Will LGIVs Be The 'Straw' To Break China's Credit-Fueled Growth 'Back'?

We presented a detailed look into China's credit bubble earlier this week and why serial-extrapolators may well have to adjust their strategy calls sooner rather than later; but the more we look around in the detritus of China's non-centrally-issued datasets, the more concerned we become. To wit, the major issuance of local government investment vehicles (LGIVs) in the last few months to stabilize growth amid falling fiscal revenue growth. The unintended consequence of PBoC-sponsored debt restructurings (as Barclays notes, rolling over debt via the issuance of new products or buyouts by asset management companies) is creating a false sense of security for these instruments, reinforcing the belief of an 'implicit government guarantee'. We tend to agree with Barclays when they conclude that the underestimation of the credit risks in both the trust loans and bond markets could induce excessive risk-taking - and warrants extremely close monitoring.

Guest Post: Be Careful Jumping On Bernanke's Bandwagon

Markets initially sold off on Tuesday as Bernanke's speech gave no mention of further easing programs; but rebounded on his closing remarks, which the media latched on to, regarding optimism about economic growth in 2013. This was welcome news - as long as you don't think about it too much. With debt levels continuing to spiral higher, which acts as a governor on economic growth due to the debt service requirement, the question of a return of economic growth becomes much more cloudy. The problem for Bernanke comes down to his inability to provide realistic economic forecasts as the Federal Reserve faces a severe 'communications' challenge, which is the creation of a self-fulfilling prophecy. Imagine that following an FOMC meeting Bernanke stated:

"The policies and actions that we have implemented to date have done little to curb economic weakness. The economy is in much worse shape that we have previously communicated as the transmission system of Fed policy through the economy, and the financial markets, is obviously broken."

The immediate reaction to such a statement would be a complete meltdown of the financial markets.

Swedish Labor Union Seeks To Set Monetary Policy - Demands Lower Rates, Higher Wages

Forget Chuck Schumer's cat-out-of-the-bag 'get back to work' comments to Bernanke, now it is union-leaders who are advising the world's central bankers. "There is a not a single reason not to lower rates" exclaims Sweden's trade union confederation to the central bank as he begins negotiations with employers on wage deals for next year. His demands (for lower rates) are "far from excessive" and he adds "should not cause inflation" as Swedish organized labor have "never called for levels that ... could not be supported economically." It seems that everyone, from NYTimes bloggers & NY politicians to Swedish Hoffas know best what the central planners must do - and furthermore, it is becoming clear to an increasing mob who is really in charge (sadly).

Guest Post: Canada's Junior Oil Companies Swap Growth for Income

Remarkably prescient given our discsussion yesterday, it seems the leading Canadian junior oil companies are doing whatever they can to create value for their shareholders. Three of the top junior oil companies in Canada are turning away from high growth and into dividend plays this morning. These are all well-respected, leading junior management teams. What we’ve seen in the markets lately is the generalist institutional money—especially in the US but also Canada—leave the junior oil sector. Growth and good management is not getting rewarded. So maybe income and good management will. Is this a sustainable business model now? Other dividend payers like Petrobakken, Pennwest, Enerplus, etc. are down in share price this year. Time will tell.

About Those Retail Investor Fund Flows

While the developed world's central banks may enjoy trading FX and stocks, either directly or indirectly, with each other in a demonstration of monetary policy "stability", the historically biggest source of capital inflows into stocks - the retail investor - has once again just said "nein", for the 17th consecutive week, and excluding tiny inflows of $95 million in the week of July 18 and $907 million in the week ended May 30, has pulled money from stocks for an unprecedented 39 consecutive weeks, with $6.6 billion pulled out in the last week, the most since the first week of October. In fact going back to the beginning of 2010, according to ICI, while $44.5 billion has been invested into domestic equity stock funds, $412 billion has been pulled out. Where has the money gone on an almost dollar for dollar basis: bonds, confirming that the New Normal mantra is all about return of capital.

Guest Post: Hating The Rich

Western culture is presently defined by many things; one of which being an instilled sense of extreme jaundice toward wealth. Before the twentieth century and the ascendance of the all-intrusive state, sumptuous living was typically seen as something to aspire to. No doubt Karl Marx would beam with pleasure in seeing how the contemporary bourgeoisie is regarded with hateful suspicion. His plan of crippling class warfare is slowly taking hold. This isn’t for the reasons Marx envisioned however. The so-called “people” have been indoctrinated to see wealth as something to take by government force. A great deal of this can be attributed to the government granting of privilege to the well-connected. As long as the state exists, there will be a class of people who use political means to acquire vast swaths of riches. Coercive egalitarianism based on ill feelings of Schadenfreud is a cancer. There is no conceivable benefit in everyone being equal. There is only one moral social system and that is free, unadulterated capitalism which gives everyone the chance to improve their own standing. Anything less represents the triumph of the idiotic masses over good sense.

On Europe's Apparent Utopia

With EURUSD hitting one-month highs, Greek and Spanish government bonds pushing higher day after day, and EU stocks up 5% this week, one could be forgiven for thinking all is well across the pond. Tail-risks removed, firewalls in place, and everything ticking along nicely. The reality, of course, is a rather different picture. As Credit Suisse notes, the apparent inability of the euro area to reach any sort of decision on how best to address Greece’s debtload is far more negative in our view than just its impact on Greece. It speaks, once again, in our view, of the inability for progress at the euro area level in the absence of market pressure. The ECB’s (unactivated) OMT backstop has worked extremely well until now, but the ability of it to continue to do so without progress on the political side is limited in our opinion. As we head into year-end, European storm clouds are building. Meanwhile, the private sector is voting with its feet: German exposure to the periphery continues to fall (down 56% from the peak to the end of September), with exposures to Italy and Spain in particular lower this year. As Santander’s CEO said this week: while the Treasury may not need the Spanish bailout, the Spanish economy and firms do.