Tuesday 18 March 2014

The next bubble - Chinese Property & Construction Debt ?


If you haven't heard of it, try to get your hands on Project X. It is a movie about teenagers plotting to throw a house party while the parents are away. And what they actually pull off is beyond huge ... it is a party of epic proportions. The kind you wish you had, that turns you into an instant local hero in the eyes of your fellow party monsters for years to come. 



But so too is the fall out and hangovers afterwards - epic. Warning - if you have kids, you might decide to preemptively lock them up for good after seeing this. 

It seems like the party might soon be over for Chinese property developers too.   Available information seems to point out that until recently Chinese construction was like a Project X type house-party of epic proportions. Everybody has had a ball of a time, building ghosts cities and constructing new developments all over the place like there is no tomorrow. 


Source: http://www.ibtimes.co.uk/china-ghost-town-city-441932

Read more about it:
 How to spot a bubble - step 16

But as with all good things in life, it seems like that part of the house party where everybody were having a blast, might be over. The party music is not pumping that loud anymore, the bottomless beer is starting to run out, the pretty people don't look that pretty anymore, and head aches are setting in. 

The first cracks in the wall started appearing. In the last 2 or so weeks the first debt defaults on Corporate Bonds started happening - sit tight and read the Bloomberg article here

It is interesting to note that during the previous (East) Asian collapse (which coincidentally also had an exceedingly optimistic construction growth spurt in places like Thailand), the first rumbles of collapse also started with default on bonds issued by construction companies - read more about that here

Read these two articles by Zerohedge for further information:
Obviously one cannot keep on kicking the can down the road and borrow money like there is no tomorrow. At some stage somebody has to pay the Pied Piper. 

And undoubtedly, other people would have made brave decisions on where to invest your money.  At this stage it is anybody's guess how much (international?) investment might be tied up in these bonds - and what exactly will be extent of contagion this time? How will it impact the economy? What about global markets?

But what is clear, is that barring a small miracle, the epic house-party just might be over.



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Saturday 1 March 2014

Is it time to look at the Rating Agency model ? TED talk by Annette Heuser


For years Fitch, Standard & Poor's and Moody's have been ruling the roost in the Rating Agency industry. These 3 Rating Agencies (and other smaller players) have the power to rate companies, banks, and even countries.  


Courtesy: The Economist

Investors, corporates, banks, and even countries rely on the work of the Rating Agencies and base their own decisions on the inherent risks of a potential investment on the ratings provided by these agencies. 

Due to the weight the ratings carry, one would expect the ratings agencies to be very objective, accurate and truthful under all circumstances - right ?  Apparently not so - The FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES after the 2008 financial meltdown found that the 3 key players:
  • "were essential cogs in the wheels of financial destruction" (page XXVV), and 
  • that the "mortage -related securities at the heart of the crisis could not have have been marketed and sold without their seal of approval". 
  • The Report continues to say that "this crisis could not have happened without the rating agencies"  (emphasis author's own)
Blind faith in the objectivity and accuracy of Rating Agencies has previously lead to billions of $ losses internationally in the wake of the Subprime financial meltdown. Worldwide thousands and thousands of jobs have been lost. Various countries are faced with crippling debt and economies struggling with recession.

This begs the question - who is providing oversight and rating the performance of the Rating Agencies?   Is the answer more competition, or more oversight? A different operating model? Can a rating agency with a strong regional and or political bias really be objective or is it simply pushing a specific geo-political agenda?  

Read the Economist's article here

The EU has in the wake of the crisis passed legislation to start the change - watch this BBC news clip 

So how about a completely different approach - Watch this thought provoking talk by Annette Heuser on TED talks


http://www.ted.com/talks/annette_heuser_the_3_agencies_with_the_power_to_make_or_break_economies.html

Your thoughts ?

Further reading:
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html 
http://en.wikipedia.org/wiki/Big_Three_(credit_rating_agencies)
http://www.treasurers.org/node/3168
http://www.yourarticlelibrary.com/business/6-important-functions-of-the-credit-rating-serve/1441/