China’s Great Old Credit Boom
Things are getting out of hand. Recent credit growth data from China's economy should be enough to excite the bears and the bulls alike. Total social financing, the metric of credit growth used to encapsulate both bank and non-bank lending in China, was a whopping US$400 billion in January alone. Or $4.8 trillion annualised!
That's up 50% from December and 100% on January 2012. These mere numbers don't convey the enormity of the credit bubble forming in China. The bulls look at the result of the credit creation as it flows through the system and rejoice at China's marvellous command economy. The bears look at the distortions created by the boom and wait for its inevitable implosion. It will be ugly.
Chinese manufacturing data is due out today. It should be very, very strong. If not, then we're at a loss to explain where all that 'money' is going. Actually, no we're not. More than likely it's going into the pockets of officialdom. They're having a great old credit boom.
Australia's biggest iron ore miners, BHP, RIO and Fortescue, aren't though. They've enjoyed a nice share price bounce since mid-2012 but the rally now looks like faltering. With an eye on China, it's not a share price 'correction' we'd be buying.
The problem with credit booms is that they unleash so much buying power into the economy that inflation begins to rear its head. Then interest rates rise to head off inflation. But the boom is so sensitive to the cost of credit that any interest rate rise bursts the bubble.
They're having similar problems over at the US Federal Reserve. Their policy of QE to insanity has sparked a speculative frenzy in the asset and credit markets. Now the Fed doesn't know what to do. It can't stop buying bonds (someone has to finance the US government's out of control spending) but it's trying to give the impression that it wants to.
A few weeks ago, we profiled an interesting speech from little known Fed governor Jeremy Stein. He focused on the speculation going on in the enormous 'shadow banking' system and raised the possibility that monetary policy should be a tool to control that speculation, instead of just the regulatory tools endorsed by Bernanke.
Last week, in an interview with CNBC, Fed Governor James Bullard mentioned Stein's speech as an important one. But he also made it clear that monetary policy is currently very loose and will stay that way for some time.
In other words, while the Fed pays lip-service to intelligent analysis on the destabilising effects of long term easy money, it's not going to lean against the speculative tide of capital flowing into all corners of global assets markets. So expect this rally to run up further and get more out of hand in the weeks to come. That's your sign of increasing deterioration! Increasing asset prices! So deceptively simple...
And don't forget, it's the ongoing currency wars helping to fuel all this speculation. Currently, Japan and the UK are winning the latest battles. More on that tomorrow...
Regards,
Greg Canavan
for The Daily Reckoning Australia