How the Next Crisis Will Start
- Before you roll your eyes… a China chart you must see
- Why China’s debt math doesn’t add up… and what you should do
- Like gambling at Rick’s Cafe: Evidence of traders front-running economic releases
- The best places to start a small business…
- … and the perils of the hot new gasoline-delivery business
- The “invisible” Fed governors… is it too early for virtual reality?… another chance to take our “Hillary survey”… and more!
Like a shark whose fin isn’t yet visible above the water… a new crisis in the global economic ocean lurks just beneath the surface.
Poke around the Web and you’ll see clips and rushes and scattered headlines that hint at what’s going on:
- “China Must Tackle Unsustainable Debt Levels, Warns S&P Credit Expert” (Global Capital)
- “China’s Debt Reckoning Cannot Be Deferred Indefinitely” (Financial Times)
- “Larry Fink: There’s a ‘20% Chance’ China’s Debt Bubble Bursts” (Business Insider).
Fink is the CEO of BlackRock, the world’s largest asset manager. “Am I worried about in the manner in which they are accelerating their economy? Yes,” he said last week. “Does it mean there is more potential for a bubble and a burst? Yes. I don’t like the 20%.”
Tres Knippa is convinced the likelihood is much higher than 20%: “China will soon have a bigger impact on your portfolio and net worth than you can possibly fathom.”
Mr. Knippa is a professional trader with more than two decades’ experience under his belt… a hedge fund manager… and contributor to Jim Rickards’ Strategic Intelligence.
“China’s crisis will be three–four times WORSE than the financial crisis of 2008,” he says. “The same sector responsible for crashing U.S. stocks in 2008 will cause the crash again this time: the banking sector.”
And then he poses the not-so-hypothetical question: “What would a collapse of the Chinese banking sector and the Chinese economy mean to already anemic global growth rates and sky-high stock valuations?”
“It is understandable for you to roll your eyes,” Tres empathizes. “A lot of people have been predicting China’s collapse for a long time. But please take a look at this chart of China’s banking system:
“That line represents the number of loans Chinese banks have made,” he explains. (Always remember, if you owe something to a bank, the bank considers that an “asset.”)
“Borrowers use those loans to operate businesses or develop real estate. Then they use the proceeds from those endeavors to pay those loans back. But if the borrowers don’t use the loans to grow their businesses enough to pay back the loan amount, they default.”
Over the last 11 years, total outstanding loans from Chinese banks have grown 871%. Meanwhile, the Chinese economy grew by 407%.
“Chinese borrowers would have a hard time paying back all that debt even in the best of economic times,” says Tres. And these aren’t the best of times: “Today, 45% of all new Chinese loans are originated to just pay the interest expense on the current outstanding loans.
“Do you think it is a good idea to use a Visa account to pay the interest expense on your American Express? No way. Not ever.”
So how much of this debt is in default… or close to it? (In other words, how much is in danger of ceasing to be “assets” for the banks?)
The official Chinese government estimate of NPLs is 1.8%. It’s in the Chinese government’s interest to lowball that number.
“A more accurate reflection of the true NPL numbers,” says Mr. Knippa, “would be to look at loans that are more than 90 days overdue. If you look at those numbers, then NPLs jump to 5%.
“If you add in another pile of nonperforming loans that are called ‘evergreen loans’ (when you take an existing loan and roll it over and then the clock starts again, no longer making it a ‘nonperforming loan’), then that NPL number jumps to 8.6%.
“Nonperforming loans at 8.6% give you Chinese banking system losses of $2.97 trillion. For context, that’s slightly more than the total GDP of the United Kingdom. Ouch.
“One private estimate I saw suggests that if you include China’s shadow banking system, then total NPLs could be closer to 21%. That’s game over. Does $34.5 trillion in official bank debt make much sense in an economy with total GDP of $10.3 trillion?
“You can’t grow a banking system faster than you can grow an economy forever,” says Tres, answering his own question. “The math gets in the way.
“Any guess on how all that debt gets paid back if the economy is not producing enough revenue to service this debt?
“Me either. It won’t ever be paid back. You should now know it after reading those facts. I know it. Chinese officials absolutely know it. And soon, when it comes crashing down, everyone else will know it too.”
That’s why the International Monetary Fund brokered the secret “Shanghai Accord” in late February. Under this deal, the globe’s major central banks are acting to strengthen the euro and the yen while weakening the dollar. By extension, the Chinese yuan will also weaken because of the yuan’s loose peg to the dollar.
“This is the IMF and the G-20 trying to get out in front of the Chinese crisis,” says Tres. “If a banking collapse in China frightens the G-20, you should be worried too.”
Jim Rickards’ usual guidance applies: Have a gold allocation, and keep some cash on hand to scoop up bargains after the inevitable reset. Tres has an additional profit recommendation, but we’ll keep that confidential to paying subscribers of Rickards’ Strategic Intelligence. Subscribe here if you’re not yet among them.
To the markets… which the mainstream tells us are freaking out because of — ta-da — a lousy economic number from China. Or maybe it’s the strong yen; the mainstream always needs a handy explanation for daily market moves, even if one doesn’t exist.
The Caixin PMI number is out this morning — a measure of Chinese factory activity akin to the ISM Manufacturing Survey here in the ’States. Readings above 50 indicate a growing factory sector; below 50, contraction.
The March number rang in at 49.7. The “expert consensus” was counting on it rising to 49.9 for April. In the event, it fell to 49.4. Doesn’t bode well for all those nonperforming loans in China.
Whatever the catalyst, the major U.S. stock indexes are all down at least 1%, the S&P 500 at 2,059. AIG had a turkey of an earnings report, but Pfizer delivered a “beat.”
Hot money is flowing into Treasuries, sending yields down, the 10-year note now below 1.79%. Gold is not benefiting… but it’s down only modestly at $1,286. Crude’s retreat continues, a barrel of West Texas Intermediate fetching $43.54.
The dollar index sits at 92.8, a 15-month low. The euro sits at an eight-month high of $1.152. It takes 106.26 yen to equal one dollar, another strongest-yen-in-18-months reading. All systems go for the Shanghai Accord…
Say it ain’t so: Someone — or a group of someones — is getting an early read on U.S. economic data and trading on the information.
Or so we’re told in a new research paper released by — hmmm — the European Central Bank.
The researchers studied trading patterns in the case of 21 market-moving indicators between 2008–2014. Some of them are government figures, like GDP. Others come from the private sector, like home sales and the ISM Manufacturing Survey.
“In the case of a third of the economic announcements,” reports the BBC, “there was strong evidence of what is known as pre-announcement price drift, in which investors correctly bought or sold stocks or bonds in apparent anticipation of an economic announcement and its impact.”
The biggest impact was on stock and bond futures contracts. Traders acting on this early information might have pocketed $20 million a year just in S&P 500 futures.
In 2013, the Federal Reserve tightened the “lockup” rules on the release of its data and policy statements: Reporters getting an early glimpse of the statements to write their stories had their phone and Internet access cut off. The Commerce Department, which issues the GDP figures, has done likewise. We’ll see whether other outfits follow suit. (That means you, National Association of Realtors.)
Looking to start a business? Consider Sioux Falls, South Dakota.
This is National Small Business Week, and the website WalletHub is out with a study of 150 big cities and how friendly they are to small business. “We did so,” say the researchers, “using 16 key metrics such as business competition, financing accessibility and availability of human capital.”
Sioux Falls, at the junction of I-90 and I-29, comes out tops. Ontario, California — 35 miles east of downtown LA — comes out worst.
Within some of the individual measures, a handful of things stand out. Grand Rapids, Michigan, registers the highest average growth in the number of small businesses. Irvine, California, has both the most-educated workforce and the highest labor costs. The lowest cost of living is found in Laredo, Texas; the highest in New York. Miami has the most startups per 100,000 residents.
Toledo, Ohio, has both the cheapest office space… and the lowest average growth in the number of small businesses.
But whatever you do, be cautious launching a gasoline-delivery business in San Francisco. “It is not permitted,” says Lt. Jonathan Baxter of the San Francisco Fire Department.
Seems a boatload of startups are trying to be “the Uber of gasoline” in places like San Fran, Nashville and Atlanta. Using an app from a service like Filld or Yoshi, you can have fuel brought to wherever you need it.
The ban in the city by the by is news to Yoshi co-founder Nick Alexander. “We haven’t talked to them,” he tells Bloomberg. “I don’t know about that. It’s news to me.”
Meanwhile, Filld launched in San Francisco yesterday. “You can never ask for permission because no one will give it,” says CEO Chris Aubuchon. Both say they operate within the International Fire Code. The drivers have commercial driver’s licenses and hazmat certification.
You have to hand it to Aubuchon for boldness: “We basically said, ‘We strive to be safe in every way to the consumer, and this is exactly what we do, and we welcome dialog,’” he said. “If it was illegal, they would have and should have told us many months ago.”
The state agency that oversees the fire marshal’s office has scheduled a meeting in three weeks to discuss how regulators will deal with the phenomenon.
“There are so many tentacles to this whole issue,” says agency spokeswoman Lynne Tomachoff. Spoken like a true bureaucrat…
“It’s interesting that yesterday you mentioned that the Fed was in Amelia Island, Florida, for meetings this past weekend,” a reader writes.
“Happen to live there, and didn’t see any giant oracles in the offing, but could be they hid among the throngs for the annual Shrimp Festival, which was well underway. Were they seeking some cover story for further ‘pronouncements’?”
The 5: Hmmm… Count yourself lucky. Judging by media accounts, some of the event was open to reporters, ensuring an even bigger to-do…
“Virtual reality is real and will be big in the future — but not now,” a reader suggests.
“I remember hearing the same near-future euphoria about 3-D printing not too long ago. Here but not yet ready for prime time.
“To quote T.S. Eliot (‘The Hollow Men’) ‘Between the conception/ And the creation/ Between the emotion/ And the response/ Falls the Shadow’.”
The 5: Even if true, the profit potential is nothing to sneeze at: Ray Blanco’s readers had the chance to capture 195% gains on 3D Systems (DDD) in less than a year during 2013 and early 2014.
But Ray believes VR’s potential is much bigger, and the growth curve much steeper — for reasons he lays out in detail here. (Of course, there’s also the porn-as-early-adopter case to be made. If you’re not up to speed, you can start here — assuming you’re not easily offended.)
The 5 Min. Forecast
P.S. In case you missed our “special survey edition” on Sunday, here’s another chance to take part.
Simple question: Are you voting for Hillary Clinton?
The truth is, no matter if you chose A, B OR C — you’re still going to have Hillary in 2016 (you’ll see the reason why when you choose your answer).
To see why we think she will win this year, click the link below: