Feb 17. Quiet start to week. FOMC minutes on Wednesday
–Friday’s Industrial Production of -0.3 added to a string of disappointing economic data. Volume was light in interest rates, with continued pressure on implied vol. Fed minutes out on Wednesday afternoon.
–A few headlines from Bloomberg over the past few days:
Feb 14: China Banks’ Bad Loans Reach Highest Since Financial Crisis (excerpt below)
Feb 15: China January New Loans, Aggregate Financing Exceed Estimates
Feb 14: European Banks Avoiding Risky-Loan Disclosure Face Review
–The last item concerns restructured loans to companies having problems; apparently many banks in the EU don’t disclose renegotiated loans. The point is that the growth of credit is positively correlated to economic growth, but the concern in China (in particular) is that such lending is for malinvestment. For example, lending to coal companies is one of China’s shadow finance issues. I’m sure this is a stretch, but I looked at the share prices for some large coal cos. in the US. In the past 3 years Peabody (BTU) from 70 to 17, Arch (ACI) 35 to 4, Alpha (ANR) 70 to 5. I would be a bit nervous to have an edifice of ‘wealth mgmt products’ secured by loans to coal companies, as is apparently the cse in China.
–A couple of other notes about debt vs equity and the interplay of QE. Japan’s Nikkei has been soft of late. From BBG: The head of Japan’s Government Pension Investment Fund has hit out at pressure to rebalance its bond-heavy portfolio, arguing that his Y124tn ($1.2tn)-in-assets institution should not be used as a tool to push up stock prices.
–A gov’t official in Norway is also urging that the percentage of bonds be cut from that country’s investment portfolio.
–Worldwide there is hope that increases in equity prices, whether pushed up by QE or, by extension, bank credit, or by other gov’t pressure, will somehow translate into solid economic growth in a positive, self-reinforcing spiral. The biggest experiment is in Japan, which appears to be the one closest to unravelling.
