Soros is wrong: This isn’t a crisis, just a bad headache

Commodity prices are collapsing. World trade volume is plummeting (down 12% year on year, as bad as the 1981 recession). Growth is minimal in the US, Europe and Japan and negative in Brazil and Russia. China is slowing. Is that a crisis like 2008, as George Soros claimed at Sri Lanka economic forum?

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For Brazil, certainly–it’s economy is shrinking at a 4.5% annual rate, the worst in generations. For the mining industry, for sure: the Bloomberg World Mining Index has fallen from 220 last May to 120 this morning. For lower-rated US energy economies, doubtless: their cost of bond funding has risen from 4% above the 10-year Treasury hield to 14% above the 10-year Treasury yield since June of 2014.

But not for the world financial system. The leverage that blew up the world in 2008 is gone.

With the regulatory equivalent of a gun to their head, US banks have raised capital and shed leverage. Us consumers meanwhile are paying the lowest proportion of disposal income in debt service since 1993.

Foreign lending to countries and corporations has doubled since 2008 (to $4 trillion from $2 trillion, according to the Bank for International Settlements), and a lot of this debt looks dicey. The Brazilian government’s 30-year bond has fallen from a dollar price of $100 to a price of less than $70 over the past year. But most of this new debt is owned by cash investors–mutual funds and pension funds–rather than banks or hedge funds. It wasn’t bought with leverage. A cash buyer can absorb the loss, unlike a levered investor.

In 2008, banks owned a trillion dollars of phony triple-AAA securities assembled by the Frankensteins of finance, and they owned a lot of it with 70:1 leverage in off-balance-sheet vehicles. That’s why the banks were technically insolvent when the subprime market crashed. All of that garbage has been flushed out of the system. Leverage allowed the big US banks to report return on equity of 15%-20% during the mid-2000s. Now their return on equity is in single digits. Bank of America trades at a third of its 2006 peak price, and Citibank at about a tenth. Under the new regulatory regime they can’t make much money. But neither can they get into big trouble.

European and Japanese banks have been rebuilding their capital cushion as well. The biggest improvement by far has been in China, whose mainly state-owned banks have come up from very thin capital levels to global standards during past several years.

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There’s not going to be a panic. Don’t cash in your life insurance policy and buy gold coins. World equity markets probably will show a negative year and investors will hate life. But it’s not 2008.



Categories: Asia Unhedged

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