Category: Asia

War complacency

With investor complacency already high (65% of the sub-10 VIX readings since 1993 took place in the past 3 months), it should be no surprise that the escalation of tensions with North Korea would be met with a yawn.

At 2:21 PM E.T. yesterday (with the S&P 500 down 0.87% on its way to a 1.45% loss), MarketWatch columnist Mark Hulbert published an article advising investors to remain calm:

If war breaks out with North Korea, we’ll have bigger things to worry about than our portfolios.  But that’s OK, because doing nothing is almost always the best investment strategy during a geopolitical crisis.

That is the clear conclusion to emerge from an analysis conducted by Ned Davis Research of the most momentous geopolitical crises of the last century. The firm found that far more often than not, the stock market, as measured by the Dow Jones Industrial Average strongly rebounds from its post-crisis panic low — so much so that within six months it is actually higher than where it stood before that crisis erupted.

The research report covered 51 events from 1900 to 2014, including the bombing of Pearl Harbor and JFK assassination.  Of note: the average stock market drop during each crisis was 17.5%, so the positive returns came after a fair amount of pain.  With stock valuations broadly at record high valuations, it is not difficult to envision a much larger correction if war breaks out with North Korea.

One problem with these sorts of back tests is that economic and market events can’t be replicated in a lab.  History doesn’t repeat, though it often rhymes.  To unravel this complicated puzzle, let’s look at three variables: valuations, sentiment and economics.  From a valuation standpoint, there is no way to compare past crisis lows to today’s twin asset bubbles in both stocks and bonds (at the lowest yields in 5,000 years of recorded history).

As for sentiment, a bit of history:

  • After WWI there was a sharp but brief depression in 1921.
  • After WWII, economists predicted another depression.  Instead we got a two-decades-long boom.
  • Initially, in the early-1960s there was complacency about the Vietnam conflict.  That eventually ushered in the intractable inflation of the ‘70s, which helped trigger (along with Watergate) the worst bear market in stocks since 1929-32, in real terms, from 1972-74.
  • The Gulf War brought back memories of the quagmire in Vietnam and was widely anticipated.  Stocks sold off in late 1990 as a result.  Operation Desert Storm began mid-January of 1991 and was over in a month.  There was no quagmire.
  • In 2003, the Iraq War was widely predicted to be brief, but it turned into quagmire.  Fortunately for stocks, they were 3 years into a burst tech bubble and prepared for bad news.  An aggressive Fed fomented the housing/credit bubble of the mid-2000s.

The lesson of #4 and #5 was that war – brief or quagmire – leads to bull markets.  Investors constantly fight the last war.  The complacency regarding North Korea is a direct reflection of recent past war experience plus an 8-year bull market where buy-the-dip behavior has been constantly reinforced by central bank asset purchases.

Lastly, let’s take a look at economics.  With the onset of war, we can expect the following to occur:

  1. The war economy is engorged while the real economy (or consumer economy) is drained.  GDP growth is highly misleading during wartime.  The consumer is worse off as resources are siphoned off to be destroyed (see chapter 3 of Henry Hazlitt’s Economics in One Lesson, “The Blessings of Destruction“).
  2. The immense costs of war are paid for through government borrowing and inflation.
  3. Government, aka the public sector parasite, is ratcheted up during war, but doesn’t relinquish all of those gains after the war (see Crisis and Leviathan by Robert Higgs).

Imagine these maladies foisted on an economy struggling to grow (the most anemic recovery post-WWII) and wheezing under record debt levels including $20 trillion of government debt (having doubled the past 8 years), $1.2 trillion in auto loan debt, $539 billion in margin debt, etc.  That debt has remained manageable thanks to miniscule interest rates, but a wartime economy would threaten this state of nirvana.

Moral of the story: act before the crisis.  With stocks and bonds priced for perfection, ignore impending danger at your peril.

Global asset deflation: nowhere to run, nowhere to hide

Over the past several months global stocks, bonds and currency markets have hit a wall.  Just 6-8 months earlier the central banks of Europe, Japan and the US were signaling endless monetary accommodation which initially emboldened global speculators and their reach-for-yield mantra.  Now we look around for evidence or confirmation that the four year stimulus experiment is DOA.

First, emerging market stocks, bonds and currencies have all dropped somewhere between 7% and 12% the last few months as the carry trade (borrowing in low cost currencies in order to buy higher returning risk assets, thus capturing the spread) comes off the boil.  Second, political commentary out of China confirms our earlier thoughts that a credit bubble for the ages has begun to burst.  Since the central banking talking heads opened their mouths last month, Shibor rates (Chinese overnight unsecured lending rate amongst 16 largest banks)  have spiked to levels not seen since 2004:

Shibor-overview

Here is the latest on the Chinese banking system from Bloomberg:

Policy makers could be taking advantage of tight funding to “punish” some small banks, which previously used low interbank rates to finance purchases of higher-yielding bonds, Bank of America Merrill economists led by Lu Ting wrote in a report. Tight interbank liquidity could last until early July, according to the report.

‘Warning Shot’

“The PBOC [People’s Bank of China] clearly has an agenda here,” said Patrick Perret-Green, a former head of Citigroup Inc.’s Asian rates and foreign exchange who works at Mint Partners in London. “To fire a massive warning shot across the banks’ bows and to see who is swimming naked. Moreover, it fits in well with the new disciplinarian approach” adopted by the government, he said.

Chinese regulators are forcing trust funds and wealth managers to shift assets into publicly traded securities as they seek to curb lending that doesn’t involve local banks, so-called shadow banking, according to Fitch Ratings.

The tightening is “emblematic of some of the shadow banking issues coming to the fore as well as some of the tight liquidity associated with wealth management product issuance, and the crackdown on some shadow channels,” Charlene Chu, Fitch’s head of China financial institutions, said in a June 18 interview. She earlier estimated China’s total credit, including off-balance-sheet loans, swelled to 198 percent of gross domestic product in 2012 from 125 percent four years earlier, exceeding increases in the ratio before banking crises in Japan and South Korea. In Japan, the measure surged 45 percentage points from 1985 to 1990, and in South Korea, it gained 47 percentage points from 1994 to 1998, Fitch said in July 2011. [Emphasis mine.  Japan and South Korea experienced bubble economies during these periods which both burst.]

Look at the massive growth in nonbank (shadow) lending in China post 2008 credit crisis while keeping in mind most of this was indirectly backed by the largest banks under the “wealth management” label:

Chinese shadow banking

Maybe this is why China made the news last week when a proposed 15.5 billion renminbi bond offering failed (for the first time in nearly 2 years), receiving only 9.5 billion renminbi.

Over in Russia and Korea we see even more instability permeating the credit landscape.

Romania’s Finance Ministry rejected all bids at a seven-year bond sale yesterday because of market volatility, while South Korea raised less than 10 percent of the amount planned in an auction of inflation-linked bonds. Russia scrapped a sale of 15-year ruble-denominated bonds June 19, the second time it canceled an auction this month, and Colombia pared an offering of 20-year peso debt by 40 percent. A cash shortage led to failures last week of China Ministry of Finance debt sales.

More than $6.9 billion left funds investing in developing-nation debt in the four weeks to June 19, the most since 2011, according to Morgan Stanley, citing EPFR Global data. The exodus is reversing the $3.9 trillion of cash that flowed into emerging markets the past four years as China’s annual economic growth averaged 9.2 percent and spurred demand for Brazilian iron ore, Russian oil and gas and Chilean copper.

Romania rejected all 688 million lei ($200 million) of bids at a bond sale yesterday because of “unacceptable price offers,” according to an e-mailed statement from the central bank. It was the first failure since August.

South Korea sold just 9 percent of the 600 billion won ($524 million) it targeted from 10-year inflation-linked bonds this week. Colombia’s government pared an auction on June 19 of 20-year inflation-linked peso bonds by 40 percent, to 150 billion pesos ($77 million).

Russia canceled planned sales of 10 billion rubles ($311 million) of notes this week, citing a lack of demand within an acceptable yield range of 7.70 percent to 7.75 percent. Yields on ruble bonds due in 2028 jumped 30 basis points, or 0.30 percentage point, yesterday to 8.1 percent, the highest level since the debt was sold in January.

After endless monetary interventions the prior 3-4 years governments around the world temporarily created the illusion that interest rates would stay below nominal GDP growth targets.  The sleight of hand only lasted this long because so many of the “professional money managers” never questioned the actions of central bankers (a.k.a. asset inflationistas) .  As currencies, bonds and stock markets decline in unison around the world, one might pose the question “Have central bankers lost control of their monetary experiment?”  Or better yet, why would so many “investors” believe that a group of central banks with combined reserves of $11.5 trillion could levitate with over $240 trillion in global assets?   Which then begs the question,  where does one hide?

Hard landing underway in China

Ever since the global coordinated bailouts in 2008/2009 numerous market participants have debated the China hard landing thesis.  We wrote about this some time ago here and here so after various data points I think a reasonable decision can now be made.

First, our curiosity began during the credit build up in early 2002 until the great recession in 2009.  Fixed investment to GDP surpassed anything witnessed to date in the emerging market frontier.  Of course most of this “growth” was financed with the help of the state and local governments.  Today, after unprecedented debt growth since the ’09 structured finance debacle, local governments are experiencing  difficulty when rolling over close to $600 billion in bank debt.

People’s Bank of China Governor Zhou Xiaochuan said in a March 13 press briefing that about one-fifth of loans to the financing arms of local governments are risky. Net debt issuance by these entities surged 179 percent in 2012 to 1.132 trillion yuan ($182 billion), accounting for 50 percent of corporate bond sales, according to Bank of America Corp. data.

Is it any wonder that people both inside and outside the country are asking real questions?  Latest questioning from Fitch:

The balance sheets of China’s banks have been growing by over 30% of GDP a year since the Lehman crisis and are still growing at a 20%, wildly exceeding the safe speed limit.

Fitch Ratings said fresh credit added to the Chinese economy over the last four years has reached $14 trillion, if you include shadow banking, trusts, letters of credit and off-shore vehicles. This extra blast of loan stimulus is roughly equal to the entire US commercial banking system.

The law of diminishing returns is setting in. The output generated by each extra yuan of lending has fallen from 0.8 to 0.35, according to Fitch.

Mr Magnus said credit has reached 21% of GDP – far higher than other developing countries – and only half of new loans are “plain vanilla” under the full control of regulators.

Chinese Money Supply

Chinese corporate debt to GDP

Recently I had the privilege to join the Macroanalytics.com program where well versed host Gordon Long and author Charles Hugh Smith discuss both Japan and China.   For those of you interested in the similarities and differences feel free to listen at the following link:

http://www.safehaven.com/print/29048/china-japan-and-central-banking

How Will Japan’s Largest Pension Fund Find Room To Maneuver?

The WSJ is out with a short piece about new rumblings coming from Japan’s $1.43T public pension fund, Japan’s Public Pension Weighs New Investments. If I may be so bold as to impersonate the Japan deflation-blogger Mish for a moment, let’s take a look at a few of the dynamics at play as reported by the WSJ. I’ll provide some commentary along the way:

Japan’s public pension fund—the world’s largest with assets totaling 123 trillion yen ($1.43 trillion)—is weighing the controversial idea of investing in emerging-market economies as a way to gain higher returns as it faces a tsunami of payout obligations over the next several years.

The conservative Government Pension Investment Fund, which alone is larger than India’s economy, has a staggering 67.5% of its assets tied up in low-yielding domestic bonds. The fund plans to sell off a record four trillion yen in assets by the end of March 2011 to free up funds for payouts to Japan’s rapidly aging population. By the year 2055, 40% of Japan’s population is expected to be over the age of 65.

There’s a lot to discuss but before I do I want to clarify an error I believe the journalists who wrote this piece made.

The comparison between the size of the GPIF and the size of India’s “economy” is not a meaningful one because the GPIF is a “stock” while the aspect of India’s economy being referred to, GDP, is a “flow”. At $1.235T (2009 estimate, Wiki), India’s GDP is supposed to measure the total monetary value of output of all goods and services for a particular period of time, in this case one year. Meanwhile, GPIF’s asset base is a static measurement of current asset valuation. I’ll avoid the bath tub analogy and instead refer to public company financial accounting: GPIF’s asset size is like examining an entry on the asset side of a company’s balance sheet; India’s economic “size” is like examining an income statement for the revenue or earnings generated in the period in question.

One other minor quibble– the “2055” statistic is completely irrelevant to telling this story because the GPIF is not going to last that long, at least not in its present form and at its current levels of funding.

With the fur out of the way, let’s dig into the flesh of the matter. First things first: the GPIF is another Ponzi-finance scheme, much like the US Social Security Administration system. I think Takahiro Mitani, president of the GPIF, explained the predicament all Ponzi-finance schemes eventually find themselves in best in this recent WSJ interview:

Mr. Mitani: Baby boomers are now 60 years old or older, and have started receiving pension. In the meantime, the number of people who pay a pension premium is smaller. What’s more, pension premium is determined by wage, which has been on decline. So, pension special account overseen by the health ministry is having a tough time.… More outlay than income in the pension system means that they need to tap into the reserve we have. [emphasis added]

Long-term, the GPIF and SSA will always be running up against a potential demographic problem like this, where the amount promised to past generations of present retirees is greater than the amount being contributed by present workers. Therefore, there will come a time in every Ponzi-pension fund’s life during which the managers of the fund will be forced to go out on the risk curve in a search for yield. And as luck would have it — or rather, as generations of inflationary central planning schemes would have it — the very time these demographic trends reach an apex, so, too, do long-running financial trends on which the fund’s internal rate of return projections have been built. In other words, the perfect financial storm, a “liquidity event” of colossal proportions, metaphorically and literally-speaking.

Unfortunately for Mr. Mitani and his loyal horde of investment management professionals (you did know that scams like the GPIF also serve as lucrative government-sponsored subsidies to investment banks like BlackRock, Morgan Stanley and State Street, Mitsubishi UFJ Financial Group and Mizhuo Financial Group, didn’t you?) there’s more than just wind and noise coming out of those storm clouds in the form of macro demographic and economic trends, though they are all related in a way. Another problem facing the GPIF is political and is tied up in the composition of the GPIF’s portfolio:

The GPIF holds the lion’s share of its assets in low-yielding Japanese government bonds. (The yield on the 10-year JGB is currently a paltry 1.07%.) Roughly 67.5% of its assets are parked in domestic bonds, including government and corporate bonds; the rest are spread among Japanese stocks, overseas shares and foreign bonds.

The GPIF is a Ponzi, wrapped in a Ponzi, inside an enigma. If you take a look at the investment results for the first quarter of fiscal 2010[PDF] provided by the GPIF, you’ll see that the “domestic bonds” portion is split roughly 76% into “market investments” (JGBs of varying maturities) and the remaining 24% into “FILP bonds”.

FILP bonds, issued by the Japanese Ministry of Finance’s Fiscal Investment Loan Program, are similar to agency debt and municipal/public works bonds floated by US state and federal government agencies (think FRE/FNM, FHLB, New York MTA bonds, DOT/highway bonds, public school and university bonds, etc.). According to the Japanese MoF’s own online resource page, which I encourage you to click and skim-read in its entirety for yourself, FILP bonds can be issued to fund nearly anything the Japanese government might deem worthy of funding, including “housing construction, small and medium-sized businesses, roads, railways and subways, airports, water and sewerage [sic], education, medical care and social welfare, agriculture, forestry and fisheries, industry and technological development, regional development” and let’s not forget “international cooperation.”

Like I said, nearly anything. And with Japan’s bubble-fueled reputation for being a corrupt, greasy-handed place to get business done, you can bet that at least one of almost everything in Japan’s economy (and other countries’ economies!) has been funded exactly this way. The FILP is like a giant government-sponsored slush fund for amakudari, Japan’s version of the “golden parachute” for its fascistic, entitled union bosses-cum-career public servants[PDF].

Back to the Ponzi within a Ponzi. One reason that Japan’s central government has been able to issue so much debt ($10.55T and rising as of the end of June) without blowing yields sky-high is due to the phenomenon of captive finance, an ugly cousin of vendor financing, of which government managed pension funds like GPIF are a facilitator. It works like this: the Japanese government issues debt, the Japanese worker is forced to contribute to a government pension fund such as GPIF, and the GPIF buys the Japanese government’s debt because it’s “safe”. Hopefully you can see it now. The Japanese government must keep rolling over debt into new debt just to stay afloat which is purchased by the GPIF, while the GPIF must keep milking workers to pay off the retirees. Ponzi within a Ponzi.

Something’s gotta give. But there’s the rub– it can’t. According to the WSJ article, 67.5% of GPIF’s funds are committed to JGBs and FILP bonds (the allocation as of the Q1 investment results[PDF] linked to above was 68.14%) with the remaining portion divided up approximately 9% international stocks, 8% international bonds and 11% domestic stocks. It can’t easily touch that 67.5% allocation without experiencing stern consternation from Japanese politicians who see their Ponzi-scheme unravelling before their very eyes.

That means the search for yield will have to come from elsewhere in the portfolio, and anywhere else it might come from means potential pain for the supplier. Think the Nikkei can’t go lower? Think the US Treasury has enough problems? Think the S&P 500 has been beat up enough already? Think again. Meanwhile, wherever the GPIF potentially re-places the funds could see a nice little second-wind. Good-bye SPY, hello EWZ!

I’m being facetious but hopefully my point is clear. Of course, where government is concerned, “can’t” doesn’t always mean “won’t”:

Regarding its four-trillion-yen selloff this year, Mr. Mitani said: “We won’t only target [selling] domestic bonds. It could be [Japanese] stocks or foreign-currency-denominated securities or stocks,” depending on market conditions.

At the end of the day, Japanese politicians can kick and scream but the GPIF has to meet its liquidity needs and one way to do that is to suck it up and kick some JGBs and FILPs out the door. Again, this is a problem and it will be chronic until it is terminal. Pay attention those of you long JGBs.

John Vail, chief global strategist at Nikko Asset Management, echoed that sentiment. “They need to take on more risk. As a long-term investment, equities will nearly always outperform JGBs,” he said “Global equities are a wise investment for the GPIF—especially with equities being so inexpensive.”

Mr. Mitani said he is aware of such opinions, but his mandate is to invest in “safe” assets with a long-term view. “In 2008 after the collapse of Lehman, while we posted a negative result we were relatively better than overseas pension funds thanks to our conservative, cautious stance. We posted only single-digit [percentage] loss while others posted double-digit loss,” he says.

In the U.S., the California Public Employees’ Retirement System, known as Calpers, is the nation’s largest with assets of $200 billion. Calpers reported a 23% slump in the year ended June 30, 2009, marking its worst year ever. Some of the biggest hits were from private or alternative investments such as real estate. Calpers has since begun pulling back on such exposure. In comparison, the GPIF reported only a 7.6% slump in the fiscal year ended March 31, 2009.

That list bit about comparative slumps should clue you in as to where the GPIF is going to want to go to first when it comes to meeting liquidity needs. Why sell volatile equity securities and potentially lock-in another loss when you can sell some ultra low-yield JGBs and FILPs, perhaps even turning that ROI-frown, upside-down in the process?

A special thanks, by the way, to John Vail of Nikko Asset Management, for providing some much-needed “useful idiot” stock-jobber equity permabull nonsense encouraging the GPIF to go out on the risk curve a bit more. Over the long-term, equities will “nearly-always” outperform JGBs… except for the past 30 years (image pulled from Mish):

Dang, looks like the long-term can be very long, indeed.

Meanwhile, Mr. Mitani seems fairly confident that the Ponzi-scheme will be kept up a bit longer:

Mr. Mitani expects the 10-year JGB yield to mostly stay below 1.5% for the next two to three years, though it may break above that point temporarily. He added that he isn’t too concerned about the risk that JGB prices will plunge due to fears about increasing JGB supply, creating a Greek-style fiscal crisis.

“If financial firms keep receiving ample funds from [the Bank of Japan], if companies remain reluctant to borrow, and if individuals keep savings at banks, there’s no choice but to purchase government bonds,” Mr. Mitani said.

Maybe. Hayman Capital Advisors’ Kyle Bass doesn’t seem to think so. Either way, it’s not a popularity contest. Just keep in mind that that’s a lot of “Ifs”. The other thing to remember is that the GPIF may be the biggest fund facing this kind of problem, but it is far from being the only one, in Japan and around the world. As discussed above with the Ponzi within the Ponzi, there are a lot of moving pieces in these deadly contraptions and this type of intertwined financial structure has been rigged, Rube Goldberg-style (you’re going to have to click the link and watch the 2min vid to the end to see just how ironic a choice it was given the subject matter at hand), across the world’s pension and financial systems as well as governments.

I know not when it will end, but I do know this– when these things end, they don’t end well.

Bailout nation…

… Not the U.S., but Japan. Japan Airlines, after repeated bailouts, finally succumbed to its $25 billion debt load and filed for bankruptcy today. According to The Wall Street Journal:

The company will be aided by a $10 billion lifeline from the government in the form of capital injections and credit, and by unloading billions of dollars in losses across an already weak Japanese economy. Bureaucrats also strong-armed Japan’s banks into forgiving more than $8 billion in outstanding loans, while retirees and employees accepted more than $11 billion in pension cuts. Shareholders will be formally wiped out when the stock — once considered one of Japan’s bluest of blue chips — is delisted from trading on the Tokyo Stock Exchange on Feb. 20.

For the record, JAL offers a quick primer on how government intervention destroys an economy:

  1. State ownership and control. “Though financial profligacy was one cause of JAL’s demise, its close ties with the government — even after it was privatized in 1987 — effectively crippled the carrier. Pork-barrel aviation policies drawn up by transport bureaucrats caused JAL to fly unprofitable routes for decades.”
  2. Moral hazard of implicit government backing. The 1987 IPO (and others like it, such as Nippon Telephone & Telegraph) were wildly successful in part because investors felt the government wouldn’t allow them to lose money.
  3. Bubble behavior. “When Japan Inc. rose to glory in the late 1980s, gobbling up trophy icons such as New York’s Rockefeller Center, JAL also spread its tentacles around the world by buying the Essex House in New York and setting up resorts in Hawaii.”
  4. Endless government lifelines. According to CNBC, JAL was bailed out four times by the Japanese government over the past decade.

How much capital was squandered on JAL? How much was looted from the real economy? This explains Japan’s “lost decades.” America’s path down the same road can only produce similar results. Repeat after me: “Fannie Mae, General Motors, Citigroup…”

China: Terra firma or quicksand?

As Bloomberg reported today, China’s statistics bureau claimed its economy grew 11.5% in the 3rd quarter. Meanwhile, the 2nd quarter clocked in at an 11.9% rate, the highest in 12 years. While we have little faith in these numbers, the authorities seem intent on tempering the boom:

Central bank governor Zhou Xiaochuan said last week that steeper or more frequent interest-rate increases are possible and expressed concern at rising asset prices.

But what really caught our eye was the size of the stock market bubble:

The stock market added $2.5 trillion in value this year — the equivalent of GDP in 2006 — as the CSI 300 Index more than doubled.

In other words, China’s market cap – at $5 trillion plus – represents over 200% of GDP. This ranks right up there with past manias:

  • U.S., 1929 – ~80% of GDP
  • Japan, 1989 – ~150% of GDP
  • U.S., 2000 – ~175% of GDP

The U.S. equity market has a capitalization today of roughly 135% of GDP. Let’s see… China’s best customer, the U.S. consumer, is doped up on credit and barely responding. And its economy appears to have a severe gambling problem. Is this the foundation the global economic boom bulls are standing on?

China bill coming due

According to Charles Dumas at Lombard Research:

The bill from the China Shop is arriving…

Summary: The Goldilocks economy and markets, arising from the initial benefits of globalisation combined with structural Eurasian surpluses (savings glut), are ended. Globalisation shifted manufacturing to cheap-labour Asia; and frenetic financial market growth recycled the savings glut. Deficit countries obliged by spending more than their incomes, capital inflows driving up wealth nonetheless. Subdued inflation was the first link in the chain to break, as wasteful Asian usage of energy and metals drove up resource prices from 2004-05. Recently, food prices have also started to surge. The boom meanwhile shifted central banks from easy money policies adopted after the Bubble burst in 2000-02. Higher interest rates and soaring prices sapped housing affordability so that US prices have stagnated or fallen for two years now. But the obviously impending end to over-spending incomes was postponed by the mortgage machine the financial industry had put in place. Quality of loans got worse as pricing became more aggressive, and the repackaging of loans into asset-backed securities ever more exotic and opaque. The credit bubble started to burst this year, as sub-prime mortgage defaults rippled through global markets.

Main Points:

– Liquidity is shrinking while the savings glut mounts further. Wider credit spreads reduce credit appetite, raise banks’ cost of funds, and cut the volume of balance sheets in any credit “chain”. “Quality” of money (bank deposits) is also in doubt.

– US mortgage delinquencies of $1 trillion are likely, and loan losses of $300 billion. The obscurity of asset-backed repackaging could raise ultimate investor losses.

– Despite central banks holding overnight money rates close to targets, 3-month Libor reflects distrust of bank credit and contagion from commercial paper. Central banks cannot and should not socialise any losses until full disclosure is achieved.

-The US economy may avoid recession, but income and jobs growth will be sharply cut, and savings rates could jump as house prices slump. Expect a tax cut in 2008.

– The European economy is growing above its potential this year, but pronounced slowdowns in Britain and Spain could ensure growth is at best on-trend in 2008. In Japan, MoF’s fanatically tight budget policy is grinding the economy to a halt.

– China’s economy is out of control and massively disruptive. Its export growth alone displaces ?% of world GDP. Its surplus, $250 billion last year, could be $370-400 billion in 2007. Gross overheating could ensure current food price inflation is soon followed by goods prices generally. Major yuan revaluation is needed.

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