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

[GRG55]

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

One of the other things I have posted a few times in the past is my firm belief that, contrary to popular political opinion in the USA, the Chinese currency is OVERvalued, and if it was allowed to free float it would decline, not rise, against the US$...

Last edited by GRG55; 06-14-13 at 07:31 PM.

Well it took a couple of more years, but the inevitable is finally underway:

China’s yuan may shed another 8% by end of 2016, says Barclays

Published: Aug 21, 2015 1:16 p.m. ET

Strategists at Barclays expect the yuan, also known as the renminbi, to weaken around 8% against the dollar over the next two years—and they expect it to drag most of the world’s currencies down with it.

That could mean more pain for stocks and for emerging-currencies, which have been hammered since the People’s Bank of China’s decision to devalue the yuan starting Aug. 11.

Barclays published wide-ranging revisions to all of their foreign currency forecasts.

According to Barclay’s outlook, downward pressure will be greatest for other Asian currencies—the analysts singled out the currencies of Taiwan, Korea and Malaysia as among the most vulnerable—as weakening economic growth scares off investors, who no longer want to shoulder the risk of funding large current-account deficits...

...The currencies of exporters like the Australian dollar, New Zealand dollar, South African rand will likely depreciate by 7% to 8% against the dollar by the middle of next year....

..."Furthermore, if Fed policymakers are dissuaded from policy firming due to risks from China, it is even more likely that other major central banks’ policies will push back tightening or move toward outright easing,” Barclays said.

China’s yuan has been steady all week, prompting some currency strategists to speculate that policy makers in Beijing have kept it pegged despite ceding more control over its valuation to market forces.

At a news conference last week, PBOC Deputy Governor Yi Gang denied that the central bank intends to push the yuan lower, saying further weakness would be inconsistent with the currency’s fundamental value. [MRDA ]

[GRG55]

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

Record capital flight from China as industrial slump drags on

China's state media decries "unimaginably fierce resistance" to economic reforms, a sign that president Xi Jinping is becoming furious with incompetent party officials

By Ambrose Evans-Pritchard

8:00PM BST 21 Aug 2015

Capital outflows from China have surged to $190bn over the last seven weeks, forcing the authorities to intervene on an unprecedented scale to defend the Chinese currency.

The exodus of funds is draining liquidity from interbank markets and has pushed up overnight Shibor rates by 30 basis points in the last ten trading days, a sign of market stress.

Yang Zhao from Nomura said $90bn left the country in July. The pace has accelerated since the central bank (PBOC) shocked the markets by ditching its currency peg to the US dollar.

Capital flight for the first three weeks of August is already close to $100bn, despite draconian use of anti-terrorism and money-laundering laws to curb illicit flows.

Mr Zhao said the PBOC had intervened “very aggressively” to stabilise the currency and prevent the devaluation getting out of hand, but this automatically tightens monetary policy...

...The Caixin PMI survey slumped to 47.1, far below the boom-bust line of 50 and the lowest since March 2009. New export orders slid further to 46.0 while inventories are rising, a nasty cocktail...

...Capital outflows from emerging markets have reached $940bn since June 2014, according to NN Investment Partners. The damage from the EM crisis is ricocheting back into the US. High-yield bonds spreads have surged to three-year highs, rising to bankruptcy levels of 1100 basis points for energy companies.
It is unclear where China’s political system is now heading. The country is gripped by an anonymous article published in the state newspapers warning that the reform process faces “unimaginably fierce resistance”

Jonathan Fenby from Trusted Sources said the article is a sign that a furious President Xi Jinping is losing faith in his officials after a secret conclave of the party leadership in August. “Behind the confident front which he presents to China and the rest of the world, factionalism is still alive within the senior ranks,” he said...

...There is little doubt that the party committed grave policy errors over the winter months, culminating in the so-called “fiscal cliff” as a botched reform of local government finance caused spending to collapse. The question is whether the worst is over as the authorities launch another stop-go cycle.

Credit growth rose to a 31-month high in July, though a chunk of this is simply rolling over old debts to keep the game going.

Fiscal spending is picking up sharply as the new bond market finally comes on stream. Local governments issued almost $200bn of securities in June and July, a blistering catch-up pace...

[ProdigyofZen]

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

A long-term crash process with monetary policy mistakes.

[GRG55]

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

Looks like they blinked. Again.

What a surprise

Even the much vaunted central planners in Beijing are having a wee difficulty restructuring the economy towards the ever elusive consumer.


...

Still trying, apparently

Citigroup braces for world recession, calls for Corbynomics QE in China

Citigroup's Willem Buiter says only a blitz of helicopter money from the central bank can stop China's economy crumbling now

By Ambrose Evans-Pritchard

6:45PM BST 28 Aug 2015

China has bungled its attempt to slow the economy gently and is sliding into “imminent recession”, threatening to take the world with it over coming months, Citigroup has warned.

Willem Buiter, the bank’s chief economist, said the country needs a major blast of fiscal spending financed by outright "helicopter" money from the bank to avert a deepening crisis.

Speaking on a panel at the Council of Foreign Relations in New York, Mr Buiter said the dollar will “go through the roof” if the US Federal Reserve lifts interest rates this year, compounding the crisis for emerging markets.

Professor Zhiwu Chen from Yale University told the same event that China will be doing well if it can contain its slow-motion crisis to mere stagnation for the next 10 years, given the dangerous levels of debt in the system.

“If the Chinese government is able to manage a Lost Decade with very low growth - or no growth - without an economic crisis, it will be a policy achievement,” he said.

Prof Chen said a Western-style financial collapse in China is “highly unlikely” since the banks are largely government-owned and losses will be absorbed by the state...

...“The only thing likely to stop it going into recession is a large consumption-oriented fiscal stimulus funded through the central government, preferably monetized by the People’s Bank of China. Despite the economy crying out for it, the Chinese leadership is not ready for this,” he said...

...Whether China really is in such dire straits is hotly contested, even within Citigroup itself. The bank’s equity team said the August sell-off on global markets is a typical late-cycle correction rather than the onset of a major downturn.

“Current equity and bond yields suggest that investors are shifting towards pricing in a global recession. While not complacent, we believe such fears are premature – it is too early to call the end of this six-year bull market,” it said.

The bank recommended 17 stocks for those willing to take a stab at “bottom-fishing”, recommending Baidu, ICBC, Tencent and Ping An.

China has already loosened fiscal policy after an unintended crunch earlier this year when reform of local government financing went awry, causing near paralysis for four months. Mr Buiter’s recession may have come and gone already...

...The government plans to pull forward a raft of spending projects scheduled for 2016, launching them this year instead.

This comes on top of a jump in fiscal spending by more than 13pc in the second half that was already planned.

These infrastructure works include water and sewage, low-income housing for migrant workers and railway construction. The share price of China Railway Rolling Stock soared 10pc in Shanghai on Friday before hitting the maximum daily limit.

China’s chief lever at this point is fiscal policy. Interest rate cuts and monetary stimulus risk setting off further capital flight, tightening liquidity...

...The 50 basis point cut in the reserve requirement ratio for banks this week added no net stimulus. It merely offset the damage already caused over the past two months by estimated outflows of $200bn, which reduces the multiplier effect of base money in China.

Prof Chen said a pattern has emerged where China’s economy weakens at the start of each year. Beijing then injects a shot of stimulus. Growth stabilizes in the late summer and then picks up in the Autumn.
The same cycle is now at work this year, but it is becoming progressively weaker as rising debt ratios slowly suffocate the economy.

Mr Buiter said the stock market crash in Shanghai and Shenzhen is a “sideshow”. The wealth effects are negligible since only one in 30 Chinese owns stocks. Companies do not rely on equity issuance to raise funds for investment...

[Thailandnotes]

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

The bank recommended 17 stocks for those willing to take a stab at “bottom-fishing”, recommending Baidu, ICBC, Tencent and Ping An.

bottom-fishing...huh?

3 months...ICBC down 15%, Tencent down 15%, Baidu down 25%

[touchring]

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

bottom-fishing...huh?

3 months...ICBC down 15%, Tencent down 15%, Baidu down 25%

How about bottomfishing some gold stocks that are down like 80-90%?

[don]

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

Reporter’s Bare-Knuckle Question to Janet Yellen Is Part of Markets’ Turmoil

By Pam Martens and Russ Martens: September 22, 2015

Ann Saphir, Reuters, Asking Question at Janet Yellen’s Press Conference, September 17, 2015

Last Friday, one day after the Fed’s announcement that it would hold rates steady at the zero bound range, the Dow Jones Industrial Average dropped 290 points. It calmed itself a little yesterday but was off more than 200 points in the first five minutes of trading this morning.

One catalyst for the market gyrations is that Ann Saphir, a reporter for Reuters, boldly asked Fed Chair Janet Yellen at Thursday’s press conference what has been on many minds for more than a year: is the Fed ever going to raise interest rates or are zero rates here for the rest of our lifetimes. This was the exact exchange:

Ann Saphir: “Ann Saphir with Reuters. Just to piggyback on the global considerations, as you say, the U.S. economy has been growing, are you worried that given the global interconnecting this, the low inflation globally, all of the other concerns that you just spoke about that you may never escape from this zero lower bound situation.”

Janet Yellen: “So, I would be very– I would be very surprised if that’s the case. That is not the way I see the outlook or the way the committee sees the outlook. Can I completely rule it out? I can’t completely rule it out. But really that’s an extreme downside risk that in no way is near the center of my outlook.”

The Chair of the U.S. Central Bank admitting that she can’t completely rule out that the U.S. may never escape from its zero bound range of interest rates is very likely the most unnerving utterance to escape the tongue of a Central Banker since time immemorial.

It was two simple sentences from Yellen: “Can I completely rule it out? I can’t completely rule it out.” That was the honest academician speaking. And, given that Japan, one of the largest economies in the world, has been hovering between zero and one-half percent interest rates for the past 20 years, has plied its economy with Quantitative Easing and has now moved into desperation mode, buying up exchange traded funds and real estate investment trusts, Yellen’s answer was forthright.

Janet Yellen’s Press Conference, September 17, 2015

The market turmoil stems from the reporter’s inclusion of the word “never” – that the United States “may neverescape from this zero lower bound situation.” While Janet Yellen may have thought she cushioned her remarks by calling it “an extreme downside risk,” Americans today fully grasp that Wall Street blowing itself up in 2008 was also an extreme downside risk but it happened, triggering a series of other highly unlikely extreme downside risks: the greatest economic collapse since the Great Depression, the biggest housing rout in seven decades, a global banking crisis that is still not fully under control, and the fastest expansion of the national debt in history. Since the repeal of the banking protections in the Glass-Steagall Act, 100-year financial floods are coming as frequently as afternoon showers in the tropics.

The saga of global deflation took on more urgent overtones in overnight trading as commodity prices slumped further. Industrial metals took hits ranging from one percent to almost three percent with copper down 2.8 percent in early morning trade. At 10:22 a.m., West Texas Intermediate crude oil is down more than 2.36 percent at $45.58. European coal prices slumped to a record low according to a report from Bloomberg Business.

All of this is consistent with a global economy battling deflation and not consistent with a roster of Federal Reserve presidents filling the airwaves with chatter about when the Fed’s rate hike is coming. The gap between “never” and next month is simply laughable.

Janet Yellen apparently understands this “never” business has rattled markets and Washington insiders. She’s scheduled to deliver a speech this Thursday in Amherst, Massachusetts where she is likely to walk back any suggestion that the U.S. is locked in the zero bound range for eternity.

Just how seriously Fed officials worry that the U.S. could morph into Japan’s two-decade experience with deflation resides in this excerpt from a 2013 speech by William Dudley, President of the New York Fed:

“Let me start by briefly reviewing the experience of Japan and the United States. As you all know, Japan’s rapid economic ascent and investment boom came to an abrupt halt in the early 1990s with the bursting of a gigantic bubble in equities and real estate.

“Asset price deflation resulted in a huge decline in wealth. This led to a sharp fall in demand, a balance sheet squeeze for both businesses and households, and a large increase in problem loans for Japanese financial intermediaries. By some measures—such as the loss of wealth relative to the size of the economy—this was a bigger shock than the U.S. experienced in 2008. Growth slowed sharply and inflation fell.

“The Bank of Japan (BoJ) responded by reducing overnight interest rates from a peak of more than 8 percent in early 1991 to ½ a percent by the fall of 1995. Most studies of this period suggest that policy was generally appropriate given economic forecasts at the time, but too tight relative to the actual outcomes. Economic forecasts for Japan—both by the official community and by private sector agents—were consistently more optimistic than the actual outturns. It is noteworthy that as late as January 1995—on the eve of deflation—10-year Japanese Government Bond (JGB) yields were still at 4.7 percent.

“With the benefit of hindsight, we now understand that the disinflationary consequences of the asset price bust and financial stress where vastly more powerful than was widely realized at the time. As we later saw in the U.S., the forces of contraction and disinflation operated through many different channels—not just directly on household wealth, for example, but also through the impact of the asset price bust on the health of financial intermediaries and the supply of credit to households and businesses.

“Over time, the Japanese banking system came under mounting stress. This was a slow-motion crisis, as the assets were mainly loans that were not marked-to-market. Accounting practices and regulatory forbearance allowed banks to delay charging off bad loans and recapitalizing at the cost of impairing the availability of credit to new potential borrowers. A full-blown banking crisis finally materialized in 1997. Although some banks were recapitalized in 1999, the full regulatory response took several more years.

“The monetary and fiscal stimulus that was provided helped Japan avoid a deep recession. But expectations about future nominal income growth for both households and businesses ground lower over time. With inflation expectations sinking, inflation-adjusted real interest rates rose, and Japan became mired in deflation.

“While deflation is ultimately a monetary phenomenon, structural elements were also important. Long-term demographic factors added to the deflationary pressures and structural rigidities, and credit supply problems constrained the reallocation of resources to growth sectors. These structural factors made it substantially more difficult to escape the deflation trap.

“The Bank of Japan was active during this period. From the late 1990s onwards, it pioneered an extremely broad array of innovative tools—many of which were later adopted, in amended form, by the Fed and other major central banks. These included forward guidance on the future path of the policy rate, quantitative easing through purchases of government securities and private assets including asset-backed securities, equities and real estate investment trusts (REITs), a more quantitative inflation objective, and funding for bank lending.

“From my perspective, Japan’s experience with forward guidance for the policy rate, asset purchases and a more formal inflation goal are particularly instructive, as this helped inform the later use of such tools in the United States.

“In early 1999, the Bank of Japan said it would maintain its zero interest rate policy until ‘deflationary concerns’ were ‘dispelled.’ This commitment was lifted in August 2000, and the BoJ raised the policy rate by a quarter-point. However, the BoJ was subsequently obliged to reverse course, and reintroduced forward guidance in March 2001. This guidance was tied to the realization of a new inflation objective.

“With deflation intensifying, the Bank of Japan embarked on a quantitative easing (QE) program in 2001 designed to increase the size of the monetary base. The Bank of Japan engaged in purchases of JGBs that were large in scale, but confined to short-dated maturities. This reflected a view that such purchases primarily acted through the liabilities side of the central bank’s balance sheet—pushing up the amount of reserves in the banking system. Because the growth of the monetary base was deemed the goal of policy, it was logical to purchase short-dated assets, which could be allowed to run off once a sustainable recovery was in place.

“The downside of this approach was that the purchases did not change the composition of the private sector’s balance sheet very much because the policy essentially resulted in the exchange of one short-term risk-free asset for another. As a consequence, the purchases had only modest direct effects on financial conditions.

“Starting in 2006, when the initial wave of QE ended, the BoJ began to formalize its inflation goal in numerical terms. This was initially expressed as an ‘understanding of medium-to long-term price stability’ based on individual policymakers’ views. The inflation objective went through several iterations before being defined in 2012 as a Committee ‘goal’ of a positive range of 2 percent or lower, with a lower interim goal of 1 percent.

“Following the onset of the global financial crisis in 2007-2008, Japan resumed QE, and gradually tightened the link between its policy actions and its objectives. By January 2012, the BoJ had committed to keep rates at the zero bound and to continue purchasing assets until the 1 percent goal was ‘in sight.’

“Several prominent Japanese experts have argued that there was a ‘start-stop’ aspect to monetary policy during the 1990s and 2000s with reversals in policy beginning before deflationary expectations were eliminated. Fiscal policy also reversed abruptly on several occasions before economic recovery was firmly established. While Japan did enjoy a period of respectable real per capita growth in the mid-2000s, escape from deflation proved elusive.

“More than a decade after Japan’s bubble burst, the U.S. housing bubble burst. This exposed extensive vulnerabilities in our financial system and triggered a global financial crisis. Unlike Japan, we had the advantage of being able to learn from another nation’s recent experience. We applied what we understood to be the lessons from Japan, though with hindsight, perhaps not in every respect as completely as we could have.

“In particular, Japan’s experience reinforced the lessons of the Great Depression here in the U.S. and made us sensitive to the disinflationary force of an asset price bust and financial crisis. We recognized that we had to be very aggressive to prevent deflation and deflation expectations from becoming well entrenched.

“The Federal Reserve reduced short-term interest rates to nearly zero by late 2008—a little over a year and a half after the initial shock hit in August 2007. Immediately upon reaching the zero bound, we provided additional stimulus by expanding our balance sheet and deploying forward guidance on the policy rate. These actions, in the context of a strong commitment to both our inflation and employment mandates, succeeded in preventing deflation expectations from taking hold, even though real outcomes were disappointing. We also took steps to formalize our 2 percent inflation objective.” [Read the full speech here.]

It is now seven years since the Wall Street crash. The Fed has been at the zero bound range since December 2008 and the U.S. is currently seriously undershooting an inflation target of 2 percent. Ann Saphir was courageous to ask the question that is on so many of our minds.

[don]

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

Soft Power On Parade - what could be more benign sounding, and evasive, then forward guidance

It's right up there with Federal Reserve . . . .

[thriftyandboringinohio]

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


Pinus parviflora 'Miyajima' | Japanese White Pine
Donor: Diazo Iwasaki |

In Training Since 1855

The good professors at the Fed seem to forget that time scales matter.
A typical human being like me earns money for 30 or 40 years.

I can't afford to earn zero interest on my money for half my working lifetime.

Neither can you.

Our life savings are not bonsai trees that can be tended for a hundred and sixty years like the one above.

[don]

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

Pinus parviflora 'Miyajima' | Japanese White Pine
Donor: Diazo Iwasaki |

In Training Since 1855

The good professors at the Fed seem to forget that time scales matter.
A typical human being like me earns money for 30 or 40 years.

I can't afford to earn zero interest on my money for half my working lifetime.

Neither can you.

Our life savings are not bonsai trees that can be tended for a hundred and sixty years like the one above.

ZIRP, albeit not the only factor, is at the heart of the pension implosion. So while the very idea of pensions is ridiculed, this connection is seldom mentioned. Sounds conspiratorial, doesn't it (aka wealth transfer on a grand scale).

[GRG55]

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

ZIRP, albeit not the only factor, is at the heart of the pension implosion. So while the very idea of pensions is ridiculed, this connection is seldom mentioned. Sounds conspiratorial, doesn't it (aka wealth transfer on a grand scale).

Pension funds tend to be heavy into bonds, large cap dividend paying equities and property holdings. All have performed magnificently under the Fed's policies. I don't understand where this "pension crisis" is sourced from?

[jk]

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

Pension funds tend to be heavy into bonds, large cap dividend paying equities and property holdings. All have performed magnificently under the Fed's policies. I don't understand where this "pension crisis" is sourced from?

one pension crisis arises from the assumption that corporate pension funds will make 8% or more per year, ad infinitum. this assumption allows for smaller pension contribution from those companies which still have defined benefit plans.

the other pension crisis comes from the fact that the vast majority of people no longer have defined benefit plans, they've saved too little and they've invested poorly. the fact that there is no safe asset with a decent yield just makes it harder for people in that position

[touchring]

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

one pension crisis arises from the assumption that corporate pension funds will make 8% or more per year, ad infinitum. this assumption allows for smaller pension contribution from those companies which still have defined benefit plans.

the other pension crisis comes from the fact that the vast majority of people no longer have defined benefit plans, they've saved too little and they've invested poorly. the fact that there is no safe asset with a decent yield just makes it harder for people in that position

It will be a crisis only if people lived too long.

[don]

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

ZIRP helps lay the foundation for extreme speculation, over-the-top stock buybacks, etc. all of which have been discussed at length on the 'tulip.

[thriftyandboringinohio]

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

It will be a crisis only if people lived too long.

touchring you have reminded me of the real role assigned to the 95%

Be silent
Consume
Die