In late April, billionaire financier George Soros sounded the “Crash” alarm, warning the world that the $30 trillion Chinese debt bubble is ready to burst.
“Stimulus can buy you additional time, but it makes the problem that much bigger. That’s where we are,” Soros said.
He’s not alone. Billionaire real-estate tycoon Sam Zell predicted the US will enter into a recession in the next year. “I’m not being pessimistic, I’m being a realist,” Zell said at a real estate conference April 19 in New York.
What Soros and Zell are predicting add up to The Panic of 2016 we had forecast. Yes, equity markets have rebounded from the worst start of a new year in the history of the Dow, and the very reasons for the rebound are why Soros, Zell and I are predicting economic turbulence: Central banks’ cheap-money-pumping schemes.
“Stimulus can buy you additional time,” said Soros, referring to the Chinese construction and real-estate boom “fueled by credit growth and eventually unsustainable extension of credit.”
Just days before Soros sounded the crash alarm, world equity markets were cheering China’s better-than-expected March trade data, citing the news as evidence for continued economic growth. “Exports revive Beijing’s flagging fortunes,” trumpeted the Financial Times following the report, belittling those who may either question the accuracy of the data, understand what drove the exports and/or why the numbers came in above expectations. “Trade figures help dispel investors’ negative views about the country’s economy… data for March add to growing evidence that the extreme gloom of a few weeks ago was misplaced,” FT declared (14 April 2016).
A Reuters poll of economists predicted a 2.5 percent annual rise for exports and a 10.2 percent decline for imports. But measured in dollars, exports rose 11.5 percent on-year, recovering from a 25.4 percent decline in February. Imports fell 7.6 percent, unchanged from February.
However, key among the exports boosting the numbers was a 30 percent increase of Chinese steel flooding the already oversaturated world market. Indeed, with demand down globally last year and continuing to fall — and with steel plants from the UK to US and from Australia to Azerbaijan closing, and tens of thousands jobs lost — China, producers of half the world’s steel, is being accused of dumping it on the market for less than it costs to produce and export.
Indeed, so contentious has the dumping issue become that in the US, following yet another quarter of dismal results, U.S. Steel Corp. filed a complaint with the International Trade Commission demanding penalties on Chinese steel imports that could include a total ban on imports into the US.
And, as Soros noted — but barely reported by the business media cheering China’s Gross Domestic Product gain of 6.7 percent in the first quarter (the slowest pace of expansion in seven years) — like dumping steel to boost exports, Chinese banks continue to dump cheap money to stimulate the slowing economy.
Commenting on a Reuters report that Chinese banks made 1.37 trillion yuan ($211 billion) in new local-currency loans in March, while social financing rose 2.4 trillion yuan ($369.38 billion) that month, Soros said, “It’s a warning sign because it shows how much more credit is needed to stop a decline.”
“Credit?” What about debt? According to the Bank of International Settlements, China’s debt-to-GDP ratio is 249 percent… up from 150 percent a decade ago. And according to Financial Times calculations, “New borrowing rose by Rmb6.2tn in the first three-month surge on record and more than 50 percent ahead of last year’s pace.” And according to the International Monetary Fund, some $1.3 trillion in risky Chinese corporate debt could trigger losses equal to 7 percent of the nation’s economic output.
BACK IN THE STATES
Sam Zell has similarly warned that the Federal Reserve’s quantitative easing and zero/low interest-rate policy have flooded the marketplace with excess capital that has heightened risky speculation, that too much money is chasing too few opportunities. Commenting on the commercial/residential building boom and sky-high prices in hot markets across the country, Zell said, “If somebody needs a bell ringing to figure out that the real-estate market is pretty frothy right now, then I’m in the business of selling hearing aids.”
In Miami, for example, condo transactions in the fourth quarter declined nearly 20 percent from a year earlier, inventory jumped by nearly a third and median sales price slipped 6.6 percent, according to a report by the appraisal firm Miller Samuel Inc.
In the sizzling New York City real-estate market, sales, especially at the high end, have plateaued, according to a Real Deal report that some developers are dividing larger apartments into smaller units to bring in buyers at lower price points. And, according to UrbanDigs.com, the numbers of contracts signed in the first two months of 2016 fell more than 20 percent from a year earlier, the lowest levels since 2009.
Nationwide, according to the National Association of Realtors, existing-home sales were down 7.1 percent in February while rising modestly (1.5 percent) in all four major regions last month, compared to March 2015. However, new home sales fell 1.5 percent for the month.
On the commercial side, sales of offices, apartment blocks, hotels and other commercial buildings registered their sharpest fall since The Panic of ’08, plummeting 46 percent in February, according to Real Capital Analytics.
“The US economy is now in the ninth inning,” warned Zell.
Indeed, it’s the cheap-money flows of stock buybacks and merger-and-acquisition activity that have juiced the overvalued equity markets and inflated the bulging real-estate bubble. In America, the six largest banks suffered their steepest decline in quarterly revenues since 2011 — and it gets much worse. It’s greater than Soros’ warning of a crashing China or Zell’s focused real-estate downturn and recession in America: It’s global.
In Singapore, for example, prices for central-business-district prime space fell 14 percent in 2015, and are expected to fall another 5.4 percent this year, according to Daiwa Securities Co. It also estimates vacancy rates in the central business district will rise to nearly 10 percent, double the 2015 rate.
In April, the London-based Grosvenor Group, a major UK real-estate firm, warned in its annual report that “it is only a matter of time” that the global real-estate boom would end and property values would decline.
DOUBLE-DOWN ON FAILURE
In Europe, despite
the European Central Bank’s negative 0.4 percent money-market rates and scheme of 80 billion euros per month of government and corporate bond-buying, the media cheered the tepid 2.2 percent annualized GDP growth in the first quarter as proof that “Eurozone recovers lost ground.”
However, considering the lack of dynamic expansion, the general consensus among economists and analysts is that the eurozone will expand at a 1.6 percent annual rate, mirroring last year’s tepid GDP.
In defense of his inconceivable negative-interest rate and quantitative-easing policies, European Central Bank President Mario Draghi, while admitting that euro area growth had been weak, vowed to double-down on his failure. “We continue to expect them (rates) to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases,” he said in late April.
Lashing out at German critics of his negative interest-rate policies that they say hurts savers, retirees and pensioners, and are harmful to small banks that rely on interest income for profits and life insurance companies that guarantee minimum returns on investment, Draghi proclaimed the law was on his side. “We have a mandate to preserve price stability for the whole of the eurozone, not only for Germany,” he said. “We obey the law, not the politicians, because we are independent, as stated by the law.”
“The law?” Could it have possibly been the 13th Commandment that Moses may have dropped on his way down the mountain? Or was it a few lines of bullshit made up by the gang of central bankers who anointed themselves “independent” rulers of the monetary universe?
“With rare exceptions,” Draghi dragged on, “monetary policy has been the only policy in the last four years to support growth.”
Growth of what? As David Stockman, former Reagan White House budget director noted, Draghi’s policies have inflated “the mother of all bond bubbles,” and there has been no real recovery. “Has Draghi not noticed that while bank loans to households and operating businesses have barely blipped upwards, there has been an explosion of high yield bond issuance?” wrote Stockman. “Never mind that almost to the last euro the proceeds have used to fund M&A rollups, buyouts and other financial engineering schemes, not an expansion of productive assets.”
Commenting on Draghi’s policy, Societe Generale strategist Albert Edwards said, “When Mario Draghi says that the ECB’s policy of printing money and negative interest rates was working, I feel utterly depressed.”
In regard to global central-bank policy in total, Edwards said, “I have not one scintilla of doubt that these central bankers will destroy the enfeebled world economy with their clumsy interventions and that political chaos will be the ugly result. The only people who will benefit are not investors, but anarchists who will embrace with delight the resulting chaos these policies will bring.”
What depresses Edwards now was of major concern to us several years ago, beginning with the Federal Reserve’s zero interest-rate policy; George W. Bush’s anti-capitalist “too big to fail” bank bailouts; his $700 billion Troubled Asset Relief Program; and Barack Obama’s nearly-trillion-dollar American Recovery and Reinvestment Act.
In our 15 September 2009 “Trend Alert: Cover-up, not recovery,” we wrote, “What is ballyhooed as ‘recovery’ is nothing more than a cover-up, papering over historically unprecedented financial losses with historically unprecedented trillions of dollars spun out of thin air, backed by nothing, and producing practically nothing. And while President Obama asserts that his policies signal a “return to normalcy,” the Fed policy of flooding the market with phantom money — meant to kick off another borrowing and spending spree — is… neither normal nor healthy.”
Nomi Prins, author of “All the Presidents’ Bankers,” also was on top of this trend and what it means. She provides Trends Journal subscribers an in-depth analysis of what to expect next (see page 11).
PANIC OF 2016
The Panic of 2016 we predict goes beyond troubled banking, frothy real estate, over-speculated equity markets and slumping commodity prices. It’s Globalnomic®.
For example, consider commodity-rich countries (Nigeria, Venezuela, Brazil, South Africa, Saudi Arabia, etc.) reliant on strong global demand and high prices for the raw materials they sell abroad to support their GDP. As the quantity and prices for what they sell falls, as production declines, factories close, jobs are lost and governments raise taxes to cover the losses… civil unrest and political strife will dramatically intensify.
In addition, the steeper the economic decline, the higher the level of social unrest and the more political instability increases, the greater the flows out of nations in turmoil by migrants in search of safe-haven, richer lands of hopeful opportunities.
Unemployed back home and unwelcome when they reach foreign shores, the consequences of the “Human Waves” trend — identified as one of our Top Trends for 2016 — will dramatically alter the social and political landscape within the countries they seek refuge. (See Human Waves, 2016 Winter Trends Journal, p. 13). TJ