...And while the consensus sees China’s recovery as fundamental to a bullish global backdrop, I’ll offer a contrary opinion.
My Macro Credit thesis holds—and there is ample fundamental support for—the view that we’re now five years into history’s greatest global Bubble. I have posited that China is deep into its “Terminal Phase” of Credit excess. With China’s 1.35 billion people and Trillions of unrestrained Credit expansion, I’ll argue China’s “Terminal Phase” is integral to the overall “Terminal Phase” of a most protracted and dangerous global Credit Bubble. In general, post-2008 global monetary inflation pushed EM to precarious “Terminal Phase” Bubble excess, leaving deep wounds of economic maladjustment and financial fragility.
So, first to the late-stage credit securities hyperinflation dance in the post-Bretton Woods era were NASDAQ's technology dominated issues back in the late 1990s. The values assigned to these equity securities were hyperinflated by way of the GSEs having become proxies for the Fed as conduits of credit. Their transformation as such in the age of King Ponzi (Greenspan) was instrumental in feeding a decades running bull market in bonds—a role since picked up by the Fed following 2008's rout of these former central bank proxies, who in their heyday were even more powerful credit transmission mechanisms than the Fed itself, effectively being equipped with an infinite multiplier employed through "creative finance" feeding a securities-based banking system. All it took was the turn of the calendar from 1999 to 2000 and no further threat of an Information Technology Armageddon for insane valuations assigned to technology-related equities to be subjected to the writing on the wall. Once the word "bubble" came into the public discourse early in the year 2000 it was all over for NASDAQ.
Still, a myriad of credit securities required support, lest the entire mountain of these built up through momentarily profitable operations of the Fed's GSE proxies up to then be doomed to collapse, thereby bringing down the banking system with it. Enter the Great Mortgage Finance Bubble of 2002-2007. We all know how that ended. Once this wildcat finance free-for-all (er uh Ponzi scheme) was being hyperinflated only by what came to be known as "subprime loans"—these at their peak representing 20% of outstanding mortgage finance—all it took was collapse of a couple of Bear Stearns hedge funds playing with this garbage and it was all over.
Nevertheless, there was an even bigger mountain of credit securities requiring support following the Great Mortgage Finance Bubble's implosion. This evidently has been accomplished through emerging markets. Their credit markets are being hyperinflated in much the same manner as was done here in the U.S. during King Ponzi's reign at the Fed.
Nolan goes on to develop the details behind these "deep wounds of economic maladjustment and financial fragility" that are becoming increasingly evident in China.
The value of China’s September residential apartment sales surged 34% from August to $113bn. Year-to-date sales are running up about 35% from 2012. After bouncing back strongly in August (almost doubling July), September’s total system Credit growth (“social financing”) was reported at a stronger-than-expected $230bn. This puts year-to-date “social financing” at about $2.25 TN, a pace almost 20% above a record 2012. Some reports have mortgage Credit growing at a rate about 50% faster than last year. Additionally, forecasts are calling for Q4 corporate bond issuance to jump to $135bn from Q3’s $40bn.
There are multiple facets of “Terminal Phase” Credit Bubble excess at play today in China. In asset-based lending Bubbles, the rapid growth in both transactions and prices combine for exponential growth in underlying mortgage Credit. It’s worth recalling that annual U.S. mortgage Credit growth increased annually from 1997’s $313bn to 2003’s $1.011 TN to 2006’s $1.410 TN. Importantly, along with the exponential rise in mortgage borrowing comes a corresponding spike in the riskiness of late-cycle lending booms. Indeed, and fundamental to Credit Bubble analysis, “Terminal Phase” excesses foster an unsustainable parabolic rise in Credit and economic risks. Systemic stability becomes a major concern anytime circumstances dictate that officials prolong the “Terminal Phase.”
The surge in risky Credit tends to have myriad distorting effects on financial and economic systems. On the financial side, increasingly creative/aggressive risk intermediation is required to transform progressively risky mortgage debt into more “money”-like instruments palatable to savers, speculators and institutional holders. In the U.S. and now in China, so called “shadow banking” came to play an instrumental role. Here in the U.S., 2006’s $1.0 TN of subprime CDOs (collateralized debt obligations) provided a key and fateful risk intermediation mechanism. In China’s historic “shadow bank” Bubble, there is huge ongoing growth in trust deposits and various “wealth management” vehicles. A rapidly expanding chasm - between the perceived safety of “money”-like deposits/savings vehicles and the mounting risks inherent in system Credit - is fundamental to “Terminal Phase” processes and fragilities.
Apparently, we have been somewhat premature here imploring NASA find benevolent life on Mars willing to backstop the trans-Atlantic banking system. China evidently took it upon themselves to further leverage wealth it amassed as manufacturer of the world, playing the same financial games as the West in the face of its developed physical capacity languishing (this latter fact being evidenced by both a CRB and an equities market intimately tied to the nation's manufacturing fortunes coming under pressure in the post-2008 era, particularly since infinite QE was implemented).
We need recognize here that, China's hyperinflation of marketable credit securities has served to sustain the trans-Atlantic banking system's Ponzi-fied capital structure, this by providing a conduit through which the "saving the world from another Great Depression" crowd and its promoters claiming "recovery" could sustain fantasy insisting intrinsic "value"—tangible wealth—indeed underlies our securities-based banking system, whose likes in fact have been only further hyperinflated in the post-2008 period. Having new breeds of securities which to hyperinflate, accomplished has been the means of masking the continued collapse of physical capacity necessary for increasing capital stock whose purpose—whose critical existence—ultimately lends finance its backing.
So, it's official: the "Made in China" that once served to mask a hyperinflationary trap used to captivate sovereign treasuries throughout the trans-Atlantic, this that their inevitable destruction be invited and made a virtual fait accompli—all the while dismantling their physical economies whose capacity to create "something from nothing" once provided backing (through taxation) to securities sovereigns have been issuing in ever greater quantities—has been extended to include Ponzi finance itself, whose principal domain in the trans-Atlantic has been widened to trap emerging markets, as well. As recent history already has amply proven, every means of extending Ponzi finance faces a breaking point. Wildcat finance exported to emerging markets certainly will prove no exception.
I believe the initial cracks in the EM Bubble developed this spring. Market turbulence from May and June provoked further global monetary accommodation, which somewhat reshuffled the deck in the global liquidity chase. And I wouldn’t be surprised if history looks back at this period as a final manic speculative blow-off in U.S. and global equities.
...The above reference to “serious imminent issues” reflects my expectation that the Chinese are likely gearing up for another stab at restraining Credit Bubble excess. It’s reasonable to presume they won’t do anything that would cause serious disruption. Yet, from my perspective, if they are serious about disrupting an increasingly destabilizing Bubble, there is no way around major global ramifications. And with international securities markets turning more intensely overheated by the week, this creates a potentially volatile dynamic.
Herein we face a transition in the hyperinflationary dynamic that has been in place during the post-Bretton Woods period, this from one masked by inflating both the supply of and value assigned to financial securities (as well as increasingly marginalized physical "assets" backing these), to one where parallels to the 1923 Wiemar Germany experience become unmistakeable—indeed, unavoidable, unless a radical departure from today's imperial monetarist lunacy is ventured. So, as there is "no way around major global ramifications," we can look forward to an impending catharsis in Ponzi finance. Securities at the bottom of the capital structure surely will be disproportionally impacted in a desperate attempt to sustain leverage exerted higher in the capital structure.
The question we cannot answer at present is what will follow this approaching incapacity to sustain appearances of the viability of Ponzi finance? The means of inflating the supply of credit securities exerting leverage over increasingly marginalized physical "assets" is being exhausted, so the question is can sovereigns be permanently sunk in an overt, hyperinflationary morass the likes of which every vested interest today supports behind a mask pretending another Great Depression is being avoided? Could this ruse be sustained in a rising rate environment sure to result once central banks are forced to ever increasingly monetize sovereign securities in a desperate bid to pretend their effort ventures avoiding another Great Depression? The effect on the physical economy would be immediate and profound, displaying Wiemar Germany tendencies with increasing intensity, while pressure on interest rates surely will make the likes of former Fed chair Paul Volcker blush, even as stock markets surge in a desperate bid by savers seeking ROI to stave off their increasing marginalization at the alter of overt hyperinflation employed by central banks turned even more criminally reckless than they are today. This is a real possibility. Yet so too is deflationary collapse mitigated in the financial realm through bail-in. These are the only two choices given today's state of things. There is no middle ground, much as we have insisted here for time immemorial.
Thus, today's fundamental backdrop as highlighted by Doug Noland's Credit Bubble analysis substantiates our Elliott wave-based, technical view toward major U.S. stock indexes. Being as Ponzi finance is in its "Terminal Phases," we have the basis for supposing the infinite QE regime is about to meet a fateful challenge. Not coincidentally, our view of the stock market's technical state concurs. We'll probably see every last bit of fantasy sustaining valuations at the bottom of the capital structure milked in the lead up to Confetti being put out to pasture early next year. Once Confetti is gone, look out. We might be wise to remember that, only a few short months after King Ponzi ascended to take the reigns of Fed leadership, the crash of October 1987 happened.
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