Tuesday, January 26, 2016

Davos!

I really want to vacation in Davos next year....I'm hooked.  I'm a groupie.  I simply don't know where I could possibly find more entertainment value for my buck.  It puts Vegas & Disney World to shame.   It's the economist's version of the Super Bowl....what a hoot!

Thanks to Bloomberg we non-erudites can get a tiny glimpse of what it must be like to have unfettered access to the inner circle. 

Upon returning from his trip to Davos, Fortune's Alan Murray made the observation that "The markets are not predicting recession.  Among the CEOs here, there is little evidence of panic".  Alan's assessment is absolutely spot on and expected.  A propensity to panic rarely appears in the DNA of the typical CEO or Investment Banker.  Why would they panic?  So....what's the problem?

Here it is in a nutshell....China's facade economy and markets are now firmly, irreversibly intertwined with the (slightly) less spurious finances of the West,  It's complex, but here's a chart of the Shanghai Composite over the last month.


Interactive Chart URL

There's been a 23% decline in the last month and a 50% decline from the all time high set about seven months ago (6/12/15).  When this whole mess began to unravel, there were roughly $3 Trillion in US & EU ADRs, Bonds, Bank financing, etc. as well as an indeterminable level of derivative (off balance sheet) risk tied specifically to China's economy and markets.

Yet, everything, according to the experts, as it's being discussed in Davos, is just fine.  That, of course, is to be expected.  I wouldn't want my skydiving instructor breaking out in a cold sweat screaming "we're all going to die!" as we plummet toward Terra Firma.  I'd want him/her calmly giving me expert instruction on how to fix my chute.  

Could you imagine Ben Bernanke, Hank Paulson or Tim Geithner sobbing, tears in their eyes, before Congress in 2009?  "It's all my fault...sniff....sniff....I wish I would have seen it coming....I'm so...so.sorry! .....WAAAHH ! 
  
Although the above might make for great theater, it's simply not going to happen  Even after the next crisis is upon us, we will all still believe that everything is just fine, right up until the point where our collective life savings is gone and they are foreclosing on our homes.  We will all be convinced that our bankers, financiers and politicians are meticulously in tune with exactly what's happening, will summon the "invisible hand-wave" and the world will magically revert back to the way it was pre-crisis. The folks in charge surely have ice water in their veins.  They were born, bred and trained to handle situations like this.  Unfortunately, for us mere mortals, it's difficult,(but not impossible) to tell what these titans of finance are thinking, unless we truly understand the secret code they implement in pressure-packed public forums.

To that end, we here at Deep Throat have spent years developing the ultra-high-tech, Dick Fuld BST (Banker-Speak-Translator....patent pending).  By deploying this technology we can drill down to see exactly how big the disconnect might be between our global financial Czar's perceptions; and the cold harsh reality of Main Street.  The BST gives us the unedited transcript, the straight-up,unabridged, no-holds barred truth, as to what these actors are thinking relative to what they are actually saying.

Here's a quick example of how the BST works on some text from Davos:

What Ray Dalio said:  "China has a balance of payments challenge...." (calmly smiling, indicating confidence and that all is right with the world)

What Ray Dalio meant: (BST Translation) "Geeeezzzz...would you guys stop printing money!  Stop building empty buildings and airports!....stop cooking your books!....you are killing me!  The RMB is going to blow up in my face and all hell is gonna break loose!  You better get your act together! ....(sweating, screaming...jumping up and down....defibrillator standing by.)

Now let's set the BST loose on the Big Dogs...

Below listed: a Bloomberg clip featuring some of the heaviest of the heavy hitters: Christine Lagarde, (IMF Head Honcho), Jiang Jianqing (Chairman - Industrial & Commercial Bank of China); Fang Xinghai (Vice Chairman of the China Securities Regulatory Commission ); Gary Cohn (Goldman Sachs - President & COO); Ray Dalio (CEO - Bridgewater Associates - Billionaire); Zhang Xin (CEO - Soho China - Real Estate Developer).

Feel free to view the clip (75 minutes) in a separate window while reading the BST translated text below. Hope you enjoy!  Isn't global-economics and monetary policy fun!

Francine Lacqua - (Bloomberg Moderator) -  "So what do you guy's think about the gigantic mess going on in China right now?"

ICBC Chairman - (Old Banker) - "China is the big dog now. In ten years the US & Europe will be largely irrelevant. US & EU policy is the main reason we're in this mess in the first place.  How long is this panel going to take?  I'd like to get back home to count my money..." 

Ray Dalio - (Hedgie) - "There are four problems that could screw me in China.  Debt levels, Economic restructuring, Capital Markets issues and Currency issues.  I hope these guys can figure it out.  I've got billions riding on this."   

Fang - (Young Regulator) - "The old guy is right.  The FED is killing us. That 1/4 point rate hike was a bitch.  Janet Yellen is the devil disguised as my grandma.  Money is leaving our markets like rats off a sinking freighter."  

Lagarde (Cool Snow Boots)  - "Yup.....China is in transition. (China is the 1st or 2nd biggest economy in the world depending on how you measure it......I want to make sure I keep saying that so I don't piss off the Chinese....they can't stand the Americans ....if they take their toys and go home the rest of this conference will really suck.)  The Chinese have gotta get rid of the crooks and the cooked books so we can trust the numbers.  This a communication issue....the West thinks China's numbers are real, but they're not.  If this were an AA meeting the Chinese government would be approaching the 1st step....recognizing that there might be a problem."

Gary Cohn (Smiling Goldman Guy) - "I agree with everything every Chinese official says.  I make a ton of cash selling the China dream to naive US investors and I really don't want that gravy train to derail."

Soho Lady - "China's markets are a real bargain right now.  My company is a bargain!  If there are any Americans in the crowd you should buy my stock!  My company isn't making money right now but eventually, some day we will!  We're renting all kinds of space to internet start-ups.  All of the buildings are filled.  It's awesome!  The economy is doing great too!  There's a disconnect between equity/stock values and real estate values that Westerners don't understand.  We just need more US money to really take off. We're all going to be rich!"   

ICBC Chairman - (Old Banker) - "All of this market driven, consumption economy stuff is a load of crap.  I liked it much better when people just did what they were told.  Communism has been berry, berry good to me.  We've got tons of empty buildings and idled steel mills and factories, but that's OK.  We just post old film clips and pictures on the evening news and everyone thinks things are great.  I can't believe Xi sent me here to talk about this stuff."

Fang - (Young Regulator) - "Volatility isn't the problem.  The problem is execution.  We're simply not executing enough rogue traders.  Like Mao always said, if you shoot one, the rest toe the line.  Our party leadership is the best in the world.  We will get this under control.  If I don't pay homage to our party leadership I won't advance and/or I'll be detained for an attitude adjustment when I get back to the mainland. We have the best leadership in the world.  Did I mention that?  Apparently we have to do a better job of communicating this to the West since I'm noticing Chris Lagarde is laughing about my comments."

Francine Lacqua (Moderator) - "Lots of regulators have quit recently...is the Chinese market getting too complex?"

Fang - (Young Regulator) -  "Of course not....are you kidding me?....this again is a short term problem.  Nothing can be too complex for China's leadership.  Sure, when I come to work in the morning I see rows of empty desks, but everything is fine.  That's a silly question."

Gary Cohn (Smiling Goldman Guy) - "The biggest problem is that China's books are cooked. We've been aware of it for years, but we can't make any money by telling everyone there's no future in Chinese stocks.  I mean....then we'd have to come up with some other BS dream to sell to American Investors and that's expensive and it takes time.  Better to make a quick buck and ride this pony till it drops." 

Ray Dalio - (Hedgie) - "The shell game is amazing.  A bad year in China is better than a great year anywhere else.  You gotta give these guys credit.  They came up with a Shadow Bank system and flooded the streets with RMB and found a way to protect the currency off shore.  (Ray also got a big laugh when he bashed the US political system.)  Authors note:  I have friends in Beijing who have friends who've received a "knock at the door" for speaking their mind.....I'm just saying.

Lagarde (Cool Snow Boots)  - "I can't believe we did the SDR thing.  What were we thinking?  They cooked the books and got us to think the RMB is actually worth something.  The RMB is the most overvalued piece of toilet paper I've ever seen.  When this thing crashes it's going to wreck the whole basket. Hopefully they can fix this mess before we're all in the dumper."

ICBC Chairman - (Old Banker) - "China is the economic locomotive of the world.  Haven't you been listening to me?  Everything is under control.  Why?  Because I said it is.  Our debt is OK.  We are reforming things that aren't OK.  So shut up.  We are the biggest economy in the world. The US is the second biggest by any measurement. "

Ray Dalio - (Hedgie) - "China can probably figure a way out of their debt problems if they do something soon.  But I'm really worried that these guys are going to drop a giant currency bomb on my ass, blow up my computer models and cost me billions.  Geeezzzz I wish these guys would get their shit together."

Fang - (Young Regulator) -  "Don't worry about volatility.  The stock markets are fine.  Sure they are 40% down from the peak, but they are 30% up from a year and half ago.  So don't worry, the markets are isolated...ummm....except for those $2 or $3 Trillion in ADRs & Bonds and the related bank assets and derivative exposures sitting on Western Exchanges.....ummm....glad I didn't say that out loud.  Anyway, the RMB will be stronger than the US$  in a few years.  Our fake economy has the fastest growing fake metrics in the world!  We have no reason to devalue....forget about the massive growth (4x) of our money supply and unregulated shadow banks over the last few years.   If anyone tries to short the RMB the PBOC is going to use it's FOREX reserves to slap 'em around. That said, China is totally stable and by far the best place to invest in the world.  We are committed to solving the current crisis.....I mean...uh.....all is well!....yeah...that's what I meant to say....there is no crisis....all is well!"

Lagarde (Cool Snow Boots) - "Volatility is OK.....but we have to let asset prices settle to appropriate valuations.  Throwing people in jail for selling stocks is not the way to go.  As far as RMB stability, the PBOC should step back, stop propping up the currency and and let the RMB go where it's going to go. God help us all."

Soho Lady - "I just want to remind everyone that China hasn't built it's huge FOREX reserves because of monetary policy.  Fortunately, for the last 30 years, China has had a compliant, obedient working class who are willing to bust their asses for pennies an hour to make cheap plastic stuff, phones. electronics and environmentally toxic products that US and EU markets have scooped up by the boatload.  Since Mr. Fang is here I'd also like to remind him of his promise to form a NASDAQ style "4th Board" stock exchange, with even less regulation and no requirement that businesses to be listed have any possibility of ever becoming profitable.  That's what we need!  Those Americans really know their stuff when it comes to launching crappy dog-shit stocks.  So let's follow their lead.  I've got a few IPO's ready to go....let's get moving on this." (Mr. Fang was apparently making notes on having Ms. Xin detained for questioning once she gets back to the mainland.)

ICBC Chairman - (Old Banker) - "Haven't you people been listening to anything I've said?  Everything is fine.  The RMB is worth what we say it's worth.  A fake currency is only as reliable as it's underlying fake economy.  Our fake numbers are as good as anyone's fake numbers.  We could have said that we are growing GDP at 10% but nobody would have believed it so we cut the fake number to 6.9% and we're still the fastest growing big, fake economy in the world.  Like I said....Everything is fine.  Let's move on."

Gary Cohn - "Let's go back a year.....last year there were only two currencies in the world that were strengthening....the US$ and the RMB.  It makes perfect sense that the RMB would want to join the rest of the world, decouple from the US$ and start to reap the benefits of the devaluation.  China will be exporting deflation all over the globe soon. I hope, for the sake of the world economy and all of the business we at Goldman Sachs do in Asia, that they take it nice and slow and don't pull a Switzerland and bust the peg overnight."

Francine Lacqua (Moderator) - "So Ray....how much do you worry about China's FOREX reserves?"

Ray Dalio - (Hedgie) - "I'm sorry Francine, give me a moment....I kind of threw up in my mouth a little bit when you asked that question.  OK.....In the past, when China has reduced FOREX reserves 10%-15% there was a corresponding devaluation of about 25%.  Again, that's been in the past.  But, that's about where we are now...reserves have dropped $500 Billion....some say $1 Trillion... but like so many Chinese numbers....nobody knows for sure.  So far the currency hasn't moved much. But, sometimes it's really hard for a government to keep control over its currency.  Obviously, that's why I'm really worried about a Chinese currency bomb getting stuffed up my boxer shorts."

Francine Lacqua (Moderator) -" So Christine, do you want another term as IMF chair?"

Lagarde (Cool Snow Boots) - "I can't believe you asked such a goofy question in this forum.  Let's move on."

Fang - (Young Regulator) - "There won't be any slowdown in GDP in 2016 simply because we can't afford to have our GDP drop.  If it drops there will be all sorts of financial problems so we can't have that.  We have lots of resources and can handle anything.  We are also perfect and don't make policy mistakes either.   Luckily, our fake GDP target is made up anyway so we should have no problem hitting it.  Now, I have to say, that some people are beginning to think that our GDP numbers are just not accurate.   This is simply not true.  For, example, tax collections (which you can't verify) went up 6.6% last year, so that's not too far from our 6.9% GDP target (which you can't verify either).  Ford sold a million cars in China last year.  So there you have it.  The numbers are right.  Did I mention that we also have great leadership in China?"

Soho Lady -"I'd like to add that the bulk of China's growth isn't coming from SOE's,  It's coming from the private sector (me), financed by shadow debt.  (which can't be verified either).  We need to have more access to capital and we need policy that will support this growth, otherwise we won't be able to pay our bills.  Since none of our businesses actually make any money we need more capital to stay in business.  I can't afford to throw up any more empty buildings so now I'm just renting my space to Internet start-ups and if these businesses start to fail I won't be able to collect the rent."

Fang - (Young Regulator) -"I agree that small business is important, but I can't move up the party ladder if I let these folks go crazy.  Keep in mind that China's growth is fueled by domestic savings.  So Chinese citizens will continue to save their money and we'll allocate it into whatever we think is best for them and they will comply.  Then we'll drop a currency bomb, all of their savings will be worth half as much in global terms, but they won't even know what hit 'em 'cuz most consumer prices are regulated and the Chinese consumer doesn't spend money anyway.  So we've found yet another way to  screw over the Chinese working class.  I love capitalism!  God Bless America!"

ICBC Chairman - (Old Banker) -"I got it...I got it.....ya, ya, ya....Small business, growth engine, green energy, save the planet, human rights, increased standard of living....got it.....no problem....I really miss Chairman Mao."

Francine Laqcua (Moderator) - "So Ray, how long do you think it will be before China assumes the role of the growth engine of the world, like the United States used to be."

Ray Dalio - (Hedgie) - "Are you kidding me?  I'm just trying to get through the next couple of years without going broke.  We are up to our asses in alligators."

Gary Cohn - "That's right.  I agree with everyone.  The FED is out of step, they are working on an outdated model.  Everything is digital now.....I use the word digital when I want to sound really smart and cool. Anyway, US Interest rates are going up even if there's no serious wage inflation.  US jobs are going overseas to Bangalore, China, etc.  and the FED is raising rates.  America is screwed.  If we can just keep the charade going for a few more years I'll be retired and living on an island somewhere.  This whole mess will be somebody else's problem."

Francine Laqcua (Moderator) - "Final Thoughts?"

ICBC Chairman - (Old Banker) "Everything is just fine in China.  I just wish everyone else in the US and the EU would get their act together.  What time does my jet leave?  Can I get dim sum on the plane?..."

Lagarde (Cool Snow Boots) - "China (the worlds 1st or 2nd biggest economy depending on how you measure it) has to admit they have a mess on their hands, get their numbers right and put some of the crooks in jail.  Other than that, everything is on course and we should all be OK."

Fang - (Young Regulator) - "Ray said that China's a mess.  I must disagree.  What we need is more cooperation between major economies.  For example, we will continue to build your cheap plastic stuff, phones and electronics as long as you keep letting us list our fake companies on the NYSE and the NASDAQ.  Deal?  Also, Ray, you mentioned that China will be a drag on the global economy for years to come...what did you mean by that?  Are you out of your mind?"

Ray Dalio - (Hedgie) - "Look kid...all I was saying is that you've gotta get your act together.  Make a new plan Stan.....get on the bus Gus.  This thing is about to go biblical....hell fire, brimstone, angels & demons type of crap.  You need fiscal stimulus and monetary easing.  There shouldn't be any central bank in the world, except maybe the Bank of England, just because they are the Brits and they like to be different.... that should be tightening right now....and you guys are about to build a giant currency wall...and it ain't gonna be built by Mexico.  So what are you gonna do???"

Fang - (Young Regulator) - "We have great leadership.  We will handle it...."

Ray Dalio - (Hedgie) - "You knuckleheads are going to cost me billions.  I'm screwed....." (Steam coming out of his ears...)

Gary Cohn - "Again, I agree with all of the Chinese panelists on everything. There are no loose cannons in China.  Did you hear that the Chinese have great leadership?  Please, for the love of all that is holy, please let me keep playing in your sandbox."

Soho Lady - "I think we need to focus on the long term and not pay any attention to any of the vacant, insolvent projects I'm running.  If we look at the long term nobody will see the financial mess I've gotten myself into."

Ray Dalio - (Hedgie) - "Hey....don't I get a final comment?"

Francine Lacquar (Moderator) - "I'm sorry Ray....we've run out of time and you've said quite enough already.  That's all from Davos!"

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4 comments:

  1. DT, thanks for your work! I've just read every post you've written and am now a big fan, albeit quite alarmed. A few quick questions:
    1) Is there anyway to reverse engineer what the banks' 'assets under custody' accounts contain? I've looked through the 10-Ks and searched state filings but found nothing.
    2) To that end, are there any books you'd suggest regarding financial institution accounting?

    Very much looking forward to your future work,
    A loyal reader and concerned investor

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    1. Thanks for the kind words....glad you enjoy my work. No need to be alarmed....as investors, we simply need to know when things are good and when to stay out of the fray. Sounds simple, doesn't it? Off-Balance Sheet risk is one of the oddest bugaboos out there. It's disclosed and analyzed (in detail) to no one, at least that I'm aware of. The BIS & other agencies publish summary data but it's really impossible to tell what the risk level is. It's just data. After Enron, LEH, BS, LTCM, et al, you'd think that there would be someone regulating this stuff or at least getting involved before it's too late....but I'm afraid it's become so complex and ubiquitous that it may be beyond regulation. On your second question, I really can't think of any single text that might be better than others. I've cited some of my favorite books in the body of the blog, Michael Lewis, Roger Lowenstein, Rich Thaler & Bob Shiller to name a few have done great work chronicling & dissecting what happens when things run amok. Hope this helps....all the best.

      DT

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  2. So glad I came across this blog. I don't think Davos could have been summarized better.

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    1. Thanks Ray....glad you like my stuff....

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