Signs of historic times, indeed…
From Rappler: (October 20, 2017)
A Dutch family has sold virtually all they own, including a business, their home, two cars and a motorbike and invested the takings in bitcoin just as the virtual currency is soaring to new heights.
"We are putting everything into bitcoin, we've sold everything to invest in this currency," Didi Taihuttu told AFP.
The 39-year-old is currently living in a camping ground with his family, aiming "to put as much money as possible to one side and transform it into bitcoin."
Having turned his back on a "materialistic life" three months ago, Taihuttu and his wife and three daughters, aged 12, 10 and seven, are living in a small holiday chalet in a camping ground in eastern Venlo in Netherlands and are watching their savings "grow every minute somewhere on the cloud".
Bitcoin smashed through $6,100 last Saturday, reported the CNBC, for a thundering over 500% return year-to-date.
Bitcoin has just been part of the overall risk ON moment. (upper window)
A deck of charts, I previously posted here, depicted that it has been a BUYING EVERYTHING! “It's Market Mania for Assets All Around the World”!
Well, risk ON everything and everywhere has only been intensifying.
Spread differentials of sovereign and high yield (corporate and emerging market) bonds have compressed to unseen levels. (middle chart) European junk bonds have even attained lower yields than the 10-year US treasury! Junk bonds have now achieved risk-free status! The world has turned upside down! And given the compressed spreads, even junk bond fund managers have turned or shifted into owning equities! (bottom chart)
While everybody seems to be enjoying the free money orgasmic shindig, notable party poopers have emerged.
The People’s Bank of China governor Zhou Xiaochuan warned of the “Minsky moment” (collapse of asset prices).
From John Authers of the Financial Times: October 21, 2017
What exactly is the Chinese for “Minsky moment”? The chances are that we will soon need to know, after a startling moment of clarity from the outgoing chairman of the People’s Bank of China.
Speaking on the sidelines of the Communist party congress in Beijing, Zhou Xiaochuan, who is soon to stand down as governor of the PBoC, said: “If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”
This might sound unexceptional. But it is about as close as someone in Mr Zhou’s position can come to yelling “fire” in a crowded theatre. To quote Robert Hockett, an expert on China at Cornell Law School: “It’s calculated to inspire panic. It’s almost an incantation to panic — especially in China.”
Why rouse the Communist party congress to panic? Haven’t the Chinese government been successful in weeding out excess capacity in the property sector, such that ghost cities are now being filled or occupied?
It turns out that the Chinese government, through the local apparatchiks, has stealthily been bailing out developers and implicitly created a mass housing project.
From the Financial Tribune (October 15, 2017)
An attempt by the Chinese government to fill empty apartments is pushing indebted cities farther into debt. Over the past three years, more than 200 Chinese cities have been buying surplus apartments from developers and moving in families who live in neighboring villages or on condemned city blocks, a program it plans to continue through 2020, according to the Wall Street Journal. Local governments spent more than $100 billion in 2016 alone to either buy housing or subsidize purchases.
The central government is supporting this strategy through bank lending, and it has helped give the property market a boost, which makes up a third of China’s economic growth.
However, the strategy is undergirded by debt: cities borrow from state banks to pay for the subsidies and purchases, and they pay back the loans by selling more land to developers, who then build more housing and accumulate more debt, prompting another bailout from the state.
Local governments borrowed 972.5 billion yuan ($147.57 billion) last year from the government’s main housing lender, which was nine times higher than three years earlier. More than half of those loans went to housing purchases or subsidized buying, while the rest funded government-built houses.
First, the local government buys out inventories from developers. Then, they bus in people to have these occupied. Two birds in one stone!
So it is not economic growth but politics to camouflage excesses that have led to a cosmetic reduction of capacity. But as the article notes, there have been numerous ramifications.
One, both government and the private sector have only amassed more debt. Two, because developers were handed free money, they go and acquire new land for fresh inventory which led to sharply higher property prices. Three, which is tied to the second, property developers indulge in building more capacity. So excessesleads to even more excesses. These subsidies have only accumulated pricing and distributional distortions, which reveals the magnified extent of credit financed malinvestments.
China’s Total Social Financing has climbed by a whopping $2.9 trillion in 12 months EXCLUDING local government and other informal (shadow banking) debts! While bank debts have been exploding, China’s belly of the yield curve has inverted. Such inversion means that the bond market is expecting a sharp tightening of monetary conditions.
Wonder why Mr. Zhou sounded the alarm bells on the ‘Minsky Moment’? Could it be that the reason for Mr. Zhou’s retirement is because he intends to bail before the ‘Minsky Moment’ strikes?
Now to more party poopers… (all bold mine)
From ex-UK PM Gordon Brown (BBC September 28)
Former prime minister Gordon Brown has warned that the UK and other major economies are not well-equipped for the next financial crisis.
Mr Brown, who was in Number 10 during the banking crash of 2007-8, said they need to guard against "complacency" or "not being aware" of risks.
The next crisis could come from Asia's shadow banking sector, he suggested.
From former president of the ECB Jean-Claude Trichet (Nikkei Asia October 19)
Jean-Claude Trichet, former president of the European Central Bank, warned of ballooning global debt in a recent interview with the Nikkei, saying: "Be very careful. A new crisis can occur." The debt-to-GDP ratio, which has been rising primarily in emerging markets, is sending such signals, he said.
"I consider that an important indicator of economic and financial vulnerability, at the level of the global economy, would be the proportion between the overall outstanding global public and private debt as a proportion of the overall GDP," he said. The ratio increased as much as 25 percentage points between 2000 and 2007, from 250% to 275%. The jump was partly responsible for the global financial crisis. After the crisis, the figure is still rising, rather than falling, reaching 300% today.
From Germany’s Finance Minister Wolfgang Schaeuble (Business Insider October 9)
Germany's outgoing Finance Minister Wolfgang Schaeuble warned that spiralling levels of debt, as well as the growth of liquidity across the world, risk creating a new financial crisis…
"Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt. I myself am concerned about this, too," Schaeuble said.
The claim that “economist all over the world are concerned about risks” seems like a fallacy of composition. That’s because this definitely does not apply to the Philippines.
From ECB’s Governing Council member and Dutch Central Bank president Klaas Knot (Bloomberg, October 9)
Financial markets may be underpricing global risks, leaving them vulnerable to a major correction, according to European Central Bank Governing Council member Klaas Knot warned.
As global stocks surge, measures of volatility suggest unprecedented calm even as crises around the world -- including the Catalan separatists in Spain, Turkey’s diplomatic row with the U.S., North Korea’s missile tests and the danger of a hard Brexit -- make political headlines.
“It increasingly feels uncomfortable to have low volatility in the markets on the one hand while on the other hand there are risks in the global economy,” said Knot, who is also the president of the Dutch Central Bank.
Finally, recently awarded Nobel winner behavioral economist Richard Thaler (Bloomberg, October 10)
A buoyant and complacent stock market is worrying Richard H. Thaler, the University of Chicago professor who this week won the Nobel Prize in economics.
“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” Thaler said, speaking by phone on Bloomberg TV. “I admit to not understanding it.”
“I don’t know about you, but I’m nervous, and it seems like when investors are nervous, they’re prone to being spooked,” Thaler said, “Nothing seems to spook the market” and if the gains are based on tax-reform expectations, “surely investors should have lost confidence that that was going to happen.”
The economist said that he didn’t know “where anyone would get confidence” that tax reform is going to happen.
Funny but, the Nobel awardee just forgot behavioral basics: the herd mentality and the post hoc rationalization for tax reform.
Forget them noisy party spoilers, JUST PARTY ON!
