Mish's Global Economic Trend Analysis

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• Australian Dollar Plunges as Home Loans Dive; Australia Insolvencies Hit Record; Worst is Yet to Come
• Fear of Missing Out Sparks Covenant Light Lending; "Return of the Silly Season"
• Chinese Economy Grows at Slowest Pace in 13 Years; What's Next for China?

Australian Dollar Plunges as Home Loans Dive; Australia Insolvencies Hit Record; Worst is Yet to Come Posted: 10 Jun 2013 08:32 PM PDT Curve Watchers Anonymous has its eye on the Australian dollar. As expected, it has taken a big dive in conjunction with a housing bust and a slowdown in China that impacts the demand for commodities. click on chart for sharper image The only thing surprising to me about this plunge is how long it took, but here we are. Aussie Falls to Lowest in More Than Two Years Bloomberg reports Aussie Falls to Lowest in More Than Two Years as Home Loans Slow Australia's dollar fell to the lowest in more than two years versus the greenback after home-loan approvals grew at the slowest pace in three months, boosting the case for further cuts to borrowing costs. The Aussie slid against all but one of its 16 most-traded peers amid speculation the U.S. central bank will reduce stimulus this year, narrowing Australia's interest-rate advantage. Standard & Poor's lifted the U.S. credit outlook to stable from negative, supporting the view that the Federal Reserve could taper asset purchases under its program of quantitative easing. New Zealand's kiwi dollar fell. "Housing is the one area most likely to make up for the mining investment downturn, and it's disappointed," said Joseph Capurso, a Sydney-based foreign-exchange strategist at Commonwealth Bank of Australia. Australian Insolvencies Hit Record Why anyone would think housing would make up for a downturn in mining is certainly a mystery given Australian insolvencies hit record for month of April. A new April record has been set for Australian companies becoming insolvent. Some 941 firms were put under administration, marking the highest tally for that month since records were first made public in 1999. Some 941 firms were put under administration, according to an FTI Consulting analysis of Australian Securities and Investments Commission records. Almost 3450 companies have gone into administration so far this year, compared with 3524 during the same period in 2012. But the number is higher than the opening four months of 2008 to 2011, which included the global financial crisis. Worst Yet to Come For Australia, the worst is yet to come. Australia escaped a big economic bust in 2008 because of high demand for housing and commodity demand from China, but both sectors are in the tank now, and will stay there. China is slowing and will continue to slow, Australia labor costs are ridiculous, the Australian housing bubble has burst, and commercial real estate has only one way to go: down. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Fear of Missing Out Sparks Covenant Light Lending; "Return of the Silly Season" Posted: 10 Jun 2013 10:28 AM PDT With the Fed forcing interest rates low, commercial and industrial lending has picked up. That may sound like a good thing, but is it? I suggest it's not. Competition is such that "covenant light" lending has returned in full force. "Cov-lite is financial jargon for loan agreements which do not contain the usual protective covenants for the benefit of the lending party." Flood of Cheap Money Sparks Covenant Light Lending Please consider Covenant-light lending making its presence felt again Competition is feral at the institutional end of the banking industry, where quantitative easing is creating a flood of cheap money, and in the big banks a recent development has everyone talking: covenant-light lending appears to be making a comeback. Covenant-light loans were a phenomenon of the boom that ushered in the global financial crisis. Bankers who say covenant-light lending is on the rise again say loans that are being proposed now are not as radical as the ones created ahead of the crisis, but say they are watching closely. Covenants are designed to protect lenders from corporate implosions. They impose financial limits on the borrower, maximum gearing levels, for example, and if they are breached, the lenders can take steps to protect their position. Bankers say now that US banks and investment banks are leading the revival of covenant-light lending. They are surprised it has returned so quickly, but acknowledge that quantitative easing has created enormous pressure. Their best guess is that covenant-light lending is back to where it was around the middle of 2006, before the final, frenetic stage of the boom. It is lighter-covenant rather than covenant-free lending, and it is only being offered to top-rated corporations where survival and debt servicing capacity is not in question. The local bankers wonder, nevertheless, whether the return of covenant-light lending is a sign of QE seeding another unsustainable debt boom, but they still need to work out how to respond: if the trend continues and they don't join it, their share of the institutional lending market will fall. J.C. Penney Loan Arranged by Goldman Sachs Is Covenant-Light On April 29, Bloomberg reported J.C. Penney Loan Arranged by Goldman Sachs to Be Covenant-Light J.C. Penney Co. (JCP), the retailer that's working to rebound from its worst sales year, will offer fewer safeguards to lenders on its $1.75 billion financing. The five-year covenant-light deal, which is being arranged by Goldman Sachs Group Inc., won't include financial maintenance requirements that typically prevent borrowers from loading up on debt, according to a regulatory filing today. Surge in Commercial lending Raises Bubble Worries Yahoo! Finance reports Surge in commercial lending raises bubble worries. There was a time when robust growth in U.S. commercial loans was seen as a good sign for the economy, but this year a double-digit surge is being seen as a red flag. U.S. banks reported $1.53 trillion in commercial and industrial loans in the first quarter, a 12 percent year-over-year gain. Bankers and analysts say this big gain in C&I lending looks more like an early asset bubble than an economic breakout. The banks reported double-digit gains in 2011 and 2012, too. Mid-size companies and publicly traded corporations are not using the loans to grease the skids of the economy for expansion. Instead, they're mostly getting cheaper credit lines or refinancing the replacement of obsolete factory equipment by dictating easy terms to banks clamoring for their business. "With so much liquidity, banks feel a lot of pressure to make loans," said Mariner Kemper, chairman of UMB Financial Corp, a Kansas City, Missouri-based bank with $3.2 billion in outstanding C&I loans. "There's deterioration in covenant terms and pricing and that's potentially the kind of behavior that drives a crisis." Douglas Bryant, a senior lender for Wells Fargo in New England, calls the C&I lending shift the "return of the silly season." "Any well-known company with a credit need is called on by a half a dozen or so banks," Bryant said. "These companies are offering very aggressive term sheets on price and loan covenants." Bryant said banks today are lucky to get one or two strong covenants on a loan. Covenants allow banks to restructure loans if a company fails to meet projections on leverage, cash flow and debt service, for example. But with more leeway on those financial metrics, a company can get deeper into trouble before it breaks a covenant, exposing banks to greater losses. "A company can deteriorate a significant amount before you get back to the table to restructure the loan," Bryant said. "We used to get as many as five strong covenants." Return of the Silly Season The Fed wants corporations to hire workers and expand their businesses. Instead, the Fed has ushered in "silly season" lending competition that is good for corporate profits, but bad for banks should some of these companies get into trouble. And with a slowing global economy it's a sure thing that yet another credit bubble is brewing. Fear of Missing Out Banks fear "If the trend continues and they don't join it, their share of the institutional lending market will fall". This sounds similar to a statement by former Citigroup CEO Chuck Prince: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing". Prince made that statement on July 10, 2007. Recall that on November 2, 2007 the Music Stopped for Chuck Prince and he did a two-step out the door. It's hard to say when the music stops this time, but it will, with similar results. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Chinese Economy Grows at Slowest Pace in 13 Years; What's Next for China? Posted: 10 Jun 2013 02:41 AM PDT Inquiring minds note the growth slowdown in China: China's economy stumbles in May, growth seen sliding in Q2. China's economy grew at its slowest pace for 13 years in 2012 and so far this year economic data has surprised on the downside, bringing warnings from some analysts that the country could miss its growth target of 7.5 percent for this year. "Growth remains unconvincing and the momentum seems to have lost pace in May," Louis Kuijs, an economist at RBS, said in a note. "The short-term growth outlook remains subject to risks and we may well end up revising down our growth forecast for 2013 further." May exports to both the United States and the European Union - China's top two markets - both fell from a year earlier for the third month running. Imports fell 0.3 percent against expectations for a 6 percent rise as the volume of many commodity shipments fell from a year earlier. The volume of major metals imports, including copper and alumina, fell at double-digit rates. Coal imports fell sharply. Economic growth slipped to 7.7 percent in the first quarter, down from 7.9 percent in the previous quarter. Both the International Monetary Fund and the Organization for Economic Co-operation and Development cut their forecasts for China's economic 2013 economic growth in May, to 7.75 percent and 7.8 percent, respectively. But the further loss of momentum in the April and May could prompt the central bank to try to give the economy a lift, said Jian Chang, China economist for Barclays in Hong Kong. "We had expected an L-shaped economic recovery in China and that the growth would stabilize at around 7.9 percent," Chang said. "We now think China's growth will stabilize at around 7.6 percent (this year). The possibility for the central bank to cut interest rates is now rising," Chang said. Pollyanna View I certainly have no difficulty believing reports that China would slow dramatically given I have been calling for exactly that. Rather, my problem is the Pollyanna view that China is going to stabilize anywhere near 7 percent. 2 percent is more like it. Given declines in energy usage, I rather doubt China is actually growing fast as claimed right now. For more on the China growth debate, please see ... The Dating Game: Michael Pettis Challenges The Economist to a Bet on China Michael Pettis on China Reforms, Ponzi Schemes in Wealth Management Programs, Rebalancing Implications Michael Pettis Interview with Lauren Lyster: Decade of Slower Growth for China Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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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