Are Central Banks Doing Their Jobs or They Are Done?

TopCools Editorial, 9am, May 4, 2016
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It has been amazing to see all the central banks have been so generously supporting their governments or their party (Janet Yellen is Democratic, same as Obama and Hilary). Their thinking is that: if they set very low interest rate, the cost of lending for enterprises are lowers and the general businesses are more likely to borrow, expand and hire. More amazing is that: after 2008 financial crisis, global debt leverage continue to increase instead of deleverage and many are go to extreme: negative interest rate. I think most forget debt and M2 are printing: spending future wealth before they are created. Central banks’ action cause more gigantic debt, thus diminish future growth, as most investment banks have already expressed this point.

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Excluding US deleverage, most EMs are doing credit credit binge due to low borrow cost of dollar. China is one of the extremes with total debt at 282% according to McKinsey. That is about 28 trillion USD of the future wealth are spent before those wealth are created by China. And Significant amount(~50%) of these debt are borrowed by local government or its investment vehicles, and use land sales as collateral, which may drop to zero as housing slump. The bigger problem: local chief bankers are often appointed or reported to local government officials, most local officials are not even thinking about paying back to banks as both government and banks are national entities. and huge number of official have carried money legally and illegally immigrated abroad in droves (tens of thousands, Search Google to find out how many of them China gov is pursuing) and the result will be much worse than Greece where most banks are private.

The latest stimulus and surge of housing price in China has many thinking China is a less risk may miss a point: when a currency has strong devaluation pressure even under tight currency control, more printing, M2, high housing price means more devaluation pressure to currency and more exodus (Housing price surge means more wealth transfer from society to real-estate tycoons) and business people are more likely move money abroad (statistics indicates about ~70% large private business people acquire foreign passports in China).

Our point is that: Everything has pretty much reach expanding limits and leverage is much bigger than any crisis in history: even if global central banks want go to negative interest rate to support their government/parties, there is hardly rooms, and China has reached its limits as Shenzhen house price already drop 6% from the late peak and Hongkong housing already slump. Maybe its time to leave the party when it is still warm. Especially May and summer’s trading activity is light and traditionally has been good time for shorter to swing in. If there is a certainty of a cliff, why wait until you experience it? Fed or central banks are done with their job and they can no longer do much about it. As long as the streets pull the rug, purchase power will tanks and nobody can do anything about it.

With Bill Gross, George Soros, Robert Shiller all sounding alarm, maybe it is wise to listen. Especially when China reach its peak debt defaults in the next few months and dollar will strengthen and CNY will again under pressure.

If you think Alibaba still have increase in profit and revenue, you need to check how much more they spend and how government lately roughly forbidden Chinese people to purchase abroad.

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Disclaimer: We are not interested in politics other than profit from political event.
contact: editor@topcools.com

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