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Pettis:
Recently the Economist had an article arguing that China is not overinvesting, it is, they claim, malinvesting. I am not sure that I fully understand the distinction, but I do not think it is meaningful in the context of this debate. That's what I said (I was not as tactful). More: So China has probably hit both constraints – capital is wasted, perhaps on an unprecedented scale, and the world is finding it increasingly difficult to absorb excess Chinese capacity. For all its past success China now needs urgently to abandon the development model because debt is rising furiously and at an unsustainable pace, and once China reaches its debt capacity limits, perhaps in four or five years, growth will come crashing down. Similar comments in Hugh Hendry's April Eclectica letter. Here is what I think the Chinese economy will look like over the coming years. Bloomberg is doing a five part series on Japan this month.
One take away is that Japan's gross debt is 230% of GDP, but its net debt is 113%. While not nearly as bad, it still leaves Japan second only to Italy in debt to gdp. Bloomberg articles reiterate many of the points made by Bass and Hendry in the Japan bear case. BTW, even though Kyle Bass lost a lot of money on the Japan trade in April, Hugh Hendry made money at it, propelling his fund to the best monthly performance in its history. This highlights the importance of transition dynamics and position management that Hendry discussed in his newsletter. Or perhaps luck? Trifecta. I like that word. Trifecta.I like that word. Trifecta.I like that word. Zero hedge quotes Hendry from the Milken Institute panel.: We have reached a profound point in economic history where the truth is unpalatable to the political class - and that truth is that the scale and magnitude of the problem is larger than their ability to respond - and it terrifies them. Concluding at 1:10:10 - "we are single-digit years away from the most profound market clearing moment" From the Eclectica Letter we get the global monetary cycle currently playing out.  Quotes Hugh Hendry.
Hugh Hendry via FT and Bloomberg.
“We might soon come to question whether China is going to be able to maintain its currency peg to the dollar,” he wrote.“When we look to at where the next market crisis will come from, we should be looking to China. There is a near consensus that China will supplant America this decade. We do not believe this.” Regarding the currency devaluation, I have been saying that to my students since China announced it would move to a managed peg. I said it on this blog 4 months ago. I have been a China skeptic for much longer :). According to Hendry, China's demise will export a crisis to Japan via Japanese corporates. Hendry says he is more bullish on US growth than most- well no one is perfect. Last month, I made several posts refering to the CDS positions that hedge fund managers Hugh Hendry and Kyle Bass took last year in Japan. I wonder whether these bets will get large enough that when Japan defaults, the entire global finanacial system will be taken down. It must be banks that are selling the CDS products. At any rate, someone is on the other side and when the dust settles - will counterparty risk once again destabilize the economy?
BTW, the Japanese Finance minister admits that they are "worse than Greece" with deficit over 10% and Debt to GDP over 230%. According to a top performing hedge fund manager, Hugh Hendry. He also believes China is in for a hard landing.
."The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it's proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can't. That's why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I'm speculating that hyperdeflation happens before hyperinflation. What's the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that—and Europe—the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can't have all your assets in real assets, in case we get that hyperdeflation event." On Greece: "As for Greece, the end game will be the Greeks rejecting austerity. The euro is nothing but a gold standard lacking flexibility, and all the onus is on private citizens to take the pain. Eventually, a Greek politician will say, 'Vote for me, and I'll get us out of this system." A man after my own heart. |
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