Doug Noland has been documenting “History’s Greatest Credit Bubble” in his eponymous Credit Bubble Bulletin for…I don’t know … at least 15 years that I’m aware of.
Noland makes John Hussman look like an optimist.
I don’t usually quote Noland because his theme has been similar over the years as the world’s credit bubble has inflated more and more. This amount of debt is bad…really bad…really, really bad… someday it’s going to pop.
You get the gist.
But this week he pointed out a trend change that could have a sudden Macro impact. Sort of like John Mauldin’s “Fingers of Instability” that suddenly cause the collapse of a growing sand pile. This isn’t a Black Swan because everyone is watching it develop. The questions are: Will it collapse? If so, when? What impact will it have on world markets, specifically the U.S. stock and bond markets?
**Credit Bubble Bulletin**
**by Doug Noland**
**Friday, July 22, 2022**
**Weekly Commentary: Nowhere to Hide**
**[Bottom line: Noland thinks that both stock and bond values are still inflated and will drop more]**
**....<huge snip full of links> ....**
**But the game has changed, and this lies at the heart of the unfolding new cycle. The central bank liquidity backstop has turned problematic and ambiguous. In the end, I believe central banks will have no alternative than to use QE to counter the forces of bursting asset and Credit Bubbles. But inflation’s resurgence suggests the halcyon “money” free-for-all days are behind us....**
**China’s international reserves dropped $116bn during Q2, suggesting significant capital flight. China’s currency lost 5.4% versus the dollar. China’s bubble collapse has recently taken a turn for the worse – perhaps a decisive turn....Predictably, Beijing moved forward with a series of aggressive stimulus measures that temporarily calmed the developer bond market while spurring a decent stock market rally. There were Covid outbreaks, including an extended crippling lockdown in Shanghai. Beijing announced more stimulus measures, including plans for massive infrastructure spending.**
**Then something very important transpired. Despite all of Beijing’s measures, developer bond yields began rising again. The crisis deepened. China’s apartment bubble is one of history’s greatest bubbles. Its collapse has significant ramifications – for China’s economy and financial system, along with the global economy and the global financial system. ...** [end quote]
Unrest is growing among investors in China. Owners of uncompleted apartment units decided to stop making mortgage payments in around 100 cities. This takes away the cash flow that real estate borrowers are counting on. The bonds of those companies have sunk like a stone with interest rates now up to 126%.
Chinese Bank Assets surged 50% over the past five years – and 200% in 10 years - to an astronomical $53 TN. China’s GDP was almost $15 Trillion in 2020.
Property and related industries account for 25 to 30 percent of China’s GDP. Banks will be saddled with significantly more nonperforming loans on their books, since 27 percent of all loans Chinese banks hold are related to property, including mortgages. The shadow banking sector, which includes trust companies and is an important funding source for Chinese developers, will be hurt as well.
China is a relatively new capitalist country that has not yet had a serious financial crisis. How dangerous is China’s credit bubble? Could a financial crisis prompt the Beijing government to invade Taiwan? How else might it impact the U.S. markets?