over the Next Decade
May 8, 2012
Let’s turn to emerging markets. Do you expect a hard landing in China?
When you have a supposed growth investment, whether it is a country, a stock, or anything else, and you use the word “landing,” it makes no difference whether it is hard or soft. You have to be very, very cautious, because people get caught up in the adjective. The suggestion is that if it is only a soft landing, it won’t matter. But it is important to remember markets don’t act on the absolutes of good and bad. Markets act on better or worse. If you are talking about a landing, it implies a worse situation than you presently have. It is very hard to find a stock market that does well when things are getting worse. That’s what’s been going on in the Chinese market.
On top of that, China’s ongoing credit bubble makes the US credit bubble look downright amateurish.
If you didn’t like Fannie and Freddie’s role in the US economy – and I’m not particularly a fan of them – you can’t like China. At least Fannie and Freddie were constrained to the housing market. The Chinese government is in every single industry, lending and facilitating credit.
People are kidding themselves when they think China’s economy was just a normal event going on for the last three, four or five years.
Are you are referring specifically to the 8% to 10% growth in the Chinese economy?
Yes. Over that period, growth was predicated on a huge, huge, credit bubble.
Here is a good way to think about it: People always talk about the great trains, infrastructure, roads and airports in China. Nobody ever asks, “How did they finance that?” A lot of it was financed by local governments that now can’t pay them back and the government is assuming all those loans.
They have been printing Renminbi like crazy. The People’s Bank of China’s balance sheet is now 50% bigger than the Fed’s, according to Bianco research. So why isn’t anybody worried about the dollar? I mean this is kind of nutty. The ECB’s balance sheet is now bigger than the Fed’s too, by the way. People are putting their head in the sand, hoping that China isn’t in a credit bubble. But it is the biggest one of my professional career.
Do you have a forecast as to the timing of how things will unfold with China?
If you look at the early-warning radar, it is already starting. Default rates are going up. Delinquency rates are going up. The Chinese government is assuming loans. It is already starting to deflate.
Beyond China, do you see a similar situation in the other emerging markets?
It depends. It may be unfair to put all four of the BRICs together, other than in a marketing concept. They are all very credit-induced economies. They can’t try to fight inflation, because their currencies would appreciate. They can’t really exist with inflation, but inflation expectations are rising. For example, the Brazilian real has been falling as inflation expectations go up in Brazil.
You’d think the Brazilian central bank would be like the Bundesbank, given its history of hyperinflation. You’d think they’d be one of the tightest central banks in the world. But nothing could be farther from the truth. They are now accepting inflation, and their currency is falling accordingly, and inflation expectations are going up.
I don’t see how that’s good for a dollar-based investor.
You mentioned earlier you expect interest rates to go lower.
Everybody asks me what is the probability that the US economy turns out to be Japan? My answer is that is the wrong question. You should be asking what is the probability the entire world turns out to be Japan?
When people ask, “Is the US becoming Japan?” they have their blinders on. They think the credit bubble is only a US credit bubble, but we know there’s been a credit bubble in Europe. We know there has been one in the emerging markets. It’s a global phenomenon. So why would only the US become Japan? Why wouldn’t the whole world become Japan?
There is a fair amount of risk in the entire world. People’s expectations for global growth are much too optimistic. If slower growth happens, investors are going to be running to safer assets.
I don’t care what the politicians tell me. I care what the markets tell me. The highest-quality assets in the world are Treasury securities.
The US is going to benefit from the rest of the world’s problems. We are going to get lower long-term interest rates, but not because our own economy is shrinking. We’re going to get lower interest rates because the global economy is shrinking. That is going to be very good for the US economy going forward.
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