Credit deflation and the reflation cycle to come (part 2)

[Hancock]

16 minutes ago, ThoughtCriminal said:

Fucking hell H, steady on. What if I had feelings? 😂

 

If you had feelings you'd not have made the move from HPC!

But after my visit south, if it was the choice of renting some shite terrace for £1300PCM in the south/buying it for £350k; or getting a 3 bed detached house in the Durham to Smoggyland area for circa £180k then the latter has to be the better option for a simple and easier life.

(i do prefer to work with Smoggy's than people from Newcastle area, seem slightly less up themselves, though i'd never admit it in public)

[sancho panza]

 

 

On 31/05/2021 at 23:08, Majorpain said:

In a nutshell China is getting old before its getting rich, its interesting reading from the article how many people are priced out of having children.  How Western!

Robots are good at many things, but it will be a long time till they are looking after the elderly.  It will probably happen in my lifetime, but not quickly enough for the CCP.

I agree,I think China has a huge problem demogrpahically.Paul Hodges has written extensively on it.China has substantial problems inbound

https://www.icis.com/chemicals-and-the-economy/2021/03/chinas-dual-circulation-policy-aims-to-reduce-debt-reliance/

China is usually the case study for this analysis, as the chart confirms. It shows the rise in debt from 2002, when official data begins, versus the rise in debt. One would hope that the borrowing would have had a multiplier impact, creating value. But in reality:

• Debt grew from $2tn in 2002 to $39tn in 2020, as measured by Total Social Financing
• GDP grew from $1.5tn to $13.2tn, according to the National Bureau of Statistics

Even if we leave aside the problems associated with China’s GDP data – uniquely for a major economy, it is reported almost immediately  and never revised – we still face one key issue.  Each dollar of debt fails to increase GDP by the same amount.

In the 2002-2008 period, each dollar of debt only created $0.41 of GDP growth. Since then, each dollar has created only $0.45c of growth. So the value created by each dollar is less than half the cost of the debt created.

THE SPECULATIVE REAL ESTATE BUBBLE IS HARD TO CONTROL

I’ve been updating on the bubble for as long as I’ve been writing this blog. And like all speculative markets, it simply gets more and more insane.

I featured this “egg house” as long ago as December 2010 as an example of the way that China’s gender imbalance (117 boys to every 100 girls) gives prospective father-in-laws great leverage when assessing whether the prospective husband can properly support their daughter.

The housing market is around 25% of GDP, and has never been known to fall. 

LOCAL GOVERNMENT DEBT IS OUT OF CONTROL

A long and detailed analysis in China’s financial paper, Caixin, highlights Beijing’s latest attempt to bring local government debt under control.  It notes that:

“A report by Bank of China Ltd. in June said that the hidden debt of local governments likely amounted to Rmb49.3tn ($7.6tn) at the end of 2019, equivalent to nearly half of China’s GDP in 2019.”

 

 

https://www.icis.com/asian-chemical-connections/2019/02/chinas-fall-in-births-and-economic-decline-may-be-impossible-to-fix/

China’s economic success has been largely built on a surplus of young workers willing to move from rural to urban areas to work in factories making very cost competitive goods for export to the West. This surplus has now disappeared and is becoming an ever-growing deficit of young people.

China is in danger of becoming old before it is rich. Despite tremendous economic growth over the last 30 years, it remains a poor country relative to the West. China’s average per capita income was just $8,827 in 2017 versus $59,532 in the US, according to the World Bank. The IMF has warned that China’s pension and healthcare liabilities could rise to 100% of its GDP.

Between 2015 and 2040, China’s population aged 50 and over will increase by roughly 250m as the population under 50 falls by the same amount. During the same years the 15-29 age group – which across all modern societies has the highest education and is the most IT and tech savvy – will shrink by 75m.

Equally as bad will be the fall in the 30-49 age group during this same time frame. It is forecast to fall by a quarter or by more than 100m. This is the generation that tends to be the most innovative and entrepreneurial.

The only cohort that will grow in size will be the 50-64 age group and those over 64. In 2015-2020, the 65+ population will jump by almost 150% – from 135m to close to 340m.

On 01/06/2021 at 05:13, Barnsey said:

https://www.theguardian.com/business/2021/may/31/uk-growth-upgraded-but-oecd-warns-of-deepest-economic-scar-in-g7-brexit-covid-19

Key part:

The OECD examined how much potential output has been lost because of the coronavirus crisis, by comparing the latest projections for national income levels in 2025 with pre-pandemic forecasts.

It found that Japan, Canada and the US will only suffer limited scarring, with the US economy expected to be larger than previously forecast in four years’ time because of massive government stimulus.

Where the U.S. leads, the ROW follows...

 

The US GDP is only growing becuase it's debts are growing faster.Context is something modern journo's don't seem to do.

[ThoughtCriminal]

3 minutes ago, Hancock said:

If you had feelings you'd not have made the move from HPC!

But after my visit south, if it was the choice of renting some shite terrace for £1300PCM in the south/buying it for £350k; or getting a 3 bed detached house in the Durham to Smoggyland area for circa £180k then the latter has to be the better option for a simple and easier life. 

True! 

 

You ever looked at Thirsk area? Lovely little place and good value for north Yorkshire. 

 

Good transport links too. 

[planit]

3 hours ago, JMD said:

Yes, I've written before that the 'war' analogy works for me (to 'help' focus my own personal investment macro thinking, etc). But context they say is everything. Ie Do you think the political policy ramping is for control/social reset reasons, or for inflation-rip/economic reset reasons? Or maybe both/neither/other? 

Neither, I think the political class are spineless idiots all acting in their own interests and they take every action on a

'will this make me look better/worse in the polls' basis.

Every idiot acting in their own interests has interesting outcomes, like a school of fish avoiding a shark. The individual effects are very small but the outcome is very visible.

 

Edit: to make clear that the political class don't care about the environment and no one cares enough about their personal carbon footprint to actually impact their lives adversely. So the politicians are just making decisions to look good and avoid negativity. 

[sancho panza]

 

On 01/06/2021 at 23:39, DurhamBorn said:

Its really difficult because a lot of capital will be pulled from the financial system for spending and investment as things open.With the repo situation its crucial the governments keep fiscal injections going for a good few months yet.I think a BK that takes everything down is getting less likely,so it could be a quick 15% off some areas as others crash and a rebound in inflation sectors.However if the BK came from flaws in the derivative markets it could still take everything down.

Im trying to look at my roadmap across sectors and where i see them in 2028/30 and for that i see a treble including divis as likely in most of our areas.

The banks balance sheets in the US and UK are fine,Europe is a problem.I think a reflation is certain now though,and looking at the structure of the recovery and the political situation the energy complex and inflation are now in a feedback loop.Higher energy prices,higher inflation,higher rates,less green investment,oil and gas higher and higher.Im not sure of the structure of green projects debt and if it needs rolling over or if it amoratises over the loan,but if much needs rolling over they will be loss making mid cycle.

It needs remembering as well inflation and more energy inflation means building renewables is going to get a lot more expensive,apart from for big oilies.They will have exploding cash flow.

The liquidity is fast approaching the level where it will eat away government and private debt,so if we do see big falls in some areas its likely a direct transfer to something else.

 

Before I begin rambling,I'd like to define a BK (to me) as a huge generational deflationary wave in the credit markets.

There are a few caveats when I predict a BK(and I do) and that's that whilst one may not be apparent from looking at nominal GDP if fiscal stimulus is added immediately and to good effect,it will still have an effect in terms of structural unemployment as the stimulus is put through govt rather than the banks.

In terms of the banks,I'm not sure the UK banks are fine.I think the US faces a different set os issues given that fannie and freddie are such a big part of their mortgage lending bubble.The UK banking sector jsut doesn't have that fall guy in place to tkae the biggest hit.

If we take HSBC's msot recent set of accounts as an example.(Let's remember they get something like 60% of their profits from Hong Kong.)

Balance sheet gives shareholder equity at 6.5% of assets.But that comes with a warning about risk weighting assets using IRB approach which is based on their own data rather than the standardized approach used by smaller banks(and likely less skewed by sample bias)

If we dig a little deeper.Goodwill and intangibles=$20bn,

net laons and other assets $2,417,846mn 2020 up from $2,103,091mn 2017 so the increase is nearly one and a half times equity.

deposits have grown to $1,765,749mn in 2020 from $1,517,271mn an increase of $248,478 mn or one and a quarter times.

long story short it won't take much of a hit to HK/UK home prices/CRE or a drop in deposits and HSBC is heading up rights issue creek.

if we take the preferred measure of capital adequacy from Prof Kevin Dowd& Dean Buckner  then HSBC's capital ratio is

$124bn/$2984bn=4.1%

and HSBC is probably the pick of the bunch.

from May 20

http://eumaeus.org/wordp/wp-content/uploads/2020/05/Can UK banks pass the COVID-19 stress test 6 May 2020.pdf

The core metrics of the Big Five UK banks have deteriorated sharply since the New Year, and even more since the end of2006, i.e., the eve of the Global Financial Crisis. Their market capitalisation is now £140.6billion, down 61% since December 2006; their average price-to-book ratio is 39.2%, down from 255% at end 2006; their average capital ratio, defined as market capitalisation divided by total assets, is 2.3%, down from 11.2% at the end of 2006; their corresponding leverage levels are 43.3, up from 8.9 (end 2006). By these metrics, UK banks have much lower capital ratios and their leverage is nearly 5 times what it was going into the previous crisis.

 

 

 

On 02/06/2021 at 13:16, DurhamBorn said:

Where people go wrong with a reflation cycle,is they think there is going to be a big recession and mass unemployment.However this isnt how inflation does its work.CBs and governments are doing everything they can to stop unempolyment with massive fiscal interventions.This isnt about 15% of the workforce losing their jobs,its about 50% of the workforce seeing their wages and savings inflated away.Reflation cycles favour assets over services and brain jobs.

So where the real damage will be done is to service industry workers spending power,and here i mean the middle class range of jobs upwards.

Employers in lots of sectors will have to pay much more,and service sector jobs will pay more,just not as much as inflation thats hitting them on every input cost.

 

As above DB,I jsut don't see a way we can get through the next ten years without a number of zombie companies and banks going to the wall.I've been a deflationist for 15 years at least now and I still hold to that.Where I've been persuaded to alter course is in this transfer from bank stimulus to govt stimulus and the inflation that will result.I was listening to an excellent jeff Snyder interview on Macrovoices the other day and whislt I hear his argumetns,I think a lot of deflationistas aren't getting their head around the size of the hole we're in and are relying on govt utilising the same stimulus methods psot BK as they did post 2008.

Overall small headline drops in GDP could mask a massive sectoral shift.Personally,I think we're headed for a junk bond collaspe/CRE collapse/Rresi collapse and all the resultant bail outs that will be needed to keep voters in their homes.Further zombifying an already zombified economy.

The worst of all worlds is where we get defaltionary collapse and rising prices.I feel too many deflationistas eg Snyder/Rosenberg think that credit deflation and price inflation are mutually exclusive.They're not imho

[sancho panza]

22 hours ago, Lightscribe said:

One look at any inflation article on the FT comments section and most think house prices will continue to rise with inflation. If salaries kept up with inflation too you could argue that maybe the case.

I look at house values as ‘growth’ assets like the FAANGs. They’ve risen into sky high bubble territory with QE since 2008 with asset inflation in a low interest rate environment. But rising interest rates will change the whole ball game, just the same as we’re investing in ‘value’ commodity stocks that will (hopefully) outperform inflation and see the market following shifting allocation away the under-inflation performing ‘growth’ sector that’s already in a bubble.

The housing market is linked to debt. There’s 2.5 million BTL landlords of which 60% are 55 years or older owning multiple properties and have been investing to seek a return in a low interest rate environment. Most will have paid off their own property, but with BTL mortgages if the tide turns their own house would be up for collateral.

The demographic is also a ticking time bomb, as the older generation die out there will be an oversupply of 3/4/5 bed houses. The younger generation are settling down far later in life, due to shouldering the costs of 40 years of disinflation. High housing costs, student debts, minimal savings mean they’re not having kids like their parents would have. Why would they need a 4 bedroom house, with no hope of paying it off on a 35/40 year mortgage, especially with the costs of running it rising with inflation and possible property levy or land value tax?

Rising interest rates will also mean that mortgages rates will be going up and will become harder to fill the requirements to borrow. The myth is that it’s supply and demand behind it all when it’s entirely down to the banks willingness to lend. People will happily borrow themselves into millions of debt if they could, but in an inflationary environment the costs will become increasingly harder to meet the repayments.

The unwind could happen in two ways. Either with declining annual housing value statistics it causes a mass rush for the exits (could also at the same time of the BK). Or a slow stagflation and gradual decline in prices not keeping up with inflation and demand decreasing. Of course this will be area dependant at first, but what happens in the London then ripples out eventually.

London has relatively flatlined now for years, most new build flats have already gone into negative equity with a backlog of cladding and fire safety requirements, and on top of all that it’s lost a million in population which may never come back with WFH. That in itself will have a knock on effect to coffee shops, restaurants and the service industry dependant on traffic.

The annual statistics had already begun to turn at the start of the pandemic, but the stamp duty prop made sure to skew statistics up the higher end nationally and staved off the inevitable, whilst the FTB was priced out even further. With that link now gone it’s only now a matter of time.

I personally think it will be panic stations due to the sheer amount of this countries finances tied up in property. If they see rising interest rates, most will want to sell up to put it in the bank which will be far easier returns than the stress of evicting tenants which will be instilled in their mind fresh from the pandemic.

 

This is a super explanation and I'd agree with msot of it @Noallegiance. The only thing I'd emphasize is the fragile nature of many UK banks balance sheets,issues with risk weighting models etc.A mortgage crunch/downward price spiral is the msot likely outcome here and as per my psot on HSBC,the UK banks are in worse shape than 2006 mainly because they never had to pay the price for being overleveraged in 2006

15 hours ago, wherebee said:

Anybody predicting a fall in oil demand from 100 to 25 is smoking crack and has drunk the cool aid.  Will China stop buying oil?  Will India?  Will Indonesia?  Will Malaysia?  Will Vietnam and Pakistan? You're looking at almost half the worlds population in that circle.  Will they fuck

The pressure will exist in the west for oil companies to to green stuff, but the oil demand will not go away (unless, as I say before, we have a new energy source/tech uncovered - cue the aliens on the other thread destroying my oilies investments).

As an example, I got this re Woodside:

• Australian operator Woodside Petroleum is looking to develop a large-scale solar project in Western Australia that could provide power for its Pluto liquefied natural gas development.
• The proposed Woodside Power Project would consist of roughly 210,000 solar panels, which the oil and gas operator claimed would make it one of the largest solar projects in Western Australia.
• Woodside is also evaluating supplying a further 50MW to Perdaman's proposed urea facility on the Burrup Peninsula, which will produce blue ammonia from natural gas.
• Woodside acting chief executive Meg O'Neill said the proposed Woodside Power Project was part of the company's vision for large-scale supply of renewable energy to existing and future industry on the Burrup Peninsula.
• Woodside stated Thursday it had already carried out a range of environmental, geotechnical and engineering studies for the proposed power project and was now progressing key stakeholder consultations ahead of seeking regulatory approvals.

I think the otehr option for the likes of Shell is to delist from countries like hooland and find a more receptive jurisdiction to home yourself in.

 

[sancho panza]

4 minutes ago, Cattle Prod said:

One thing I noticed about both Snyder and Rosenberg is recency bias. They are not looking back far enough. "QE1, 2,3,4 didn't work so why would it now?" or "Velocity of money has been dropping for the last ten years" or "Japan". They aren't looking at the 40s or even the 70s. I try and listen to them to check my own bias, but I find it a narrow view.

Me too.I was too focused on what the banks would/could do/aggregate demand and it's mainly thanks to @DurhamBorn that I've been able to learn about the possiblity of govt stimulus replacing credit demand.

I'm still a credit deflationist,but I now think we'll see rising prices (there'll be the odd Hunter freak pullback) in msot commodities and anyhting bought with cash eg food.Prices down in things bought with credit eg housing.

[Loki]

I am confused why the DXY has rocketed on the day Russia announced it is selling its dollar assets - does this mean there was a lot of demand for them?

Just trying to understand, I am not concerned.

[DurhamBorn]

1 hour ago, sancho panza said:

Me too.I was too focused on what the banks would/could do/aggregate demand and it's mainly thanks to @DurhamBorn that I've been able to learn about the possiblity of govt stimulus replacing credit demand.

I'm still a credit deflationist,but I now think we'll see rising prices (there'll be the odd Hunter freak pullback) in msot commodities and anyhting bought with cash eg food.Prices down in things bought with credit eg housing.

I think thats right,governments replacing other forms of credit was what most people missed.I always learned that it was the fear of unemployment that fired up the 70s inflation and that the oil shock and unions etc were simply after affects for all the liquidity.Its striking how history is repeating here.Governments fear of unemployment and another looming energy crisis.It was obvious credit would fall,but its interesting to see why and how.The repo market is saying their is nobody solvent to lend it too for a positive return.So governments grow the economy or nobody does,at least for  while longer.

 

[Hancock]

1 minute ago, DurhamBorn said:

.Governments fear of unemployment

That is true.

https://www.independent.co.uk/news/uk/politics/furlough-extension-uk-michael-gove-b1858798.html

[Loki]

Why did they import a load of labour from Eastern Europe if they're scared of unemployment?  

[Castlevania]

2 hours ago, Loki said:

I am confused why the DXY has rocketed on the day Russia announced it is selling its dollar assets - does this mean there was a lot of demand for them?

Just trying to understand, I am not concerned.

Better than expected economic data was released.

[Loki]

2 minutes ago, Castlevania said:

Better than expected economic data was released.

That makes sense, thank you

[DurhamBorn]

43 minutes ago, Loki said:

Why did they import a load of labour from Eastern Europe if they're scared of unemployment?  

Because 30% of our population wont work because welfare is so high.New Labour decided to import new workers instead of deal with the above fact.Brown hoodwinked Blair on it with tax credits.My Aldi had 5 Polish girls working there,20 yards away is an estate with over 200 single cough cough mothers on benefits.Labour couldnt get them 20 yards so brough in people 1000 miles instead.

House in my close sold a few months ago.Woman two doors down her sister bought it.She is renting it to the woman two doors away daughter and her 5 kids.She is using the housing benefit to pay the house off.The daughter has never worked.She also has a brand new BMW and seems as thick as pig shit.So an ex council worker is using her tax payer funded massive pension to buy  house and then let taxpayers pay it off for her at the same time as forcing prices up for couples who are working and paying tax to pay that womans pension and fund the sack of shit niece to live in a lovely house free.

[Castlevania]

52 minutes ago, Loki said:

Why did they import a load of labour from Eastern Europe if they're scared of unemployment?  

I think at the time (in the late 90’s/early 2000’s) they were still a bit worried about inflation. More recently in a world without meaningless growth they used it to pump up the glorious GDP figures.

[DurhamBorn]

13 minutes ago, Castlevania said:

I think at the time (in the late 90’s/early 2000’s) they were still a bit worried about inflation. More recently in a world without meaningless growth they used it to pump up the glorious GDP figures.

My dad knew Blairs agent very well and he told him that they pushed immigration and welfare because it meant there would never be another Conservative government.Incredible to think what it really made sure was that there will never be another Labour government,at least in their present form.

Im not sure the Tories really understand the Red Wall yet though.They voted Tory because the ones not getting welfare are sick to the back teeth of how much people are getting and blame Labour for that and immigration.The Tories dont seem to be doing much to sort out these things though.

[Loki]

34 minutes ago, Castlevania said:

I think at the time (in the late 90’s/early 2000’s) they were still a bit worried about inflation. More recently in a world without meaningless growth they used it to pump up the glorious GDP figures.

That's a couple of good financial points thanks

[Loki]

17 minutes ago, DurhamBorn said:

My dad knew Blairs agent very well and he told him that they pushed immigration and welfare because it meant there would never be another Conservative government.Incredible to think what it really made sure was that there will never be another Labour government,at least in their present form.

Im not sure the Tories really understand the Red Wall yet though.They voted Tory because the ones not getting welfare are sick to the back teeth of how much people are getting and blame Labour for that and immigration.The Tories dont seem to be doing much to sort out these things though.

Totally agree about benefits etc. No colour tie seems to have made a positive difference to anything in my limited interest and experience of politics and work!

[planit]

US reaction to oil prices rising 60% to $70 per barrel - 

 

Blue line shows the 4 week average, it was higher in December than it is now!

There were articles saying output would recover by May but it has not materialised, even slightly. In fact there seems to be a slow downwards trajectory. I think @Cattle Prod was expecting the downwards trend to be clear later this year. 

OPEC is growing in confidence that they have control over supply now and they must be laughing that western politics is helping.

I doubt they want to shock any economies, but if I was them ,a gradual rise to $80 per barrel would be in order.

 

All this is before any potential oil squeeze in the medium term.

 

PS. BP/Shell share price is low and lots of negative sentiment but I am just concentrating on the profit - 

$450m per $1 of refining margin + $350m per $1 of oil price 

Extra profit in Q2 over Q1 at average prices so far

= $450m x 5.2 + $350m x 5.41 = $4233.5m per year so divide by 4

$1.06bn extra profit this qty form the oil and refining conditions, I am hoping this is enough to make the qtr cash flow positive, even with the Horizon $1.1bn payout and capital investments.

Source

[Shamone]

2 hours ago, DurhamBorn said:

Because 30% of our population wont work because welfare is so high.New Labour decided to import new workers instead of deal with the above fact.Brown hoodwinked Blair on it with tax credits.My Aldi had 5 Polish girls working there,20 yards away is an estate with over 200 single cough cough mothers on benefits.Labour couldnt get them 20 yards so brough in people 1000 miles instead.

House in my close sold a few months ago.Woman two doors down her sister bought it.She is renting it to the woman two doors away daughter and her 5 kids.She is using the housing benefit to pay the house off.The daughter has never worked.She also has a brand new BMW and seems as thick as pig shit.So an ex council worker is using her tax payer funded massive pension to buy  house and then let taxpayers pay it off for her at the same time as forcing prices up for couples who are working and paying tax to pay that womans pension and fund the sack of shit niece to live in a lovely house free.

I will never work full time again because of just this. 

[MrXxxx]

3 hours ago, Loki said:

Why did they import a load of labour from Eastern Europe if they're scared of unemployment?  

To build all of those London apartments cheaply, to those Asians at overpriced values, who are going to default on their loans, so the UK government can bail them out again....is this what Elton meant when he sung 'The circle of life'?

[MrXxxx]

3 hours ago, DurhamBorn said:

Because 30% of our population wont work because welfare is so high.New Labour decided to import new workers instead of deal with the above fact.Brown hoodwinked Blair on it with tax credits.My Aldi had 5 Polish girls working there,20 yards away is an estate with over 200 single cough cough mothers on benefits.Labour couldnt get them 20 yards so brough in people 1000 miles instead.

House in my close sold a few months ago.Woman two doors down her sister bought it.She is renting it to the woman two doors away daughter and her 5 kids.She is using the housing benefit to pay the house off.The daughter has never worked.She also has a brand new BMW and seems as thick as pig shit.So an ex council worker is using her tax payer funded massive pension to buy  house and then let taxpayers pay it off for her at the same time as forcing prices up for couples who are working and paying tax to pay that womans pension and fund the sack of shit niece to live in a lovely house free.

Thats it @DB you have finally 'sold' moving the the NE...where do I sign the deeds?!

[reformed nice guy]

4 hours ago, DurhamBorn said:

Because 30% of our population wont work because welfare is so high.New Labour decided to import new workers instead of deal with the above fact.Brown hoodwinked Blair on it with tax credits.My Aldi had 5 Polish girls working there,20 yards away is an estate with over 200 single cough cough mothers on benefits.Labour couldnt get them 20 yards so brough in people 1000 miles instead.

House in my close sold a few months ago.Woman two doors down her sister bought it.She is renting it to the woman two doors away daughter and her 5 kids.She is using the housing benefit to pay the house off.The daughter has never worked.She also has a brand new BMW and seems as thick as pig shit.So an ex council worker is using her tax payer funded massive pension to buy  house and then let taxpayers pay it off for her at the same time as forcing prices up for couples who are working and paying tax to pay that womans pension and fund the sack of shit niece to live in a lovely house free.

You should buy those 3 houses with your dad and rent them to three dosbodders that are on housing benefit

Soon enough Durham will be a commune of mostly middle aged, grumpy, balding, techy geeks

[JMD]

7 hours ago, sancho panza said:

 

Before I begin rambling,I'd like to define a BK (to me) as a huge generational deflationary wave in the credit markets.

There are a few caveats when I predict a BK(and I do) and that's that whilst one may not be apparent from looking at nominal GDP if fiscal stimulus is added immediately and to good effect,it will still have an effect in terms of structural unemployment as the stimulus is put through govt rather than the banks.

In terms of the banks,I'm not sure the UK banks are fine.I think the US faces a different set os issues given that fannie and freddie are such a big part of their mortgage lending bubble.The UK banking sector jsut doesn't have that fall guy in place to tkae the biggest hit.

If we take HSBC's msot recent set of accounts as an example.(Let's remember they get something like 60% of their profits from Hong Kong.)

Balance sheet gives shareholder equity at 6.5% of assets.But that comes with a warning about risk weighting assets using IRB approach which is based on their own data rather than the standardized approach used by smaller banks(and likely less skewed by sample bias)

If we dig a little deeper.Goodwill and intangibles=$20bn,

net laons and other assets $2,417,846mn 2020 up from $2,103,091mn 2017 so the increase is nearly one and a half times equity.

deposits have grown to $1,765,749mn in 2020 from $1,517,271mn an increase of $248,478 mn or one and a quarter times.

long story short it won't take much of a hit to HK/UK home prices/CRE or a drop in deposits and HSBC is heading up rights issue creek.

if we take the preferred measure of capital adequacy from Prof Kevin Dowd& Dean Buckner  then HSBC's capital ratio is

$124bn/$2984bn=4.1%

and HSBC is probably the pick of the bunch.

from May 20

http://eumaeus.org/wordp/wp-content/uploads/2020/05/Can UK banks pass the COVID-19 stress test 6 May 2020.pdf

The core metrics of the Big Five UK banks have deteriorated sharply since the New Year, and even more since the end of2006, i.e., the eve of the Global Financial Crisis. Their market capitalisation is now £140.6billion, down 61% since December 2006; their average price-to-book ratio is 39.2%, down from 255% at end 2006; their average capital ratio, defined as market capitalisation divided by total assets, is 2.3%, down from 11.2% at the end of 2006; their corresponding leverage levels are 43.3, up from 8.9 (end 2006). By these metrics, UK banks have much lower capital ratios and their leverage is nearly 5 times what it was going into the previous crisis.

 

 

 

As above DB,I jsut don't see a way we can get through the next ten years without a number of zombie companies and banks going to the wall.I've been a deflationist for 15 years at least now and I still hold to that.Where I've been persuaded to alter course is in this transfer from bank stimulus to govt stimulus and the inflation that will result.I was listening to an excellent jeff Snyder interview on Macrovoices the other day and whislt I hear his argumetns,I think a lot of deflationistas aren't getting their head around the size of the hole we're in and are relying on govt utilising the same stimulus methods psot BK as they did post 2008.

Overall small headline drops in GDP could mask a massive sectoral shift.Personally,I think we're headed for a junk bond collaspe/CRE collapse/Rresi collapse and all the resultant bail outs that will be needed to keep voters in their homes.Further zombifying an already zombified economy.

The worst of all worlds is where we get defaltionary collapse and rising prices.I feel too many deflationistas eg Snyder/Rosenberg think that credit deflation and price inflation are mutually exclusive.They're not imho

This article argues against the deflationists, and cites Rosenberg in particular. The article author used to be a deflationist himself, but now makes interesting points about the expected huge amounts of MMT spending that will almost certainly prove to be hugely wasteful, but adds also that lots of the spending will be directed toward green energy which is itself highly unproductive, ie seeking to replace high density energy sources with lower density, therefore forcing less productivity/efficiency and so ultimately causing  yet more inflationary pressure. Apparently Rosenberg counter's all this by saying the big spending bills won't get voted in in the first place.                                                                                                               https://blog.evergreengavekal.com/to-be-or-not-to-be-transitory/

[JMD]

8 hours ago, planit said:

Neither, I think the political class are spineless idiots all acting in their own interests and they take every action on a

'will this make me look better/worse in the polls' basis.

Every idiot acting in their own interests has interesting outcomes, like a school of fish avoiding a shark. The individual effects are very small but the outcome is very visible.

 

Edit: to make clear that the political class don't care about the environment and no one cares enough about their personal carbon footprint to actually impact their lives adversely. So the politicians are just making decisions to look good and avoid negativity. 

Thanks, I think I misinterpreted your original post so just wanted to check. I do agree that the economics drives the politics.