Mike Holt

Mike Holt
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  • Listen Carefully, She's Yellen  [View article]
    George Friedman of Stratfor believes that the level of bad loans held by Italian banks coupled with an unwillingness on the part of the Eurozone, under the heavy influence by Germany, to bailout the Italian banks or their depositors, is going to lead to huge economic and political problems ahead"

    He claims that Reported NPL's are at 17% and that unemployment levels are at 22%. Since Italy is the 4th largest economy in Europe and the eighth largest economy in the world, he thinks these problems could have very significant implications.

    Is he right? Or has he overestimated the magnitude of the problem?
    Feb 10, 2016. 09:21 PM | 2 Likes Like |Link to Comment
  • Brief Thoughts On Chinese Capital Flows Ahead Of The Year Of The Monkey  [View article]
    Marc, your clarifications are helpful and your comments seem much more reasonable when viewed in this context.

    I also recognize the validity of your observation that foreign investments in "A" shares are limited by the quota under the QFII program, which I believe is only about $93 billion. As such, the recent announcement that restrictions under the QFII program will be eased is a relatively insignificant development. The entire quota is less than the capital outflows from China that were reported for last month alone.

    Of far greater concern is a continuation of capital outflows on this same scale or higher. China's M2 money supply is about $21.5 Trillion, so their Fx reserves now equal to $3.2 Trillion represent only about 15% of those liquid assets. As you may know, this ratio is commonly used to evaluate whether Fx Reserves would be sufficient to ward off a currency crisis, which is typically a greater cause of concern for countries with Fx rates that are fixed or heavily controlled. To put this into perspective, the ratio of Fx reserves to M2 money supplies for Thailand and a numver of other Asian countries that suffered currency crises in 1997 was generally around 25%.

    I think this would be less of an issue if China had continued to implement the privatization measures and other reforms to their banking system that were underway before the GFC in 2008, but all the progress that had been made through 2007 seems to have been completely undone since then. Yet, for various reasons, Chinese leaders have still been very anxious to accelerate efforts to internationalize the RMB, which necessitates the lifting of capital controls. Historically, lifting capital controls before a country's banking system has been developed / privatized has been a recipe for disaster. And, given the mounting evidence that the quality of the debt that has rapidly accumulated in China over the past several years is likely to be much worse than reported, this hardly seems to be the right time to expose China's banking system to outside market forces over which the CCP can't exercise the same degree of control to which it has become accustomed.

    In light of recent aggressive comments made by George Soros, and the research by Mark Hart of Corriente Advisors that China would have been the logical destination for a massive carry trade of perhaps $1.5 Trillion to $2 Trillion while it was believed that the PBoC would be able to continue to support the RMB Fx rate, it's understandable why there is so much concern about a continuation of elevated levels of capital outflows that could cause a further weakening of the RMB. The anti-corruption campaign and disappearances of high-ranking officials in the wake of the CCP's botched attempts to prevent a bursting of a stock bubble that they themselves orchestrated also adds to these concerns.
    Feb 9, 2016. 09:51 PM | 2 Likes Like |Link to Comment
  • China's Missed Opportunities  [View article]
    It's hard to believe that the elite members of the CCP, under pressure from Xi Jinping and the other new leaders of the party to relinquish some of their control over the economy in order to put it on a sustainable footing, have still refused to do so despite the glaring signs of capital misallocations as banks controlled by the CCP limit their lending to state-owned corporations or entities controlled by elite members of the CCP.

    The result is surplus capacity and unprofitable companies, debt growing three times faster than economic growth, and a banking system choking on all this bad debt but attempting to conceal this due to political pressure.

    Nationalist sentiment has also contributed to the decision to keep going down the same path in an effort to achieve economic growth through amplification of the same debt-financed investment activities that were appropriate when their economy was in an earlier stage of development, but now at even higher levels, perhaps under the belief that this is how China, or at least those in control over the commanding heights of their economy, will "take over the world."

    In order to achieve sustainable economic growth, they must also seek economic development. But, since that would involve more diffuse economic activity and greater opportunities for a broader segment of the population, the elite have refused to relinquish their control, preferring instead to saddle the population with higher and higher levels of debt--whose poor quality is more important than its growing quantity even though the growth in debt is staggering. And even higher tax rates to pay for this will follow.

    For what? To breathe toxic air, drink toxic water, and eat toxic food, and then be trampled upon since they gave up their personal rights and freedoms in exchange for these "improved" living standards?

    Those who somehow manage to survive and achieve any meaningful level of economic seem more inclined to get their money and their families out of the country before they are charged with corruption and have everything taken away from them. And yet, just like the Syrian refugees, it is their efforts to escape that are being described as the problem.
    Feb 9, 2016. 07:38 AM | 1 Like Like |Link to Comment
  • Brief Thoughts On Chinese Capital Flows Ahead Of The Year Of The Monkey  [View article]
    Thanks Marc, I thought the PBoC complemented its Fx reserves with various derivatives, etc. to hedge its currency exposures and that gains from those might have offset the weakening of the Euro relative to the US dollar.

    As for the IIF report, I'll review it to evaluate the strength of the data they're relying upon to support their conclusions.

    It's hard to believe that Chinese leaders are going to all the lengths they have been going to in order to staunch outflows of capital Simply because they were burned by an unhedged exposure to 1 Trillion Euros and some corporations decided to convert their US dollar denominated debt into RMB denominated debt. It also seems inconsistent with so many other developments.
    Feb 8, 2016. 10:41 PM | Likes Like |Link to Comment
  • Japan's Negative Rates: The China Connection  [View article]
    There are good investments and bad investments.

    Debt incurred to finance bad investments, even if it can be labeled as investment debt, is still bad debt.

    When a population is being saddled with bad debt that is growing at a rate two to three times faster than its economy, some may believe they are growing taller, even if the reality is that their balance sheet is just getting more bloated.
    Feb 7, 2016. 07:46 PM | 1 Like Like |Link to Comment
  • Brief Thoughts On Chinese Capital Flows Ahead Of The Year Of The Monkey  [View article]
    Marc, if the PBoC did hold $1 Trillion of Euros as part of its Fx Reserves as you have postulated in your hypothetical example, but the PBoC also held $1 Trillion of US Dollars, wouldn't the weakening of the Fx Value of the Euros be offset by the corresponding strengthening of the Fx value of the US Dollars?

    The view of the IIF that some of the nearly $1 Trillion of net outflows of RMB may have been attributable to Chinese corporations paying off some of the $1+ Trillion of US dollar denominated debt incurred in recent years seems more plausible. But, to what extent has this occurred and is there hard data to back this up? Or, is this just an example of exaggerated claims in the other direction?
    Feb 7, 2016. 01:34 PM | 1 Like Like |Link to Comment
  • Brief Thoughts On Chinese Capital Flows Ahead Of The Year Of The Monkey  [View article]
    Another argument being put forward is that the net capital outflows from China are being driven by concerns about the true quality of the debt on the balance sheets of China's state-owned banks and national champion corporations.

    Although Non-Performing Loans ["NPL's"] are reported to be less than 2%, which is less than the 3% level for which banks are prepared to address, according to this article, some believe that if non-performing loans to local government financing vehicles were included in this total, the level of NPL's would rise above 10%.


    The article goes on to identify the staggering number of "smoke and mirror" techniques that are being used to conceal the true nature and quality of the debt plaguing China's relatively undeveloped financial system that is still dominated by banks that are owned by the government and controlled by the Chinese Communist Party.

    This is of especial concern to many given that loans on the balance sheets of China's banks have more than tripled from about $4 Trillion in 2007 to about $13 Trillion today, and aggregate bank assets have grown from about $7.5 Trillion in 2007 to about $30 Trillion today.

    Debt growth at such high rates calls into question the level of attention that was given to credit quality, as do the now glaringly visible signs of unused and unaffordable infrastructure and staggering levels of surplus capacity in a number of industries.

    And, if it is concerns about the quality of all this debt more so than slowing economic growth in and of itself--although slowing economic growth could add to financial strains--then wouldn't it make more sense to look more carefully at the capital flows out of China rather than their current account. The current account is a more meaningful measure of trade flows than the merchandise trade balance, but this doesn't seem to have much relevance within the context of the topic of net capital flows out of China.

    Have you given any consideration to the size of carry trades involving borrowing at historically low rates in the US in order to take advantage of much, much higher rates on money market accounts and other Wealth Management Products available in China whose currency had been strengthening as part of China's currency internationalization efforts? And, what would happen to that carry trade if the RMB was no longer expected to strengthen as it had over the past several years? Wouldn't the unwinding of such a carry trade put downward pressure on the RMB? And, wouldn't such downward pressure on the RMB create a catalyst for others to find ways to convert their money out of RMB before it has fallen in value?

    Because China's M2 money supply of about $21.5 Trillion dwarfs the size of their remaining $3.2 Trillion of Fx Reserves, down from about $4 Trillion at the beginning of 2015, rather than depleting their Fx Reserves any further, it does seem that Chinese leaders have been seeking other means to support the Fx rate of the RMB and to staunch capital outflows, such as eliminating all of the RMB that was trading in Hong Kong at Fx rates about 10% below the official rates established by the PBoC?

    This recent Financial Times article seems to make it clear that Chinese leaders have been seeking ways to both limit capital outflows and attract capital inflows, especially after their failed attempt to orchestrate a stock market bubble that would enable Chinese corporations to issue equity at lofty prices and then use the proceeds to pay down their debt that accounts for most of the debt that has been accumulated in China over the past several years, even though it was the local government debt that had been receiving the most public attention until now.


    So, why go to such great lengths to pretend otherwise?
    Feb 7, 2016. 11:32 AM | 1 Like Like |Link to Comment
  • How Does Monetary Policy Affect Asset Prices?  [View article]
    Re: Claudio Boro's "recent BIS paper" are you referring to Chapter 4, "Debt and the financial cycle: domestic and global" from the 2015 BIS Annual Report?

    That made it clear that there has never been a period of rapid debt growth that was not followed by a debt crisis, and the debt growth in China over the past 5 years was even faster and larger than anything the world has ever seen before.

    You could argue that this debt growth was not due to monetary policies of the PBoC and/or those of other central banks around the world, but as for Monetary policies within China it should be remembered that the four largest banks in China that account for over 80% of all lending are state-owned and controlled by the CCP so their influence over the terms and conditions of debt issuance are not so unlike monetary policy decisions formally emanating from their central bank; the policy decisions are just being made in a less transparent manner and through a more extensively controlled monetary policy transmission mechanism.
    Feb 6, 2016. 11:18 AM | 1 Like Like |Link to Comment
  • China Explores Its Monetary Easing Toolkit  [View article]
    When a country is faced with the twin risks of both a debt crisis and a plunging currency, the risks of either occurring are much higher. And, when confronted with these twin risks, the choice has typically been to allow the currency to fall since a debt crisis would be more detrimental to the domestic population, while a plunging currency is believed to be more detrimental to foreign investors and competitors, etc.

    Capital outflows that put downward pressure on the RMB and/or serve to deplete China's Fx Reserves have been visible for some time. But, the true health of their banking system has been much more difficult to decipher due to a lack of transparency and data that is often opaque and unreliable when it is available. This article describes some of the "smoke and mirror" games that are played to either remove bad debt from the balance sheets of China's banks, or to dress it up to make it look different than what it really is.


    The array of creative accounting and financial engineering being employed to conceal problems with the massive amount of debt that has been issued to borrowers other than local governments is staggering. But the eye popper is that Non-Performing Loans are believed to be upwards of 10%, rather than the official 1.5% level reported, if non-performing loans to local governments were reported as such. Even if banks aren't receiving interest payments on these loans, they still carry them at face value because they are "guaranteed by the government." And, in China, writing off a loan that is guaranteed by the government is not politically correct so is "discouraged."

    Meanwhile, banks must maintain capital against an inflated value of assets and sustain their dividend payments, so this, together with the continual need to rollover high-yield money market accounts known as Wealth Management Products with one to three month maturities is said by some to squeeze their liquidity at the end of each month, and to limit their ability to make new loans other than the extend and pretend loans to borrowers that are in trouble and would probably be allowed to fail if they weren't controlled by the CCP that also controls the banks.
    Feb 5, 2016. 08:40 AM | 2 Likes Like |Link to Comment
  • China Situation Critical: The Presidential Economic Veto Kicks In  [View article]
    Capital controls rarely, if ever, work.

    The announcement yesterday that capital controls for qualified institutional investors will be eased may be guided by this understanding.

    But, it remains to be seen whether they intend to allow the RMB to fall, or they're hoping that removing restrictions will put people's minds to rest so they will be less likely to rush to get their money out of the country "while they can."

    And, regardless of their intent, it remains to be seen how investors and those with savings will react. We've become so accustomed to government and central bank policymakers exercising greater control over financial markets and the economy that many have almost forgotten the role that market forces may play, and should play, in order to achieve a true market equilibrium, rather than a stable disequilibrium.
    Feb 4, 2016. 07:33 AM | 1 Like Like |Link to Comment
  • China Situation Critical: The Presidential Economic Veto Kicks In  [View article]
    The popular narrative in the media these days is that investors fear slowing global economic growth.

    The reality is that economic growth has been slowing for years, largely due to trade contagion from China as the new leaders of the CCP have had some success in scaling back debt financed investments in unaffordable infrastructure and unnecessary surplus capacity.

    As expected, that trade contagion from China has caused slowing economic growth in countries that were major trading partners of China, particularly those with commodity-oriented economies. Dramatic declines in trade have put downward pressure on their currencies, and some countries have also intentionally devalued their currencies in an attempt to maintain their exports. But, their economies have slowed anyway, and this has created financial stress in many of these countries, which introduces another type of contagion risk, namely financial contagion risk.

    Capital has therefore been flowing from these countries to the US, guided by the adage that Emerging Markets Pain would translate into Developed Markets Gain. But, it wasn't long before the destination for this capital was narrowed from "Developed Markets" to the US, and the question now being asked is whether the trade contagion ripples from China that have had such a pronounced impact on commodity prices and on the economies of China's major trading partners could morph into bigger challenges whose impact won't necessary be limited to "Emerging Markets."

    In other words, its not just slowing economic growth in China, a development that has been known for quite some time that has suddenly caught the attention of investors, but rather the risk of financial contagion transmitted through either the debt markets or the currency markets.

    That is because the CCP is faced with the dilemma of a potential debt crisis or a potential currency crisis. Although NPL's on the books of China's banks are reported to be a mere 1.5%, and the CCP has declared that reserves have been set aside sufficient to cover loan losses of up to 3%, it is widely believed that the level of bad debt is far worse than what has been reported. And, unlike prior years when bank liquidity was occasionally constrained by PBoC actions intended to curtail undesirable lending practices on the part of China's banks, bank liquidity issues now seem to be resulting despite PBoC efforts to create liquidity.

    The result has been a surge in net capital outflows from China, and the PBoC has already depleted over $800 billion of its Fx Reserves in an effort to support the RMB by buying the RMB being sold. Any further depletion of Fx Reserves would be undesirable for a host of reasons, and efforts to support the RMB by removing liquidity from the banking system would put further stress on their underdeveloped financial system that is still dominated by China's state-owned banks through which the CCP continues to seek a high level of control over the Chinese economy.

    So, the more likely outcome is a weakening of the RMB despite years of effort to strengthen the RMB as part of China's currency internationalization efforts. That, in turn, has negative implications for China's One Belt One Road Strategy, which was essentially an alternative means of maintaining economic growth without the need to rebalance the Chinese economy which would require the elite to relinquish some of their control over the Chinese economy in order to create more opportunities for the broader population who could then use some of their increased household income to fund the increases in domestic consumer spending that are necessary to put further growth and development of the Chinese economy on a sustainable footing.

    What will a weaker RMB mean for the rest of the world, and how fast can we expect the RMB to weaken? The economic data coming out of China is opaque and unreliable, so this is not clear, but it is the uncertainty in this regard--not concerns about slowing economic growth that have been well known for years--that is giving the market jitters.
    Feb 3, 2016. 07:30 AM | 1 Like Like |Link to Comment
  • China Manufacturing PMI: It's At Recession Levels, Folks  [View article]
    The leaders of the CCP disagree. They are already taking measures to close unnecessary plants and to write-off the bad loans incurred to construct these unnecessary plants so credit can then be freed up to be invested more productively.

    The question is whether their actions will be too little, too late--and whether they will continue to encounter insurmountable resistance from entrenched interests and overly optimistic pollyann-ish naysayers who refuse to acknowledge the debt problem due to their inflated egos.
    Feb 2, 2016. 01:59 PM | 1 Like Like |Link to Comment
  • China Manufacturing PMI: It's At Recession Levels, Folks  [View article]
    With the aging of populations in wealthier developed countries and stagnating wages in those countries, what is needed to sustain global economic growth is increased consumer demand elsewhere.

    And, due to the bursting of housing bubbles and massive government bailouts of banks in the ensuing debt crisis, an orderly deleveraging process over a period of a decade or more was also necessary in order to bring soaring debt levels from their already lofty levels down to manageable levels.

    But, what we got instead was lower interest rates that have channeled themselves into additional debt that has been used to fund additional capacity so that supplies of manufactured goods now outstrip consumer demand by even wider margins.

    And, as companies compete for market share in this low interest rate environment they have relied upon automation to drive down labor costs, which translates into fewer employees in those industries and downward pressure on wages even as employment levels in other lower paying industries are on the rise. [Pay attention to the continued decline in wages as a percentage of GDP, not just the unemployment numbers.] This downward pressure on wages also puts downward pressure on aggregate consumer demand, as well as prices for those goods and services that are subject to global competition.

    Governments around the world are attempting to subsidize corporations in their countries in order to maintain, or even grow their market share in these consumer demand constrained industries. Since the capacity for certain countries to take on more additional debt than other countries is considered to represent a form of competitive advantage, debt levels in those countries, particularly China, have soared.

    As a result, it appears that an increasing number of companies in these industries are not generating enough profit to cover their cost of capital, despite the fact that capital costs are at their lowest levels in decades!

    Capital flight combined with intentional currency devaluation strategies as another means to provide a competitive advantage to state championed, export-oriented corporations in strategically important industries may be adding further pressure to margins, and triggering further rounds of currency adjustments in other countries, in addition to the currency pressures being experienced for other reasons by some countries with commodity-oriented economies.

    The result is a trajectory of increased debt and increased supply, rather than a trajectory of decreased debt and increased consumer demand, as well as disruptive currency adjustments. And this is leading to decreased profits and therefore a decreased ability to service that debt, especially if it is denominated in a different currency than the currency in which revenues are being received.

    Is this sustainable? And, can there be any real winners in this "game?"
    Feb 2, 2016. 07:32 AM | Likes Like |Link to Comment
  • China Manufacturing PMI: It's At Recession Levels, Folks  [View article]
    A recent Bloomberg Business article titled "The $29 Trillion Corporate Debt Hangover That Could Spark a Recession" points out that an unprecedented $29 Trillion corporate bond binge [it doesn't break this down by country] has left many companies more indebted than ever, and claims that this is underpinning much of the angst in recent weeks over whether "the US, and the whole world for that matter, are about to sink into recession."

    On one hand, the article points to some alarming trends:

    1. growing numbers of companies--one third globally--are failing to generate high enough returns on investments to cover their cost of funding;

    2. corporate leverage is at a 12-year high; and

    3. Worsening debt profiles contributed to S&P downgrading 863 corporate issuers last year [2015], the most since 2009.

    Yet, on the other hand, the article goes on to say that:

    1. Corporate borrowing costs, while on the rise, are still below the average of the past two decades [apparently some consolation for the fact that one-third of corporations globally still can't cover their cost of funding, possibly because low interest rates have encouraged them to take on too much debt];

    2. "Leverage is higher but it's only a problem if you can't service your obligation and the ability of INVESTMENT-GRADE companies to service obligations is at a very good level" according to Suki Mann, founder of bond market commentator CreditMarketDaily .com.

    According to the World Bank, growth across the world will be dragged down further this year since a continued slowdown in growth in China will prolong the commodity slump, thus perpetuating slower economic growth in countries with commodity-oriented economies such as Brazil, Australia, Canada, and South Africa, as well as China's major trading partners including Japan, Taiwan, and Korea. And, low oil prices, driven more by a glut of supply than the slowdown in demand for this commodity as well, are putting downward pressure on the economies of major oil-producing nations such as Saudi Arabia, Russia, the US, Venezuela, and Nigeria.

    This slowing growth coupled with high and growing levels of debt--too much of which is of questionable quality--does seem to be a valid reason for concern. Yet, in ten years, we may start to see driverless cars so....
    Feb 1, 2016. 11:31 PM | 1 Like Like |Link to Comment
  • How Much Will China Affect Your Portfolio?  [View article]
    The Japanese economy is also highly levered to the Chinese economy, which explains why its central bank, the BOJ, just announced the introduction of a negative interest policy intended to weaken its currency.

    That will also put downward pressure on the economies of Taiwan and Korea.
    Feb 1, 2016. 10:49 PM | Likes Like |Link to Comment