miercuri, 16 mai 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Real Estate Crash in China Underway: Foreign Funding Down 80%, Land Sales Down 57%, Starts Down 27%; Expect Chinese GDP to Plunge

Posted: 16 May 2012 03:39 PM PDT

Inquiring minds are reading an excellent report China Real Estate Unravels by Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing, China.

The report confirms many of the things I said would happen in regards to the Chinese real estate bubble and GDP.

Here are a few items of note.

Developers, burdened by 70% leverage ratios and loans threatening to come due, rushed to complete projects already in their pipeline, to put those units onto the market and raise cash.

That rush to complete inflated real estate investments, allegedly up 23.5% in the first quarter. Other statistics from the report tell the real story.

  • Year-on-year sales in Q1, for all real estate, was down 14.6%.
  • Residential property sales were down 17.5%
  • Office sales were down -10.2% 
  • Sales in January-February were a disaster, falling 20.9% overall, compared to the first two months of 2011, -24.7% for residential.
  • Total amount of floor space "for sale" was up 35.5%, compared to the same date last year
  • Floor space of residential units "for sale" grew 47.4%.
  • At the end of 2011, total floor space "under construction" was roughly 4.6 times the floor space sold
  • A year and a half worth of excess inventory is hidden somewhere in the pipeline
  • New starts in April fell 14.6% year-on-year and 27.0% month-on-month, for property as a whole
  • Housing starts fell -14.4% year-on-year and -23.4% month-on-month
  • Office starts fell -21.0% year-on-year in April, and -45.1% compared to March
  • Retail property starts fell -18.7% year-on-year, and -36.8% compared to March
  • Land sale revenues in April (RMB 27 billion) were down -54.7% compared to April last year
  • Foreign funding for property development was down -91.4% in March and -80.8% in April, compared to the same months last year.

Clearly a crash is underway. The above stats also show the soft-landing thesis is written on toilet paper.

GDP Analysis

I like the analysis by Chovanec on GDP implications and the highly-overrated "soft landing" theory.
The "resilient" growth in real estate investment that seemed to promise a "soft landing" is not very resilient at all. It's more like the last gasp of a market that's running out of steam. Once the surge in completions plays out, the declining number of new starts will become the pipeline, and growth in property investment will flatten or go negative.

Property investment accounts for roughly a quarter of gross Fixed Asset Investment (FAI), and net FAI accounts for over half of China's GDP growth. As I noted in January, in a back-of-the-envelope thought exercise, if property investment plateaus (growth falls to zero), it could shave as much as 2.6 percentage points off of real GDP growth. If it fell 10% (in real, not nominal terms) it could bring GDP growth down to 5.3%.

At the time I first saw this dynamic in the data, when the Q1 numbers came out, I figured it would take several months to begin playing out. But the April numbers suggest it is already happening.
Chovanec notes if real estate investment drops by 10%, GDP will come in at 5.3%. What if real estate investment falls by 20% or 25%? Moreover, why shouldn't it?

Nails in the Hard Landing Coffin?

One of the sillier stories making the rounds earlier last month was China currency move nails hard landing risk coffin

I responded at the time with ...
The longer China puts off rebalancing its economy, the bigger the crash later on. Moreover, widening the band on its currency is a needed part of that rebalancing, and does not preclude in any way a huge slowdown in growth.

The structural imbalances in China are large and for now, still growing. However, huge cracks have appeared in real estate, and changes are coming up with a regime change. Finally, peak oil alone makes many of the growth estimates we have seen for China outright impossible.
The real estate crash has arrived. The GDP crash will follow. For details, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Capital Flight From Greece Accelerates, €5bn in May, Exodus Even Hits Time Deposits; Fed, ECB, BOE, BOJ Balance Sheet Comparison

Posted: 16 May 2012 08:22 AM PDT

Capital flight from Greece continues, €5bn in May, not counting orders to buy foreign bonds. The exodus now includes cashing out time deposits as reported by the Financial Times in Greek banks see steady deposits outflow.
Greek banks have seen a steady outflow of deposits this month, reflecting savers' concerns over the failure of political leaders to form a coalition government and the prospect of another inconclusive election, which will be on June 17.

Athens-based bankers said withdrawals exceeded €1.2bn on Monday and Tuesday – 0.75 per cent of deposits – as President Karolos Papoulias failed in two final meetings with conservative, socialist and leftwing leaders to form a national unity government.

A senior Greek banker said the experience of the past few days "gives rise to concern that withdrawals may accelerate". Another banker said: "We are seeing something very unusual, customers breaking their time deposits in order to withdraw funds."

"The situation with the banks is extremely difficult ... there is no panic but there is great fear which could turn into panic and the resistance of the banks is very limited just now," Mr Papoulias told the political leaders on Sunday, according to a transcript of the meeting released by his office.

The president cited a briefing by George Provopoulos, the central bank governor, who told him that withdrawals last week reached €700m, excluding funds used to buy German bonds and other foreign securities.

One of the Greek bankers said that since the end of April, deposits had been reduced by some €5bn, including orders to buy foreign bonds and securities.
Why anyone would have even a cent in Greek bank accounts is a complete mystery. Certainly the smart money left long ago.

Here are a few charts courtesy of Steen Jakobsen, chief economist at Saxo Bank in Denmark.

Demand Deposit Flight: Greece, Italy, Portugal, to Germany



click on chart for sharper image

ECB Deposits



click on chart for sharper image

Central Bank Balance Sheets as Percent of GDP



click on chart for sharper image

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Note to Ambrose Evans-Pritchard at The Telegraph: You Have Excellent Insight as to What is Happening and Why, But Please Get a Grip on Reality as to Solutions

Posted: 16 May 2012 12:37 AM PDT

Once again, I sadly report that Ambrose Evans-Pritchard at The Telegraph hits the nail on the head as to what is happening, yet cannot hit the broadside of a barn with a shotgun from 15 feet in regards to the solution.

It really pains me to see excellent analysis go straight into the toilet with hopeless proposals to problems at hand.

Please consider Appetiser cost of Greek exit is €155bn for Germany, France: trillions for meat course by Ambrose Evans-Pritchard.
Eric Dor's team at the IESEG School of Management in Lille has put together a table on the direct costs to Germany and France if Greece is pushed out of the euro.

These assume that relations between Europe and Greece break down in acrimony, with a full-fledged "stuff-you" default on euro liabilities. It assumes a drachma devaluation of 50pc.

Potential losses for the states, including central banks.
Upper bound of the losses
Billions €

French State
German State
TARGET2 liabilities of the Bank of Greece
22.7
30.2
Greek sovereign bonds held by the Eurosystem: SMP
9.8
14
Bilateral loans to Greece in the context of the first programme
11.4
15.1
Guarantees to bonds issued by the EFSF to provide loans to Greece in the context of the second programme
8.4
11.2
Guarantees to debts issued by the EFSF in the context of its participation to the "Private Sector Involvement" –restructuration of the Greek debt:"sweetener"
6.5
8.6
Guarantees to debts issued by the EFSF in the context of its participation to the "Private Sector Involvement" –restructuration of the Greek debt: payment of accrued interest
1
1.4
Guarantees to bonds issued by the EFSF to provide loans to Greece in order to buy back sovereign bonds used by banks as collateral to obtain funding from the Eurosystem
7.6
10.2
Total
66.4
89.8


Sounds about right.
So far so good. I think a 70% devaluation is about right, but let's not quibble.

Contagion Silliness

This is where Pritchard's analysis starts getting more debatable.

Pritchard writes ..."Needless to say, the real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between €15 trillion in public and private debt in these countries and the €27 trillion European banking nexus."

This idea of contagion sounds much like the totally discredited "domino" theory in regards to Vietnam. Simply put the rest of Asia did not fall into the hands of communists when the US lost the war in Vietnam.

In this case, Spain will sink or swim on its own merits regardless of what Greece does.

If anything, there will be contagion in the reverse sense. There exists a possibility that Greece recovers "because" it exits the Eurozone (however structural reforms are needed as well).

The ridiculous fear is failure in Greece will lead to a failure in Spain. Clearly both states have failed already.

Mad Hatter Tirade

Pritchard then went off the deep end into a mad hatter tirade.
This nonsense can of course be stopped in ten minutes if the EU:

1) announces that it will equip itself with a real central bank (a lender of last resort) that takes all risk of sovereign default off the table — with conviction and overwhelming force, with no ifs and buts, and no ambushes from the Bundesbank.

2) announces EMU debt-pooling, fiscal union, a joint EMU budget and tax system, and an EMU government as a counterpart for the enhanced the ECB.

The idea that Greece and Spain can be saved by central bank printing "with conviction and overwhelming force, with no ifs and buts" is of course asinine.

Sorry Ambrose, "asinine" is the best word that describes what you propose. Greece and Spain can only be saved if and only if they implement badly-needed structural reforms.

Defaulting on debt which would cause inflation in Greece and Spain (not Germany), may assist recovery, but the 100% necessary condition in both cases is structural reform.

Pritchard then recovers by concluding ...
My sympathies to the German people. This is what your leaders got you into (without asking permission). It was the elemental implication of monetary union.

We at the Telegraph screamed from rooftops in the early 1990s that EMU was a destroyer of nation states, and democracies. So did the brave German professors. Nobody would listen.

My guess is that German citizens will not accept this implication.
Precisely!

As Pritchard suggests, Germany will indeed pay. Mathematically Germany must pay. It's something I have pointed out numerous times over the years.

The problem as Pritchard notes is the flaw in the Eurozone in the first place.

I commend Pritchard for being among the first to point that simple fact out. However, neither Keynesian nor Monetarist nonsense is the cure for anything.

Regrettably, Pritchard keeps attempting to put a square peg into a round hole, and worse yet keeps proposing "asinine" solutions to a fundamental problem.

If Wishes Were Fishes

  • If monetary stimulus worked, the LTRO would have been a spectacular success already. 
  • If monetary stimulus worked, housing in the US would be in full-blown recovery.
  • If monetary stimulus worked, Japan would not have a debt-to-GDP ratio above 200%. 
  • If printing worked, Zimbabwe would have been the greatest country in the world long ago.

It is really sad to see otherwise fine analysis go straight into the toilet with such ridiculous proposals as solutions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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