The New CS Board

[jumanji0881]

Doug Noland -

My comment: Noland gives a potential scenario for the bursting of the Granddaddy of all bubbles in which China's debt implodes and once that happens the dominoes in the EU, Japan, and US fall. The CBs are at the zero bound and they would have to print money like crazy and even that may not be enough. We are getting close.


Weekly Commentary: Unsound Finance : http://creditbubblebulletin.blogspot.com/2017/04/weekly-commentary-unsound-finance.html

Excerpts:
It’s now been over eight years analyzing the global government finance Bubble – the “Granddaddy of All Bubbles.”

There’s an interesting dynamic that I’ve lived through a few times now. These Bubbles inflate for years – much longer than would seem reasonably possible. And the longer they survive the more dismissive conventional analysts (and the business media) become to Bubble analysis. At the same time, over time as a Bubble gains momentum there becomes overwhelming evidence and analytical support for the Bubble view. My feelings these days recall 1999 and 2007 experiences: I have great conviction in the analysis, while conventional analysis turns increasingly bullish and dismissive of what have become increasingly conspicuous (and precarious) market distortions and excesses.

April 23 – Wall Street Journal (Carolyn Cui, Ian Talley and Ben Eisen): “Emerging-market companies are binging on U.S. dollar debt and that could become a source of trouble in some parts of the world if growth slows, interest rates rise or the dollar resumes its ascent. Governments and companies in the developing world sold $179 billion in dollar-denominated debt in the first quarter, the most dollar debt ever raised in the first quarter and more than double the amount raised during the same period last year, according to… Dealogic. In all, U.S. dollar debt stood at $3.6 trillion in emerging markets through the third quarter of 2016, an all-time high... Including local currency debt, and emerging-market companies have increased their borrowing by a staggering $17 trillion since 2008, according to the Institute of International Finance.”

I have argued for a while now that EM Finance is Unsound. Over the past year, Chinese reflation coupled with global QE spurred a major short squeeze followed by an onslaught of (performance-chasing) EM inflows. As always, EM economies show alluring potential – so long as international inflows boost asset prices, lending and investment. To have EM binging again on dollar-denominated debt should be a troubling development for anyone paying attention.

My opening paragraph noted that we live in the age of derivatives. To what extent these “carry trades,” and leveraged speculation more generally, are accomplished through derivative transactions is an important issue. Not only would such imbedded leverage create latent fragilities, it also ensures transparency issues. There is ample evidence that huge amounts of finance have exited Europe, Japan, China and EM over recent years to participate in king dollar. Yet I believe such flows are not adequately reflected in Fed data. Could the explanation be that the proliferation of derivative strategies has distorted traditional flow data?

And it is not a totally crazy notion to ponder growth faltering concurrent with a rise in Treasury borrowing costs. Such a scenario would likely see a bursting of assets Bubbles and a resulting collapse in revenues throughout the government sector. There’s as well all the entitlements and unfunded pension plans. When things turn sour globally, we’ll be spending a lot more on national defense. Unsound Finance always comes back to bite. The worrying part is that the world has never experienced anything comparable to the past 30 years.