Stronger Dollar Intensifies
Emerging Market Debt Burden
Written by Jason Simpkins
Posted July 13, 2015 at 5:16PM
http://www.outsiderclub.com/stronger-dollar-intensifies-emerging-market-debt-burden/1603
Greece isn't the only small country with a big debt problem.
There are others, and the dollar's advance is making them worse.
That is, many countries and overseas companies borrow U.S. dollars, but their revenue comes in the form of a local currency, be it peso, krona, ruble, yuan, etc.
So as the greenback strengthens, these foreign entities must come up with more and more revenue to cover their dollar-denominated debt. However, that's getting increasingly difficult with Europe in chaos and China slowing.
Between 2009 and 2014 dollar-denominated debt more than doubled in emerging markets, rising from around $2 trillion to $4.5 trillion, according to the Bank for International Settlements (BIS).
This can be seen most clearly in China.
Roughly 25% of Chinese corporate debt is dollar-denominated, compared to just 8.5% of its corporate earnings. Put simply, these firms are borrowing in dollars but earning profits in yuan. And as you can see in this chart, the yuan has taken a some nasty spills over the past couple of years.
The country will issue its second-quarter GDP report on Wednesday, and it's likely to show further cooling. Indeed, after expanding by just 7% in the first quarter, analysts are anticipating 6.8% growth in the three months ended in June.
Beijing has been loosening monetary policy to ease the pain, slashing interest rates and boosting banking lending. And it's a safe bet we'll see more declines in the yuan over the next several months, as policymakers work to gin up exports and juice the country's manufacturing base.
The end result will be a weaker yuan, a stronger dollar, and thus, a more onerous debt burden.
The good news for China is that its government holds a huge stack of currency reserves, with about $1.2 trillion. It also turns a trade surplus. So if there is some kind of debt reckoning, it could intervene.
The same isn't true of other countries, which harbor great sums of dollar-denominated debt, without the reserves to pay it.
Turkey, Mexico and Indonesia have 20% or more of their government debt denominated in foreign currency, according to a report by Moody's.
Yet, Mexico's peso hit a new historic low of 15.8695 pesos per dollar as recently as July 7. The Turkish lira is at a historic low, as well. And the Indonesian rupiah was one of Asia’s worst performing currencies in the first half of the year, tumbling 7.5% against to levels not seen since the Asian financial crisis nearly two decades ago.
There isn't exactly light at the end of the tunnel, either. While the Fed is talking rate hike, many rival central banks around the world are going in the opposite direction. That's made the dollar the belle of the ball when it comes to fiat currency.
No doubt, the greenback's rally is likely to continue, and the debt screws will tighten on emerging markets as it does.
The Biggest Bubble
No One's Warned You About
Written by Jason Simpkins
Posted February 20, 2015 at 7:17PM
http://www.outsiderclub.com/china-dept-corporate-bubble-property-real-estate-world-clock/1423
It's hard to think about China as a country with a debt problem, but that's precisely what it is.
China's ratio of total debt to GDP is 282%, according to the McKinsey Global Institute. That includes borrowing by the government, banks, corporations, and households.
By comparison, the United States' ratio of total debt to GDP is 269%. Greece's was 260% at the time of its crisis.
China's debt level is growing fast, too — about twice as fast as its economy.
In fact, China’s economy has added $20.8 trillion in new debt since 2007, accounting for more than a third of total global debt growth in that period.
How can this be?
Well, what you have to realize about China is that it doesn't just lend to the United States — it also lends to itself. That is, the government gives money to banks, and then instructs them on how generous or frugal they should be.
And since the financial crisis struck in 2007, China's banks have been very generous — especially when it comes to property development.
The problem is, not all the money that gets lent out is put to efficient use. A huge portion of it is wasted on projects for which there is no demand, and thus, no return. It's being wasted, funneled into bubbles that will inevitably pop.
So the problem isn't with the government direct, it's with China's banking sector, particularly its shadow banking sector.
The risk is China's lenders won't recoup their losses, become insolvent, and a banking crisis will ensue. But it's Beijing that will have to clean up that mess, bailing out its banking sector the same way the U.S. government did in 2008.
I'll say that again, to be clear: We could be in for a repeat of the 2008 financial crisis, except this time with China's real estate market and financial sector serving as the epicenter.
Drowning In Debt
If you take a look at the chart below you'll see where the problem lies.
It's in China's corporate debt. At 125% of GDP, China now has the highest level of corporate debt in the developed world...
Chinese companies hold a staggering $14.2 trillion of debt, according to a recent report by Standard & Poor's.
Much of this debt was accrued during the country's massive real estate boom.
Indeed, one of the ways China manufactures growth is by funding large construction projects for which there is no demand — the infamous ghost cities.
More than 60 million empty apartments await buyers in China, and some 6.7 billion square feet of commercial office space remains unsold.
This development is a key cog in China's economic engine.
The real estate sector accounts for between 25% and 30% of China’s GDP, if you include both upstream and downstream industries such as steel, cement, glass, furniture, and appliances.
The problem is, it's grinding to a halt.
After years of blistering growth, oversupply, low demand, and soaring property prices have caused the property market to stall.
The average prices for new homes in China’s 70 major cities fell for the fifth consecutive month in January.
Prices for new homes fell 5.1% last month, accelerating from the annual 4.3% fall in December.
This regression is a big reason why China failed to meet its growth target last year. And if it deepens, the economy could be in real trouble.
Consultancy firm IHS recently predicted that a property crash could reduce China’s GDP from to 6.6% this year, and to 4.8% in 2016. That may not sound like much, but it would be a disaster by China's standards.
High unemployment and a drop in consumption would be bad enough, but what about all those heavily indebted companies?
Many would go under, pulling the rug out from under China's banks.
But the real mess would be in China's “shadow” banking sector.
It's hard to think about China as a country with a debt problem, but that's precisely what it is.
China's ratio of total debt to GDP is 282%, according to the McKinsey Global Institute. That includes borrowing by the government, banks, corporations, and households.
By comparison, the United States' ratio of total debt to GDP is 269%. Greece's was 260% at the time of its crisis.
China's debt level is growing fast, too — about twice as fast as its economy.
In fact, China’s economy has added $20.8 trillion in new debt since 2007, accounting for more than a third of total global debt growth in that period.
How can this be?
Well, what you have to realize about China is that it doesn't just lend to the United States — it also lends to itself. That is, the government gives money to banks, and then instructs them on how generous or frugal they should be.
And since the financial crisis struck in 2007, China's banks have been very generous — especially when it comes to property development.
The problem is, not all the money that gets lent out is put to efficient use. A huge portion of it is wasted on projects for which there is no demand, and thus, no return. It's being wasted, funneled into bubbles that will inevitably pop.
So the problem isn't with the government direct, it's with China's banking sector, particularly its shadow banking sector.
The risk is China's lenders won't recoup their losses, become insolvent, and a banking crisis will ensue. But it's Beijing that will have to clean up that mess, bailing out its banking sector the same way the U.S. government did in 2008.
I'll say that again, to be clear: We could be in for a repeat of the 2008 financial crisis, except this time with China's real estate market and financial sector serving as the epicenter.
Drowning In Debt
If you take a look at the chart below you'll see where the problem lies.
It's in China's corporate debt. At 125% of GDP, China now has the highest level of corporate debt in the developed world...
Chinese companies hold a staggering $14.2 trillion of debt, according to a recent report by Standard & Poor's.
Much of this debt was accrued during the country's massive real estate boom.
Indeed, one of the ways China manufactures growth is by funding large construction projects for which there is no demand — the infamous ghost cities.
More than 60 million empty apartments await buyers in China, and some 6.7 billion square feet of commercial office space remains unsold.
This development is a key cog in China's economic engine.
The real estate sector accounts for between 25% and 30% of China’s GDP, if you include both upstream and downstream industries such as steel, cement, glass, furniture, and appliances.
The problem is, it's grinding to a halt.
After years of blistering growth, oversupply, low demand, and soaring property prices have caused the property market to stall.
The average prices for new homes in China’s 70 major cities fell for the fifth consecutive month in January.
Prices for new homes fell 5.1% last month, accelerating from the annual 4.3% fall in December.
This regression is a big reason why China failed to meet its growth target last year. And if it deepens, the economy could be in real trouble.
Consultancy firm IHS recently predicted that a property crash could reduce China’s GDP from to 6.6% this year, and to 4.8% in 2016. That may not sound like much, but it would be a disaster by China's standards.
High unemployment and a drop in consumption would be bad enough, but what about all those heavily indebted companies?
Many would go under, pulling the rug out from under China's banks.
But the real mess would be in China's “shadow” banking sector.
Become an Outsider Today!
A decade ago, conventional, tightly-monitored state-run banks accounted for pretty much all the lending in China.
But now, credit is available from a wide range of alternative financiers: trusts, leasing companies, credit-guarantee outfits, money-market funds...
Collectively, these are known as “shadow banks.”
Many of these lenders are legitimate, but others are not. Some are just vehicles used to get around China's banking laws. (Sound familiar?)
They're also speculative.
Trusts, for instance, offer returns as high as 10%. They do that by raising money from businesses and individual investors and lending it out to companies that banks won't lend to.
Several trust products have defaulted. And as China's economy — and its real estate bubble — deflates, more will follow.
That's problematic, because shadow banks have gotten very popular. They accounted for a third of the rise in lending last year.
These institutions don't operate in a vacuum, either. They're connected to China's legitimate banks and investors. Though, disturbingly, no one knows to what extent.
That is, when everything was directed by the state, the government knew precisely where the exposure was. But that's not true anymore. No one knows exactly how big the shadow banking system is, or what entities are entwined within.
So if there's a contagion in the shadow banking sector, it could easily spread throughout the banking sector, which is already vulnerable.
And China's not really prepared for that.
You see, America has the Resolution Trust Corporation, which disposes of bad loans. But there's no such entity in China. There's no mechanism to collect and write down bad assets.
Some people think that China is just going to grow itself out of this problem. Others think that because China has a huge pile of currency reserves it'll be able to bail itself out.
Well, neither is true. China's debt problem is outpacing its economic growth. And bailouts come at a cost.
China's ascent has been relatively smooth these past few decades. But no such voyage comes without weathering a few storms, and there's a big one on the horizon.
The World Debt Clock
One last thing: I don't mean to pick on China, here.
The United States and Europe have debt bubbles, too. And they may very well pop before China's.
What I'm saying, though, is that our whole world has a debt problem.
Since the start of the global financial crisis at the end of 2007, the total debt worldwide has risen by $57 trillion — from 269% of global economic output to 286%. In a few years, it'll be 300%.
There's not just a U.S. Debt Clock; there's a China Debt Clock, an EU Debt Clock...
But most importantly, there's a World Debt Clock.
And it's attached to a bomb that will one day go off.
So safeguard yourself. Invest wisely. Buy gold. Be ready to short the market. Because all these record highs we're seeing in the stock market won't last forever.
Get paid,
@OCSimpkins on TwitterJason Simpkins is a seven-year veteran of the financial publishing industry, where he's served as a reporter, analyst, investment strategist and prognosticator. He's written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks. For more on Jason, check out his editor's page.
*Follow Outsider Club on Facebook and Twitter.
U.S. Debt Really Closer to $65 Trillion
Written by Jason Simpkins
Posted November 10, 2015 at 6:23PM
http://www.outsiderclub.com/us-debt-really-closer-to-65-trillion/1729?r=1
When
it comes to the national debt, the oft-cited figure is $18.5 trillion.
That's concerning enough, considering it gives the U.S. a debt-to-GDP
ratio of 104.5%.
However, the real figure is actually much, much higher, according to Dave Walker, who headed the Government Accountability Office under Presidents Bill Clinton and George W. Bush.
“If you end up adding to that $18.5 trillion the unfunded civilian and military pensions and retiree healthcare, the additional underfunding for Social Security, the additional underfunding for Medicare, various commitments and contingencies that the federal government has, the real number is about $65 trillion rather than $18 trillion, and it’s growing automatically absent reforms,” Walker told host John Catsimatidis on “The Cats Roundtable.”
This is a startling admission, and one that suggests the day of reckoning is closer than many would like to believe.
This isn't just a domestic issue, either.
Global debt has grown some $57 trillion since the collapse of Lehman Brothers in 2008, reaching a record-breaking $199 trillion in 2014. That's more than 2.5 times global GDP, according to the McKinsey Global Institute.
And servicing these debts is getting harder and harder. Economic growth is largely stagnate, commodities and export markets are weak, and interest rates are set to rise.
That last one could be the real back-breaker.
Indeed, higher interest rates will make borrowing more expensive for everyone – including the U.S. government. And the stronger dollar is crushing indebted foreign entities, especially those in emerging markets.
The chief problem is that many countries and overseas companies borrow U.S. dollars, while their revenue comes in the form of a local currency (pesos, kronas, rubles, yuan, etc.).
As the greenback strengthens, these foreign entities must come up with more and more domestic revenue to cover their dollar-denominated debt. And a lot of debt has been accrued over the past few years.
Between 2009 and 2014, dollar-denominated debt more than doubled in emerging markets, rising from around $2 trillion to $4.5 trillion, according to the Bank for International Settlements (BIS).
China has been at the forefront of this debt balloon.
At 125% of GDP, China now has the highest level of corporate debt in the developed world.
Roughly 25% of Chinese corporate debt is dollar-denominated, compared to just 8.5% of its corporate earnings. Put simply, these firms are borrowing in dollars but earning profits in yuan.
But with exports flailing China's been forced to cut rates and devalue its currency – thus exacerbating its debt problem.
Of course, China's government, with more than $2 trillion in currency reserves, does not have a sovereign debt problem.
Others do.
Turkey, Mexico and Indonesia have 20% or more of their government debt denominated in foreign currency, according to a report by Moody's. All of their currencies have tumbled into the gutter.
Ghana, Greece, Puerto Rico, Ukraine, and many other countries are already struggling, and failing, to cope with these burdens. And they're only going to intensify as rates rise.
The sad reality is that the global economy has a terrifying debt problem. And the United States is leading the parade into fiscal insolvency.
Jason Simpkins
@OCSimpkins on Twitter
Jason Simpkins is a seven-year veteran of the financial publishing industry, where he's served as a reporter, analyst, investment strategist and prognosticator. He's written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks. For more on Jason, check out his editor's page.
*Follow Outsider Club on Facebook and Twitter.
However, the real figure is actually much, much higher, according to Dave Walker, who headed the Government Accountability Office under Presidents Bill Clinton and George W. Bush.
“If you end up adding to that $18.5 trillion the unfunded civilian and military pensions and retiree healthcare, the additional underfunding for Social Security, the additional underfunding for Medicare, various commitments and contingencies that the federal government has, the real number is about $65 trillion rather than $18 trillion, and it’s growing automatically absent reforms,” Walker told host John Catsimatidis on “The Cats Roundtable.”
This is a startling admission, and one that suggests the day of reckoning is closer than many would like to believe.
This isn't just a domestic issue, either.
Global debt has grown some $57 trillion since the collapse of Lehman Brothers in 2008, reaching a record-breaking $199 trillion in 2014. That's more than 2.5 times global GDP, according to the McKinsey Global Institute.
And servicing these debts is getting harder and harder. Economic growth is largely stagnate, commodities and export markets are weak, and interest rates are set to rise.
That last one could be the real back-breaker.
Indeed, higher interest rates will make borrowing more expensive for everyone – including the U.S. government. And the stronger dollar is crushing indebted foreign entities, especially those in emerging markets.
The chief problem is that many countries and overseas companies borrow U.S. dollars, while their revenue comes in the form of a local currency (pesos, kronas, rubles, yuan, etc.).
As the greenback strengthens, these foreign entities must come up with more and more domestic revenue to cover their dollar-denominated debt. And a lot of debt has been accrued over the past few years.
Between 2009 and 2014, dollar-denominated debt more than doubled in emerging markets, rising from around $2 trillion to $4.5 trillion, according to the Bank for International Settlements (BIS).
China has been at the forefront of this debt balloon.
At 125% of GDP, China now has the highest level of corporate debt in the developed world.
Roughly 25% of Chinese corporate debt is dollar-denominated, compared to just 8.5% of its corporate earnings. Put simply, these firms are borrowing in dollars but earning profits in yuan.
But with exports flailing China's been forced to cut rates and devalue its currency – thus exacerbating its debt problem.
Of course, China's government, with more than $2 trillion in currency reserves, does not have a sovereign debt problem.
Others do.
Turkey, Mexico and Indonesia have 20% or more of their government debt denominated in foreign currency, according to a report by Moody's. All of their currencies have tumbled into the gutter.
Ghana, Greece, Puerto Rico, Ukraine, and many other countries are already struggling, and failing, to cope with these burdens. And they're only going to intensify as rates rise.
The sad reality is that the global economy has a terrifying debt problem. And the United States is leading the parade into fiscal insolvency.
Get paid,
@OCSimpkins on TwitterJason Simpkins is a seven-year veteran of the financial publishing industry, where he's served as a reporter, analyst, investment strategist and prognosticator. He's written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks. For more on Jason, check out his editor's page.
*Follow Outsider Club on Facebook and Twitter.
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