Wednesday, June 01, 2011
May gone. June arrives and, to be honest, TMM are baffled.
So far May 2011 has been uncannily like May 2010 and if we were to follow that roadmap we should soon be moving our attention from European woes to concerns over US growth, which steadily builds to deflation worries and more QE. So far we are running to plan. In the US data is consistently surprising to the downside and in Europe it looks like policy makers are trying to re-implement the STFU policy that worked so well last summer. The lack of official comment has meant the European market has caught the Australian disease of reacting to anything said by a man in a mac - the journalist. Yesterday was a WSJfest and today opened up with a trawl of badly read German newspapers. The related market moves have been remarkable. If anyone were wishing to move markets there could be harder ways than writing an article for "Der Hamburger Sandwich Weekly" on how the IMF is planning to invade Greece disguised as the Portuguese fishing fleet to steal the Greek firstborns to be enslaved in German sandwich shops in lieu of bailout funds - then wait for the resulting selective cut'n'pasting in sales land to cause mayhem.
But with Europe and the US suffering obvious slow downs why are equities doing so well? Why is Euro perking up? Why is Gold coming off as USD falls elsewhere on gloom? The only thing we can think of is that there are two functions. Firstly, the invulnerability now felt by real money who have weathered a catalogue of otherwise disastrous calamities. And secondly, the old favourite of Voldermort and friends being the buyer of last resort of everything. And we mean EVERYTHING.
Now call us cynical, but pinning all your hopes on previous lucky bullet dodging and the China story is a little rash. For one, fortune may favour the brave, but in markets "brave" is only a whisker away from "dead". But more worrying is that we really don't think that China is capable of assuming the position to support the world just now.
Take the Reuters story that $463bn of local government financing vehicle debt would have to be written down or otherwise managed away to China's asset management companies (AMCs). TMM find this amusing because this is the old China banking trick - banks give dud loans to AMCs, so the AMCs can buy the banks' dud loan portfolios. Think Maiden Lane with a fortune cookie at the end. It's not even robbing Peter to pay Paul - it's Paul the schizophrenic junkie robbing from Paul the schizophrenic accountant's wallet. Nonetheless, it is worth trying, as it worked in 1998 when the rest of the economy grew fast enough to cover the idiocy of the State Owned Enterprises (SOE) so all were none the wiser.
The problem now is that those loans to AMCs are still a problem and TMM aren't sure where the next equity injection is going to come from for these banks, given that they can't re-IPO without a nationalization. So, TMM reckon we're about to see a lot of dilution of Chinese bank shareholders. Otherwise the local governments that get their funding from the central government, which is in turn dependent upon SOE dividends, are going to need some alternate sources of revenues (property taxes are already being mooted to be rolled out beyond Shanghai).
One would normally think that new taxes + massive loan losses = stocks down, but in the bizzare world we live in that does not seem to be happening. TMM are puzzled and wonder if this Reuters story of a writedown could be a leak from the CBRC to put pressure on other parts of the government in the leadup to a power transition. Either that or everyone has tuned out to anything that sounds like Jim Chanos.
TMM are enormously frustrated that after a massive balance sheet recession in the US, as well as parts of Eastern Europe and arguably a good chunk of the Eurozone, economics departments of banks do not do credit analysis. It seems that the great and the good (including the US Ex-investment bank) are taking the view that looking into this seriously is beneath them just like the last few major blowups, so TMM really appreciate the work done by the few exceptions (ANZ and Stan Chart) in providing real economic insight, rather than yet another absurdly overfitted PMI or initial claims model.
So all in all, TMM are not buying this "risk on" mood and think that praying to the great God Voldermort to save the world is like a European cucumber farmer hoping that no one checks what he's been doing with his produce.