A veteran's view on short term interest rates pinned at zero

While I disagree with Mr. Koo's prescription for getting out of Japan's mess (more stimulus) his battlefield view of what happened and why Japan is going on 20+ years of malaise should not be discounted:



(ht: Pragmatic Captialist)

Jim Chanos on China and Rogoff on Excessive debt

Here's 2 interviews for your digestion.  Jim Chanos last night on Charlie Rose regarding China and Mr. Rogoff on how excessive debt growth eventually gets you into trouble.  I reccommend (again) you read the book "This time is different" by Rogoff & Reinhart

Charlie Rose Interviews Jim Chanos

Charlie Rose Interviews Kenneth Rogoff

Consumer credit continues dropping

Consumer credit continues falling.  The rate of decline appears to have stabilized but this means consumer credit continues to contract with no anticipated point of stabilitzation.

Longer term a deleveraged consumer is good news.  Getting there is not pleasant, whether it be from consumer paydowns or bank writing off debts.  As I have mentioned before the decline in consumer credit and debt prevents a strong recovery.  Not only is the added impulse of new debt (and thus spending) missing but the additional drag of debt reduction is still present.

After the inventory bounce recedes in the next 2 quarters GDP growth will remain muted in my opinion.

Watching the Greek tragedy -- 10 year Greek bond rates

The Greek Tragedy is not over, even with 'assurances' by the EU and IMF they stand ready to help.  If you'd like a front row seat to events and watch what everyone else is watching I suggest you keep an eye on 10 Greek bond yields.  While yields spiked and fell back earlier this year they have begun creeping upwards.  If they continue upwards this will eventually precipitate another risk-off selloff in the markets.

The recent debt auctions by Greece have been met with lower bid / cover ratios and lower foreign participation. 

Non-domestic investors accounted for 80 percent of purchases of the first bond in January, 77 percent of the second, and 57 percent of the third. Reuters

While the Greek issue has slid back off the front burner it has not been resolved.  Abrose Evans-Pritchard has an interesting blog post about this very issue recently and his conversation with Carmen Reinhart regarding the slow motion trainwreck that is Greece:

But I digress. Professor Reinhart said Greece cannot hope to escape from its debt trap under the current EU austerity plan. The cure of devaluation is blocked by EMU membership. The restrictive monetary policy of the European Central Bank — a contraction of both M3 money and lending to firms, record low core inflation — must inevitably unleash deflationary forces in Club Med states already trapped in credit busts.
A country can in theory deflate its way back to competitiveness by an `internal devaluation’, ie relative wage cuts, in this case by 20pc to 25pc . . .

On a parting note, Professor Reinhart says the only budget deficit that matters in a crisis is the “cash deficit”, and this reached 16pc of GDP in Greece last year — not the 12.7pc officially registered under “accrual” accounting.
As countries near default, they typically find all kinds of way to disguise their troubles, by shifting debts between government agencies and delaying payments.
“In the end, everything comes out of the woodwork. You realize that it is even worse than you thought,” she said.

Greece is seriously behind the 8 ball and faces tough choices with no easy solution.  They can either drastically cut spending and face a severe recession, accept IMF/EU austerity and lending support, or even default and leave the Euro. I think the last option is least likely but I'm not making any bets for a positive outcome regardless of what happens.

Carmen Reinhart has a recent  interesting paper regarding country growth rates declining as debt/GDP levels rise.  I am currently reading the book she co wrote - This Time is Different and the paper is an excellent primer to the detailed description in the book. Read the paper and then consider buying the book.

The pragmatic capitalist also has some video by MIT professor Simon Johnson about the Greeks.

The locals are also fleeing the Greek financial system.  From the Telegraph:  (ht Zerohedge)

More than €3bn (£2.6bn) of deposits held by Greek households and companies left the country in February, while in January about €5bn of deposits were moved out, according to the latest figures available from the Bank of Greece.

Switzerland, the UK and Cyprus have been the largest recipients of the money, with the wealthiest Greeks looking to move their deposits to Swiss banks accounts to escape the more punitive tax measures many fear will be introduced in the wake of the country's economic crisis.

It's never good when the locals start pulling money out of the banks. . . .

Chinese lending update --- Is the peak in?

It's been a while since I last updated you on Chinese loan growth.  Some of that was due to the problems of getting the data out of China. I was finally able to extract the data and it appears the peak in lending is finally in.  March data comes out soon but considering the difficulties of updating this data I thought I'd get you up to date now.

Even with the 'record' lending in the first two months of 2010 both the trailing twelve month total of lending and year over year percent change of total loans outstanding have peaked.

As with every massive increase in lending it ends up on all sorts of places and turns out to be much more prevalent than commonly thought.  Elite Chinese Politics blog (Mr. Victor Shih) has some serious allegations of hidden debt in the local government investment entities that are the analog of the Special Investment Vehicles (SIV's) of our banking bust.  Here's some more reading on the matter at businessinder.com and here.  Of course this is difficult to 'prove' as the Chinese accounting books are not the most transparent but Mr. Shih's work should not be discounted out of hand.  I suggest you go to his blog and read the comments and rebuttals.  It's good stuff. . .

Home loan delinquencies keep rising

From Calculatedrisk  Home loan delinquency rates keep going up.   As I have mentioned before this may be one reason consumer spending keeps slowly rising as people are just not paying their home loans. . .  

All these late paying homes represent a serious overhang of 'shadow' inventory hinted at by several blogs and news outlets. As you can see some portions of the 'shadow' can be quantified.  When this data series finally starts falling we'll hopefully start to see an end of the inventory overhang .  I'm not holding my breath.

Running into the Great Firewall of China

I access data from public Chinese webservers for some of the data I present on this blog.  During the start of the Google/China controversy I began to notice some odd 'errors' as I attempted to access Chinese web servers.  Sometimes I get a simple 'hello!' from the server and nothing else, other times I get a 404 error and other times there is no problem.  

I wonder if the 'Great Firewall of China' as described by the WSJ is working on keeping away the outsiders as well? 

China generally doesn't tell its people when it is interfering with their Web access, unlike some other countries, such as Saudi Arabia, that give explanatory warning messages when users are denied access to forbidden sites.

Instead, China's filtering can look to users like a technical glitch—an error message in a user's browser that makes it seem like his connection to the Internet malfunctioned. Authorities don't discuss the methods or tools they use.

Anyone else running into the same issues? 
Here's one test I just ran:
http://www.pbc.gov.cn/  -- Returns 'hello'
 
http://www.pbc.gov.cn/english/ -- Gives me a 404 error (page not found)
 
Both of those sites have worked on and off for a week or so. If you do a Google search for "people's bank of china" these are the first links you get and the Chinese central bank is not an obscure web site I'm hitting.  There's others web sites that return the same errors... puzzling . . . .

[edit 04/05/10 11:20am pst: I was able to access the above web sites on Saturday and pull the data I was looking for.  Today, Monday, I was unable to do so and received the same error messages.  I'm going to get a packet sniffer and see if the error message / 'hello' comes from the same location as the normal data and see if the Great Fire Wall is somehow blocking me ]