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…

Greg Canavan
for Markets and Money

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From the Archives…

High Tide on Main Street?
22-02-13 – Bill Bonner

The Fed’s Funny Money is Losing its Mojo
21-02-13 – Dan Denning

Resurrecting BHP, the ‘Big Australian’
20-02-13 – Dan Denning

End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
18-02-13 – Chris Mayer

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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