even pull back.’

‘Yet another indicator is excess server capacity. According to some estimates, about one-third of servers are “comatose,” meaning they consume resources but provide no useful service. Such rank inefficiency of capital expenditure may indicate a number of things; malinvestment is one (but not the only) possibility.’

‘According to IDC’s latest market forecast, global shipments of PCs will decline 8.7%; for tablets, it’s 8%. Fred O’Connor noted at Computerworld, “Combined volume shipments of PCs, tablets and smartphones are expected to increase only in the single digits through 2019. This could indicate market saturation or the effect of a ‘good enough computing’ mentality among potential buyers, IDC said.” These facts by themselves don’t necessarily reflect on the data center market, but they do raise the question as to whether companies have overshot the mark with regard to capacity in the industry as a whole.’

‘The question of whether there’s a bubble comes down to whether the supply is fit for a sustainable amount of demand. Unfortunately, the answer may only become clear when interest rates normalize—something the Federal Reserve has been loath to do. Recent troubles in global equity markets, including the U.S., mean near-zero interest rates will likely continue for some time. If data centers do represent an area of malinvestment (i.e., a bubble), the eventual outcome could be worse the longer those rates stay low. If the industry is simply meeting the demand of a burgeoning market, however, then the eventual result may be less unpleasant. But the only way to find out for sure is to wait and see.’

Comment by Professor Bear
2015-08-29 13:58:04

‘Malinvestment goes hand in hand with booms and busts. For instance, suppressed mortgage rates can lead consumers to buy more housing than they can afford, resulting in a surge in construction. That’s the boom. But when those mortgage rates rise to normal levels, demand shrinks leaving an excess supply. Prices must drop to clear the market. That’s the bust.’

That is why I don’t expect mortgage rates to increase by a significant amount any time soon.

Comment by Prime_Is_Contained
2015-08-30 11:12:41

First, as mentioned above, the low interest rates mean malinvestment could be almost anywhere.

Ha, that’s funny. What an understatement.

My take: “the low interest rates mean that mal-investment is most likely EVERYWHERE.”

Comment by Senior Housing Analyst
2015-08-29 12:48:32
Comment by Blue Skye
2015-08-30 06:45:20

“Thirteen rowers on the 40-member US team came down with stomach illness at the world junior rowing championships in Rio de Janeiro – a trial run for next summer’s Olympics…The event took place amid rising concerns about the water quality at venues for the Rio de Janeiro Olympics, now less than a year away. Olympic chiefs to order testing for viruses in Rio’s sewage-polluted waters…The Americans were by far the hardest hit at the regatta that concluded over the weekend, with reports of vomiting and diarrhea.

“Last month AP published an independent analysis of water quality that showed high levels of viruses and, in some cases, bacteria from human sewage in all of Rio’s Olympic and Paralympic water venues, including the Rodrigo de Freitas Lake, where the rowing competition took place.”

Comment by Senior Housing Analyst
2015-08-29 12:52:24

Pomona, CA Housing Prices Plummet 11% YoY

Comment by Ben Jones
Comment by Mafia Blocks
2015-08-29 14:43:17

Click/save. TY

“About 5 million Californians left between 2004 and 2013. Roughly 3.9 million people came here from other states during that period, for a net population loss of more than 1 million people.”

A declining population, 4.4 million excess empty houses and growing, a ravaged impoverished population, etc.

Yep. What a hole California is.

Comment by The Selfish Hoarder
2015-08-29 20:32:01

I would guess the ones leaving are 1) retirees, knowing that they can take their traditional 401ks to Nevada or Texas and avoid the 10% tax California has on ordinary income while those former states have 0 tax, and 2) lower middle class people who are priced out of California.

For some, the high paying jobs are still worth it.

Starting in November my rent (in Orange County, “just south of Irvine”) will be 10% of my salary and compensation. Currently it’s 20% while I pay for a vacant apartment in Phoenix.

Yeah rent is 10% of my income in California and I can still put $30,500 per year into a Roth IRA and Roth 401k.

The employment opportunities around my OC place are huge compared to Phoenix. Phoenix is big on Java and SQL. It would take me a few years to get the years of experience to come up to speed in salary in Phoenix though. Like when I intend to downsize!

(Comments wont nest below this level)
Comment by Ben Jones
2015-08-29 15:18:25

‘It can be a little nerve-wracking — renting out your home to a stranger to make some extra money. What if that tenant decided to make a little money of his own, and sublet while you’re out of town?’

‘CBS 2’s Mike Parker reports on a man looking for answers, after it happened to him. Robert Corwin is a digital artist who lives part-time in California and part-time in a West Town condo.’

‘Recently he came back to Chicago and found a young couple living in the master bedroom. His liquor supply was gone and there was a hookah on the dining room table. “Your imagination goes crazy. What’s been going on? It could be everything from orgies to to drugs,” Corwin says.’

Comment by drumminj
2015-08-30 10:42:04

Yeah, I don’t see how one can be comfortable allowing random strangers to sleep (and do whatever else) in your bed.

Comment by Ben Jones
2015-08-30 07:04:54

‘Fischer, Carney and other policymakers are wrestling with the world’s stubbornly low levels of inflation, and recognizing that the rapid pace of globalization over the last quarter century may have made it harder for any individual country to move inflation higher.’

“There are profound secular and cyclical disinflationary forces at work in the global economy,” Carney said, making it harder for central banks in London, Washington and elsewhere to reach the inflation targets they have set as a core policy goal.’

Oh boy, the globalists have realized their little project is deflationary! That’s going to make paying back all these Yellen bucks kinda hard Mark.

Comment by Blue Skye
2015-08-30 07:36:31

Excessive lending eventually destroys the borrowers, which is why inflating the currency leads to default and deflation.

Comment by Senior Housing Analyst
2015-08-30 10:54:11

Pleasanton, CA Housing Prices Fall 10% YoY

Comment by Senior Housing Analyst
2015-08-30 11:03:23

“Beijing Bingo And The Tottering Edifice Of ‘Chinese Paper’”

“China’s orgy of buildings, airports, new cities, harbors, highways, high-speed trains was all financed by “Chinese paper” and overseas Chinese money. Today, no one knows how much bad debt is choking China.”

“The US seems poised for growth – if its useless Federal Reserve central bank will just get out of the way. Interest rates must come up to restore market stability.”

*David Stockman intuitively understands the only thing in the way of a thriving, growing economy are these grossly inflated prices.

Comment by Blue Skye
2015-08-30 11:49:29

And the grossly not going to be paid back debts that they rode in on.

Name (required)
E-mail (required - never shown publicly)
Your Comment (smaller size | larger size)
You may use <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong> in your comment.

Trackback responses to this post