Tag Archives: shadow banking

China’s Growing Economic Miracle…(Collapse). Or… Everyone Pays the Piper! by Brett Redmayne-Titley

Posted on January 18, 2020 | 1 comment

Nobody knows just how much of China’s economic miracle was bought with a credit card. We may soon find out. From Brett Redmayne-Titley at watchingromeburn.uk:

In emulating the American economic raison d’etre,China has attempted to develop its unique capitalist model while ignoring that it too will soon suffer the same fate for the same reason: Unsustainable debt.  When examining the recent realities of Chinese banking and finance over the past year it seems the steam that president Xi Jinping touts as powering the engine of his purported economic miracle of a master-planned economy is only a mirage, now almost completely evaporated before his eyes.

Like the many other similarly foolish western nations, China seeks only one path out of this fiscal death spiral, one that will likely spell doom and/or revolution in many countries soon: More debt.

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Pondering the Collapse of the Entire Shadow Banking System, by Mike “Mish” Shedlock

Posted on October 29, 2019 | 1 comment

The repo market is gigantic and very few people on the outside know much about it. Right now, the salient point is that it is not functioning properly and the Federal Reserve is quietly engaging in emergency measures to keep it going. This article is a good explanation of what’s going on and what may be causing the repo market stresses. The article links to a Pater Tenebrarum article “Repro Quake – A Primer” that is technical but worth the read for those who want to delve further into the matter. The repo market’s troubles may end up being the proverbial canary in the coal mine for an impending financial crisis. From Mike “Mish” Shedlock at moneymaven.io:

What’s behind the ever-increasing need for emergency repos? A couple of correspondents have an eye on shadow banking.

Shadow Banking

  • The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
  • It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
  • The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight since then.

The above from Investopedia.

Image courtesy of my friend Chris Temple.

Hey It’s Not QE, Not Even Monetary

Yesterday, I commented Fed to Increase Emergency Repos to $120 Billion, But Hey, It’s Not Monetary.

Let’s recap before reviewing excellent comments from a couple of valued sources.

The Fed keeps increasing the size and duration of “overnight” funding. It’s now up $120 billion a day, every day, extended for weeks. That is on top of new additions.

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Implosion of China’s P2P Lending Boom Hits Consumer Spending, by Wolf Richter

Posted on September 10, 2018 | Leave a comment

Is China’s economy hitting the great wall? From Wolf Richter at wolfstreet.com:

First sign: auto sales suddenly plunged.

The Chinese government legalized peer-to-peer lending platforms in 2015. P2P sites attract money from individual investors – mostly savers – by offering them extraordinarily high yields. They lend this money at high interest rates to borrowers who have trouble getting loans elsewhere – classic subprime. By the end of 2017, there were over 8,000 P2P platforms, according to the People’s Bank of China, with over 50 million registered users. By the end of June, in a little over two years, the industry had gone from zero to $190 billion in outstanding loans.

That was the peak. But the fun didn’t last long. Borrowers defaulted on their loans or just absconded with the money, and the platforms began collapsing. In May this year, regulators stepped in. By the end of July, 4,740 P2P lenders had collapsed or where shut down. Continue reading →

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The Most Important Asset Class In The World, by David Robertson

Posted on September 9, 2018 | Leave a comment

You probably won’t guess it, even with ten tries, but it is an important asset class. From David Robertson at realinvestmentadvice.com:

Here we are, ten years after the bankruptcy of Lehman Brothers, and one would be hard pressed to find evidence of meaningful lessons learned.

“As long as the music is playing, you’ve got to get up and dance,” – Chuck Prince, Citigroup

Chuck’s utterance now sounds more like a quaint remembrance than a stark reminder. Ben Bernanke’s proclamation also sounds more like an “oopsie” than a dangerous misjudgment by a top official.

“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers …” 

One of the most pernicious aspects of the financial crisis for many investors was that it seemed to come out of nowhere. US housing prices had never declined in a big way and subprime was too small to show up on the radar. Nonetheless, the stage was set by rapid growth in credit and high levels of debt. Today, eerily similar underlying conditions exist in the Chinese residential real estate market. Indeed, a lot of investors might be surprised to hear it called the most important asset class in the world.

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Next Mortgage Default Tsunami Isn’t Going to Drown Big Banks but “Shadow Banks”, by Wolf Richter

Posted on June 17, 2018 | Leave a comment

Shadow banks like Quicken Loans have a bigger share of the mortgage market than they did back in 2007. That may not be a good thing, because their capitalization is thinner than banks’. From Wolf Richter at wolfstreet.com:

As banks pull back from mortgage lending amid inflated prices and rising rates, “shadow banks” become very aggressive.

In the first quarter 2018, banks and non-bank mortgage lenders – the “shadow banks” – originated 1.81 million loans for residential properties (1 to 4 units). In the diversified US mortgage industry, the top 10 banks and “shadow banks” alone originated 260,570 mortgages, or 14.4% of the total, amounting to $75 billion. We’ll get to those top 10 in a moment.

Banks are institutions that take deposits and use those deposits to fund part of their lending activities. They’re watched over by federal and state bank regulators, from the Fed on down. Since the Financial Crisis and the bailouts, they were forced to increase their capital cushions, which are now large.

Non-bank lenders do not take deposits, and thus have to fund their lending in other ways, including by borrowing from big banks and issuing bonds. They’re not regulated by bank regulators, and their capital cushions are minimal. During the last mortgage crisis, the non-bank mortgage lenders were the first to collapse – and none were bailed out.

So let’s see.

Of those 1.81 million mortgages originated in Q1 by all banks and non-banks, according to property data provider, ATTOM Data Solutions:

  • 666,000 were purchase mortgages, up 2% from a year ago
  • 800,000 were refinance mortgages (refis), down 11%from a year ago due to rising interest rates.
  • 348,000 were Home Equity Lines of Credit (HELOCs), up 14% from a year ago

HELOCs, which allow homeowners to use their perceived home equity as an ATM, are once again booming: $67 billion were taken out in Q1, though that’s still less than half of peak-HELOC in Q2 2006, when over $140 billion were taken out.

To continue reading: Next Mortgage Default Tsunami Isn’t Going to Drown Big Banks but “Shadow Banks”

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World Banks Are “Swimming Naked”, by Bill Bonner

Posted on May 23, 2018 | Leave a comment

Recently we’ve worried about southern European banks, especially Italy’s, but let’s not forget that an appreciable segment of the Chinese banking system has a lot of wood to chop before it can be considered solvent and safe. China’s efforts to deal with the situation will have global ramifications. From Bill Bonner at bonnerandpartners.com:

YOUGHAL, IRELAND – The Dow turned down a bit yesterday. The 10-year Treasury yield held at 3.07%.

As long as neither revisits its recent top and bottom, respectively, we presume the “primary trend” for both the bond market and the stock market is down.

Everything else is just noise.

Bad Guy Syndrome

We have been exploring the “bad guy” syndrome. The U.S. has invaded 70 countries since its founding. Modern Iran: zero.

The U.S. has weapons of mass destruction and has proven that it is ready to use them; it dropped an atomic bomb twice – both times on civilians.

Iran has no atomic weapons. The U.S. has troops in Afghanistan and Iraq, within easy striking distance of Iran… and now makes demands that no self-respecting sovereign nation would ever accept.

Iran has no troops in Mexico or Canada… no way to attack America… and makes no demands of it.

So who’s the bad guy? It doesn’t matter what we think. But what do the gods think?

We’ll come back to that question tomorrow.

Rabble-Roused

In the meantime… let’s stick with the primary trend. If the primary trend for equities really is down… we are unlikely to make any money in stocks for the next 10 or 20 years… at least.

It takes that long for a bear market to run its course. Individual stocks may go up. But, unless you are lucky or very well-advised, they won’t be the stocks you own.

Nominal prices may go up, but after you adjust for inflation, you will see that you have lost money.

And if the primary trend in bonds is also down, you should get out of the credit market… and stay out… for the rest of your life.

It takes a lifetime for the credit market to complete a full cycle. So we are unlikely to see another top. We’ll be lucky if we live to see another bottom; it might come in 10, 20, or 30 years.

To continue reading: World Banks Are “Swimming Naked”

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Why We Won’t Have a “Lehman Moment” in the 2016 Crash, by Charles Hugh Smith

Posted on February 3, 2016 | Leave a comment

Notwithstanding the title, this is not an optimistic article. From Charles Hugh Smith at oftwominds.com:

What the central banks cannot do is create productive places to invest the credit they’ve generated in such excess, or force qualified borrowers to swallow more unproductive debt.

One way to lose a war is to focus on preparing to fight the last war. Preparing to fight the last war is a characteristic of losing generals, militaries and nations. The same is true of finance and economies.

General Grant’s difficulties in breaking the trench warfare around Petersburg, VA in the last year of the American Civil War (1864 to early 1865) telegraphed the future of trench warfare to astute observers. Few took heed of the lessons of the “first modern war,” and many of the same strategies of 1864 (digging a tunnel under enemy lines and filling the tunnel with explosives to blow a hole through their defenses, for example) were repeated in the Great War of 1914-1918 fifty years later.

When a weapon system capable of breaking the stalemate emerged–the tank–its potential for massed attack escaped planners on both sides, and the new weapon was squandered in piecemeal assaults.

“The last war” in 2008-09 was a battle to save heavily leveraged centralized financial institutions from default and liquidation–commercial and investment banks, insurance companies, etc. The concentration of capital, leverage and risk in these behemoths rendered the entire system vulnerable to their collapse (or so we were told).

Saving imploding private-sector banks was no problem for central banks that could create $1 trillion in new money with the push of a button and offer essentially unlimited lines of credit to banks facing a liquidity crunch.

But the current financial meltdown is not like the last war. Central banks are ready to extend unlimited credit again to private-sector financial institutions, but this time around, the problem won’t be a lack of liquidity.

To continue reading: Why We Won’t Have a “Lehman Moment” in the 2016 Crash

 

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