Sometimes you cannot believe what you see, you have to believe what you feel.” - Mitch Albom

Dear readers, please find below the usual links. One topic that has become obvious in recent years is China’s debt and economic future. A blogger recently said that opinion on China have become quite polarized, and we believe this is true. Our team is quite cautious on the outlooks for the country, especially in light of the rapid growth of debt since 2009. Indeed, historical precedents indicate that the likelihood for a massive recession, even debt deflation, and ‘lost decades’ is quite high.

As usual, the Chinese bubble is lasting much longer than expected, giving credit to the saying: “bubbles explode when the last bear throws the towel“, although given the size of the excesses it is very unlikely that bears will throw the towel anytime soon. In Western countries, political decisions already make it quite difficult to time the market. So we would expect that China’s opaque decision making process makes it quite impossible. So far, the only accurate description of the Chinese economic process comes from Michael Pettis, who accurately predicted the stop-and-go use of credit (debt) to boost or slow economic performance.

While timing the endgame is impossible, we can reasonably expect the following:

  • Chinese political elite will prove less than able at handling the task before them for the following reasons: while the top decision makers must be aware of the size of the issue (debt and its consequences), local governments probably have a poor understanding of it and in any case little incentive to change their paradigm (which until now proved quite rewarding);
  • Chinese economic growth will continue to decline, although quite unevenly;
  • A series of shocks, minors and majors can be expected and will last until the debt binge will be resorbed, and this can take quite some time: Japan’s peak of default happened between 1997 and 2002, with the official number of Non-Performing Loans climbing to about 8% of bank loans in 2001, or 10 years after the double crash of stocks and house prices.


China’s slow down is expected to impact a lot of countries. The commodity exporting ones have already taken quite a toll, but the worst may be yet to come. Western countries are probably less exposed, yet their companies have become increasingly exposed to China and the potential impact is quite difficult to quantify, especially given the weak economic conditions in Europe. We will be following the development closely. Stay tuned.

Science, General Knowledge & Environment

Eske Willerslev Is Rewriting History With DNA – (Ha tip Lao Ho) – “As the director of the Center for GeoGenetics at the University of Copenhagen, Dr. Willerslev uses ancient DNA to reconstruct the past 50,000 years of human history. The findings have enriched our understanding of prehistory, shedding light on human development with evidence that can’t be found in pottery shards or studies of living cultures.

Goldman Sachs emerges as growing natural gas player – “Goldman Sachs has quietly overtaken Chevron and ExxonMobil to become one of the biggest natural gas merchants in North America, expanding in physical commodities trading even as other banks pull back.

Private equity faces China challenge in key mining assets – “Chinese buyers have lower cost of capital than a PE firm, if an asset has strategic value a PE should not compete […] For the few good, large high-profile assets, strategic (buyers) will always outbid PE.

History & Geopolitics

This is how fascism comes to America – “In democracies, at least for politicians, the only thing that matters is what the voters say they want — vox populi vox Dei. A mass political movement is thus a powerful and, to those who would oppose it, frightening weapon.

Avoiding a War in Space – “A war in space would disable a number of key satellites, and the resulting debris would place vital orbital regions at risk. The damage to the world economy could also be disastrous. In severity, the consequences of space warfare could be comparable to those of nuclear war.

Conversation: France’s Ties to Africa – [Video] – “Stratfor Vice President of Africa Operations Mark Schroeder and Africa Analyst Stephen Rakowski discuss the reasons behind France’s current and historical interventions in Africa.

The Meaning of Jihadist Silence on the EgyptAir Crash – “In a worst-case scenario, we may have a competent bombmaker on the loose with knowledge of how to get a bomb onto a plane, and the authorities have no idea what method he is using.

Finance & Economics

Hard Landing Coming Soon? Chinese Officials Set Off Red Alert on Debt, Urge Serious Measure to Contain It – “Even though Japan’s payment system was never at risk in the implosion of its colossal credit bubble, its banks and economy have been in a zombie state for a full quarter century. Japan’s massive bubble took place through a mere 11 massive “city banks” and another three “long term credit banks”. By contrast, China has a large shadow banking system. Just like our officialdom in 2007 and 2008, it’s very unlikely that they have a good grasp of the extent and the interconnectedness of the risks. They may find out very soon.

Picture of the day: Balance (Defined)

Jap dog balance Ball

About Carlito Riego

"Great perfection may appear imperfect, but its usefulness is inexhaustible. Great abundance may appear empty, but its usefulness cannot be exhausted. Great correctness may appear twisted, great skills appear crude, great eloquence appear awkward. Activity conquers cold; inactivity conquers heat. Clear serenity governs the world." - Lao Zi