I will be on Larry Kudlow’s 7 PM Show (First Segment): Here are my notes
March 11th, 2010By David Goldman
Here are the notes I sent to the CNBC producers for tonight’s show:
On Corporate Bond Spreads:
1) Corporate spreads are at post-collapse lows, but mortgage spreads are at all-time lows. There actually is an implosion of spread assets outstanding: the total universe of non-Treasury securities fell by 1% during 2009, compared to a gain of 8% during 2007.
2) Much of this is due to massive purchases of mortgage-backed securities by the Fed, which has bought $1 trillion worth of MBS since January 2009
3) Total bank credit has also fallen by nearly $600 billion since September 2009 and continues to shrink at an unprecedented rate
4) Corporations are hoarding cash rather than investing so credit quality has improved in some cases. S&P’s upgrade to downgrade ratio accordingly improved:
The improvement in balance sheets has occurred much faster than the recovery in profits:
This reflects cash hoarding. JP Morgan reports that non-financial corporations held $708 billion in cash at the end of 2009, compared to about $500 billion between 2004 and 2008.
5) Savings are increasing (personal savings running at 3% to 4% from 0% in 2008) so there is greater demand for securities
6) As the baby boomers retire savings demand will continue
Conclusion: a combination of massive Federal Reserve intervention and a collapse in credit demand has reduced the total supply of spread assets by previously unseen margins just as the demand for savings instruments has risen.
On China:
1) The Chinese economy is doing well. The headline numbers are strong. There is some indication of overheating. Many manufacturing companies in Guangdong, for example, report labor shortages following the Chinese New Year as migratory workers did not return from their vacations. This reflects the success of the Chinese government’s efforts to push capital towards the interior of the country.
2) China’s banking system is a blunt instrument. The country lacks credit ratings, consumer credit reports, and all the other mechanisms that banks use to evaluate credit quality. The government responded to the 2009 crisis by ordering the banks to lend. Because the banking system lacks the infrastructure to evaluate credit (and we have seen that banks can get into enormous trouble even with all the credidt information in the world), the result is a dangerous buildup of bad credits.
3) Both because of overheating and inflation risk, and the buildup of nonperforming loans on banks’ balance sheets, the government will turn the spigot off.
4) China’s economy will continue to grow but it simply lacks the infrastructure and financial mechanisms to grow at a rate sufficient to move the needle in the US economy.
5) Part of the manufacturing sector in the US will continue to benefit from rising export demand in China but the overall impact on the US economy will be limited (manufacturing is only 15% of total employment).
March 12th, 2010 at 8:24 am
It’s difficult to measure the effect of Shenzhen’s sudden housing bubble burst a couple years ago, then the average market price was halved. Banks was rumoured to have NPL to the tune of a few tens of billion Yuan, but that was never substantiated by the banks. Shenzhen Development Bank’s profit was squeezed 85% by loan loss reserves.
The government has been more cautious with the housing bubble since 2009. It has so far been successful in cutting down the volume of transactions since Q3 2009. Other than a surge due to expiration of transaction tax and fee holidays at the end of 2009, Q1 2010 seemed to continued the path of declining transaction volume. With M1 surging to 37% y-o-y in January, everyone is holding his breathe for market activities in March.
But the real concern for the banks in recent months has been the local government borrowing. It’s reported that the local governments and their businesses have raised some 5 trillion yuans in loan from the banks during the ‘economic stimulus’ Great Leap of 2009. CBRC belately issued an order disqualifying local government ‘guarantees’ as a ground for approving lending. Between loans and all other sources of revenues, the Chinese local governments collectively spent a staggering 13 - 14 trillion yuan in 2009 (China’s 2009 total GDP was 33 trillion yuan).
There have got to be consequences.
March 12th, 2010 at 12:22 pm
Here is the link:
http://www.cnbc.com/id/15840232?video=1438374182&play=1