Lately, the opening quote that adorns the pages of The Automatic Earth is from John Kenneth Galbraith. It says:“In economics, the majority is always wrong”. And, well, since everybody talks about the same thing these days, namely Greece, perhaps it’s time we should take Galbraith to heart. Perhaps when everyone is looking in the same direction, the smart thing to do is to look where they don’t. Nonetheless, the whole thing certainly takes the herded blindness of the investor crowd and puts it in a bleak light, in the same way that Hugh Hendry exposed Joe Stiglitz.
Hendry showed us all a painful truth, that economic policies are crafted by a clueless ensemble of theorists who will swear on their mothers’ graves that their theories should work. And in theory they will. Just like in theory Greece could go bankrupt soon. The money managers of the planet are all anxiously waiting for a salvation signal to come from Germany and France, a signal neither is in any hurry to provide. In the past year, German and French export industries have been hammered not only by a weakening market, but even more by a rising Euro. The commotion surrounding Greece is a gift from heaven for them, and they’ll use it for all they’re worth, only to say the word at the very last minute.
Meantime, while everyone’s focused elsewhere, in the American part of the real world Elizabeth Warren warns that $1.4 trillion in commercial real estate loans that need to be rolled over by 2014 will endanger 3000 smaller US banks. Half the loans are underwater, while the government has hardly any idea how healthy these banks are. Also in an adjacent corner of the field, Fannie Mae and Freddie Mac have announced they will buy up delinquent mortgage loans they have written securities on, to the tune of at first glance $200 billion. Which is in turn of course only the first batch they’ll purchase, since it’s not exactly as if the rest of their portfolios are seeing better days .
You know, just in case you were wondering why they needed that Christmas Eve blank cheque from the Treasury. Remember, their loan portfolio’s are north of $5 trillion, and the latest Case/Shiller prediction calls for another 20-odd percent drop in home prices just this year, so get yourselves ready, party hat and all, to become the proud owners of a $1 trillion or so “worth” heap of failed junk, with more, much more, on the way. Don’t forget that mortgage debt valuations have come down much less than home prices, and while they may never arrive at par, the former has a long way down to go just to catch up.
Oh, and that of course still leaves open the question of the manner in, and the extent to, which Fannie and Freddie (plus Ginnie Mae, FHA and FHLB) are exposed to securities written on the failed and failing loans. An indication could possible come from the fact that the Federal Reserve has approved the backstopping of $25 trillion worth of derivatives, another grab-bag of garbage that may soon need to be expanded if and as conditions continue to deteriorate. In short, matters are rapidly getting worse back home while the gazes of the masses linger on the Acropolis. How convenient.
On another continent still, questions about China are persistent and growing in number and loudness. The same Hugh Hendry who needed to explain economics to the Stiglitz who got that Fauxbel prize for his mastery of the field, sketches Beijing’s (and the world’s) core issues in a few lines today:
China has become the world’s biggest creditor, after amassing nearly $2.3 trillion of foreign exchange claims on us. However, the spectre of a creditor nation running persistent trade surpluses has ominous historical portents. It has happened only twice before, with the US economy in the Twenties and with the Japanese economy in the Eighties.
Economics is a cruel master and in both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis. Never forget that in economics, first can become last.[..]
A country that represents just 7% of global GDP is now responsible for 30% of global aluminum consumption, 47% of global steel consumption and 40% of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment.
Sometime down the line, and it could come soon, China’s lending binge will need to slow; indeed, banks are already being ordered to rethink their ways. But that will slow growth as well, and it will hit global commodities markets square on the nose, as among others Marc Faber notices. The Chinese can keep doing what they do until they don’t.
The overall drift of what Hendry’s saying, of course, is that China is not producing wealth, it’s merely producing numbers. Just like the Obama administration in its report on unemployment, which contains predictions as far out as 2020, something Washington can foresee maybe, just maybe, as accurately as Punxsutawney Phil can tell the weather 6 weeks out. Not. Have they nothing better to do? Sort of like Nero and Rome, as the country burns, the commander in chief and his staff engage in folklore.
In the skies over the Acropolis, the gods are laughing.
PS : If you have time and stamina left after all this, I would urge you read the following over at ZeroHedge: