Thursday, June 23, 2011

Bernanke Just Admitted He's Lost Control of the Markets

by Phoenix Capital Research

For weeks now I’ve been warning that absent the hint of additional liquidity at the June FOMC meeting, the markets would tank.

And tank they have… almost to the minute that the Fed FOMC ended.

The number of problems facing the financial markets today is absolutely enormous. China has begun an interbank liquidity Crisis. Europe’s banking system continues to collapse. Heck even Trichet now admits that risk is on “red” for the Eurozone (remember how everything was “fine” for the last year?).

The Middle East continues to go up in flames… literally. Greece is seeing full-scale riots (coming to a country near you in the next 12 months). Inflation is erupting in China. And on and on.

And at the head of all of this, the US Federal Reserve, run by Time’s “Man of the Year” Ben Bernanke, admitted openly they don’t have a CLUE why the economy is not picking up.

Folks, this is the same guy who was MONTHS BEHIND on calling the US recession, the Financial Crisis of 2008, and every other problem facing the US. So if he’s admitting he doesn’t know what’s going on now… after spending TRILLIONS of Dollars… then you better BELIEVE things are going to be getting ugly.

I’ve long said that the next Crisis will make 2008 look like a picnic. The reason is quite simple: the next Crisis will be a Crisis of Faith pertaining to the US Federal Reserve.

For 80+ years, the US financial system has operated under the belief that the Federal Reserve could handle any problem. This belief was put to the ultimate test in 2008 when the Fed faced off against the biggest Financial Crisis of the last 80 years. And the ONLY thing that kept us from the brink was the belief the Fed could fix things.

It couldn’t. And we’re all beginning to see that now.

So when the next Crisis hits it will become clear the Fed CANNOT fix these issues (it never could but most people hoped regardless). And that’s when the real collapse will begin.

It’s coming. The fact Bernanke has admitted publicly that he’s clueless what’s going on is a MAJOR step towards the world realizing that he’s lost control.

See the original article >>

Sugar prices tumble after India lifts exports


Sugar prices slumped 5% after India's government, under pressure from mills, allowed an additional 500,000 tonnes of unrestricted exports.
The concession fell short of the 1.5m tonnes in shipments that the Indian Sugar Mills Association had been seeking, after stocks reportedly rose above 23m tonnes this month – more than a year's supply.
Even so, the move by the world's second-ranked producer of the sweetener took markets by surprise, initially sending New York's July raw sugar contract down 5.7%.
"This decision was not a given," Macquarie analyst Kona Haque, in London, said.
"Only earlier this week, the government said it was going to wait until the end of the year to release more exports."
'Really strong margin'
Such caution was lent credibility by the government's proven caution over measures which risk stoking inflation, currently running at more than 9%.
However, domestic sugar prices have been on the slide, opening up a discount of some 5,000-6,000 rupees per tonne to international values.
"There is a really strong export margin now," Ms Haque said.
Mills have been especially keen for immediate concessions on exports given the likelihood of a continuing seasonal rise in shipments from Brazil, the top exporter, where the logistical hang-ups which marred trade last year have, thus far, proved less severe this time.
Terry Roggensack, at Hightower Report, said: "Traders see some tightness for spot sugar supply in the next few months. But with most major world producers expecting higher production this year, a global production surplus for the coming year is seen as a longer-term negative force."
Supply boosters
Expectations of a further rise in Indian output in 2011-12 have been lifted by forecasts of a near-average monsoon and a lift in plantings encouraged by higher prices.
Vinay Kumar, managing director of India's National Federation of Co-operative Sugar Factories, on Thursday estimated output at 26.0m-26.5m tonnes, a rise of 8-10% year-on-year, with some estimates as high as 28m tonnes.
Export supplies could also be boosted by improved weather in Europe, which could put it "in a position to allow the export of 700,000 tonnes", Mr Roggensack said, also highlighting a rise in beet sowings in Russia, a major importer.
Raw sugar for July had recovered to 26.31 cents a pound at 14:10 GMT, down 3.4% on the day, with London white sugar for August down 2.0% at $725.50 a tonne.
As an extra depressant to prices, the dollar soared 1.2% after Jean Claude Trichet, the president of the European Central Bank, warned that the Greek crisis was destabilising the eurozone.

See the original article >>

China should raise rates soon to curb inflation

by IBT

China should raise benchmark interest rates soon to tame inflation and accelerate economic restructuring, even though the move could slow growth, the official China Securities Journal said in an editorial published on Thursday.

The central bank has relied more on rises in reserve requirement ratios than interest rate increases so far this year to check inflation.

China's real interest rates had been negative for too long, fuelling money flows outside the banking system, weakening the effectiveness of quantitative easing tools such as required reserve ratio increases or lending curbs, the newspaper said.

For example, although interbank money market rates had jumped and growth of new lending and money supply had slowed in June, according to official data, loan demand remained robust as many enterprises turned to non-banking financial institutions for financing, the article said.

In addition, China's inflation was largely driven by its booming real estate market, which had pushed up prices of labour and raw materials, and interest rates were typically necessary in such a scenario, it said.

If China did not raise interest rates now, the momentum of higher inflation could accumulate while the task of transforming the model of economic growth would become more difficult, the paper said.

Separately, He Keng, a senior lawmaker, told the People's Daily that the central bank should suspend raising bank reserve requirements as it had failed to contain inflation.

The central bank has raised reserve ratios six times so far this year but has only increased interest rates twice. 

Its latest move last week sparked an acute money market squeeze, forcing it to suspend bill issues on Thursday.

More RRR rises could threaten economic growth in the world's second-largest economy, He warned.

"The six rises have caused big funding difficulties for small and medium-sized companies. We are also hearing big companies complain about tight capital. If such adjustment continues, our economy will be in trouble," he said, reminding that excessive RRR rises and yuan appreciation sharply slowed the Chinese economy in 2008.

"What's the point of relentlessly raising RRRs regardless of economic conditions and corporate difficulties?" 

He said.

Dr. Copper and the Chinese Housing Market Bubble

By: Submissions

The mighty Dr. Copper; the only metal has a suffix attached to his name, for his accuracy predating equity prices for years. In the past 30 months or so, copper had a fantastic performance, almost quadrupled its price from December 2008 lows. But recently, this is becoming more of a story about emerging market infrastructure spree than acclaimed shortages.

 An article in daily mail about a Chinese ghost city Kangbashi may give us some idea about the scale of the spree.


One approach road leads past what was until recently a 30,000-seater stadium, costing £100 million and rushed to completion in nine months for last year's Mongolian Games - horse-racing, archery and wrestling. When it was opened, it looked rather like Concorde about to take off. But soon after New Year's Day, a whole white wing, plus the central peak, collapsed during the night. 

As the ancient Chinese saying goes:” one shall invest in art in heyday and own gold in troubled times:” With some Chinese art prices soaring to unprecedented levels, not doubt we are in a boom time. However, anybody who studied some history may ponder the question whether this time is different. Looking at the media flooded with articles about how superior a state-driven fixed asset investment economy is, I couldn’t help but wonder if anyone experiences the same déjà vu as I do. 

Supply wise, for all the Malthusians I’ve got bad news for you. BBC just discovered new source of copper supply! They are in Goldman’s warehouse! Several prominent website has already covered this story in detail:

BBC bubble trouble interview via

MR: In fact it turned out that only about 40% of the copper was on the LME’s official stocks, and therefore visible to the market. 


The primary driver of this anti-competitive behavior is the fact that GS, JPM and Glencore now control virtually the entire inventory bottlenecking pathways: "In recent years, major investment banks like Goldman and J.P. Morgan and commodities houses like Glencore have been snapping up warehouses around the world, turning the industry from a disperse grouping of independent operators into another arm of Wall Street. The LME has licensed about 600 warehouses around the world.

Copper guru Simon Hunt explained:

The real story about copper is the size of the financial sector’s involvement in buying surplus copper and warehousing it outside the reporting system both in your country and elsewhere, which probably started in 2006. This is what creates robust demand, which is quite different to consumption. 

I’m also a big believer in seasonality; the chance of a market collapse in autumn is just too high for me to discredit markets seasonal traits. So I examined three major housing bubble in the past 20 years or so, the Japan asset bubble, Asian tiger, and US housing bubble and put them into a seasonal perspective, presidential cycle in this case. These three housing bubbles are each characterized by the same stated-induced cheap credit, reckless speculation, and debt fueled asset inflation. And here is the result:

If the Chinese housing bubble talk is validated, with inflation pressure mounting up and further tightening measures in emerging market, Simon hunt’s prediction of copper price plunging to 7500 level surely could be realized by year end. After that, copper price tend to rally at the beginning of election year, and an even lower copper price in second half of 2012 is not avoided.

See the original article >>

Oil Back Below 200-Day Moving Average

by Bespoke Investment Group

Oil is getting crushed this morning on news that the IEA will release 60 million barrels of crude to make up for the shortfall created by the unrest in Libya. At a current level of around $91 per barrel, NYMEX crude is now poised to close below its 200-day moving average for the first time in more than six months, and below its highs from late December and early January.

Durum resists further sell-off on grain markets


Durum is, thanks to weak North American sowings, avoiding the worst of the sell-off in grains which continued on futures markets, sending Paris's November wheat lot to a fresh three month low.
Early resilience on grain markets on Thursday gave way to fresh selling, sending November wheat down a further 1.4% to E194.00 a tonne at one point, the weakest for the contract since March.
London wheat lost 0.8% to £162.75 a tonne with Chicago wheat, the world benchmark, losing 0.9% to $6.32 ¾ a bushel as of 10:00 GMT, if remaining well above the lows of the last session.
Prices are being depressed by talk of a significant backlog of shipments to sell from Russia after the lifting of its export ban next week, with dollar-denominated assets also facing the headwind of a 0.8% jump in the greenback against a basket of currencies.
"Russia has got to export this before the new crop arrives anyway, so they are not going to hold out for high prices," a market source told
Against the grain
However, prices of durum wheat, the type used to make pasta, while not quoted on futures markets, remained relatively stable on cash markets, selling for E350 a tonne at France's Port La Nouvelle, according to Agritel, the Paris-based consultancy.
That represented a fall of 1.4% on the day, compared with slides of nearly 5% in soft wheat, and more than 2% in corn and feed barley.
For June overall, durum prices are still nearly 19% up, compared with losses of 15.4% for wheat, at the French port of Rouen, and declines in all other significant crops, including malting barley and feed peas.
This diverengence was echoed in Australia, where AWB, in its first pools update as a Cargill-owned company, on Thursday lifted estimates for durum returns for farmers in eastern states using its wheat pools, while cutting forecasts for all other grain types.
At Aus$375 a tonne, top-quality durum is expected to achieve 7.8% more than benchmark Australian prime wheat over 2010-11.
'Quality risk'
Durum's resilience follows a dismal sowing season in both western Canada and in the northern US states, major producing regions.
"Only 6% of the North Dakota durum crop was planted by the third week of May, which is exceptionally late," the Canadian Wheat Board said.
"Late planting in North America also increases quality risk for the crop, which is supportive of higher-quality values."
Furthermore, while yield results from North African and Spanish crops are expected to turn out strong, late rains have depressed the quality of the crop.
See the original article >>

China Hard Landing Bets Rise As It Now Costs More To Bet On Renminbi Strength Than Weakness

About a week ago, Goldman Sachs closed its tactical short USDCNY Non-Deliverable Forward trade, which was opened on June 10, 2010 and which expired a year later for a 4.2% gain. Goldman added: "Our view has not changed. The necessary adjustments to global imbalances demand a weaker US Dollar, and especially so vs the CNY. The cyclical and political backdrop remains supportive along those lines. Moreover, we expect $/CNY depreciation to continue/extend in the months to come. We remain positioned for the theme via our $/CNY NDF recommended Top Trade with longer initial maturity, expiring on 4 December 2012." Nonetheless, something appears to have shifted in the derivative CNY market, where as Bloomberg points out, it now costs more to bet on RMB weakness than strength. It adds: "China appears headed for a hard landing as the country’s housing market shows more signs of weakness. Currency traders have reduced their expectations for more appreciation of the yuan versus the dollar in the derivatives market, meaning they expect Chinese policy makers to fundamentally shift their approach to the currency due to economic softening. Other markets may soon follow currency’s lead." As the attached chart shows the USDCNY 3 Month 25 Delta Risk Reversal for the first time since September 2009, there appears to be some outright bearishness on the renminbi appreciation scenario. Does this mean that yesterday's decline in the official fixing rate to 6.4736 on Thursday, lower than the record high of 6.4683 on Wednesday is more than a one time adjustment and is the start of a new trend? We will find out soon enough.
USDCNY internals:

More from Bloomberg:
A number of signs point to a decline in Chinese housing. The Bloomberg Brief Population Weighted National Home Price Index shows that while housing prices are still rising year over year, the rate of appreciation is diminishing as government tightening measures aimed at quelling the bubble have taken effect. Growth slowed to 4.1 percent in May from 5.9 percent in January, and is approaching the nation’s one-year deposit rate of 3.25 percent.

With inflation above five percent, this decline means housing has joined deposit rates in negative territory in real terms, reducing investor incentives to put money into real estate. Transaction volumes also appear to be slowing, which may point to lower prices ahead.

There are also declines in other related data series. Sales of excavators have fallen 9.6 percent year over year, and sales of heavy-duty trucks needed for building are down 22.4 percent.

All of this likely fed into Standard & Poor’s recent revision of its outlook on Chinese housing to negative from stable. S&P expects home prices to fall 10 percent over the next year.

A decline in home prices may cause significant wealth destruction in China. The country’s investors essentially have only three main options: bank accounts, equity markets, and property. With real deposit rates in negative territory since February 2010, many Chinese have been pushed into property and equity markets. According to a survey by Hurun reported on by Forbes in May, about 20 percent of Chinese millionaires get their money from the country’s “hot real estate market.”

Growing concerns about a hard landing are definitely on display in the currency market, where betting that the yuan will fall recently became more expensive than backing its appreciation for the first time since September 2009. US D/CNY three-month 25 delta risk reversals, which measure the skew of out-of-the-money options to determine the direction of the spot rate over the next three months, turned positive on June 13.

This is remarkable given that the yuan is largely a political tool in China, held at lower levels than it should be to encourage exports and allowed to appreciate only gradually by Chinese policy makers under pressure from foreign counterparts to lessen global imbalances. In a hard landing scenario, Chinese policy makers would likely stop allowing appreciation, as strong exports would become a more important tool for bolstering the economy.
Bloomberg's proposed solution to what may be the start of China's downturn? Why print more of course:
Eventual government action may borrow from Fed Chairmen Alan Greenspan and Ben Bernanke’s playbooks. Their moves to loosen monetary policy in response to faltering markets became known as the Greenspan and Bernanke puts. In China, support would likely include fiscal as well as monetary policies focused on increasing investment into low- and middle-income housing and infrastructure as outlined in the country’s 12th five-year plan, as well as the lifting of certain borrowing restrictions for new homes. This “Jiabao” put would help put the economy back on sounder footing while likely engineering a soft landing for China.
Luckily, the financial markets have already put the stranglehold on the "Jiabao" put, and unless China promptly agrees to commence the printing, the interbank liquidiy market as we have been showing for the past week, is about to die a gruesome death.

Brent Crude Oil Pattern ...

by Kimble Charting Solutions

Does Bernanke Understand Why We Have a Weak Economy ?

By Washingtons Blog

Bernanke Is Either Not Very Bright or Not Very Honest. He Admits He Doesn’t Know Why We Have a Weak Economy … But He’s the One Who Weakened It

In “Bernanke Admits He’s Clueless On Economy’s Soft Patch”, Forbes blogger Agustino Fontevecchia notes:
Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.”
Specifically, Bernanke said today:
We don’t have a precise read on why this slower pace of growth is persisting.
Well, it is obvious to anyone who has been paying attention what’s causing the slow down, and if Mr. Bernanke doesn’t know, he should be fired.

As I’ve repeatedly explained since 2008, all independent economists and financial experts know why the economy is weak … and everything the Fed has been doing has been weakening it.

High-Level Fed Officials Slam Bernanke

Fed Vice Chairman Donald Kohn conceded that the government’s actions “will reduce [companies'] incentive to be careful in the future.” In other words, he’s admitting that the government’s actions will encourage financial companies to make even riskier gambles in the future.

Kansas City Fed President and veteran Fed official Thomas Hoenig said:
Too big has failed….
The sequence of [the government's] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state…
Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone.
To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery….
Many of the [government's current policy revolves around the idea of] “too big to fail” ….
History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail.
Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger…
The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke’s strategy of the endless printing-press and ever-increasing fed balance sheet:
Plosser urged the Fed to “proceed with caution” with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.*** 
Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed’s various asset purchase programs are not easily summarized in a single number.
But Plosser said that the growth of the Fed’s balance sheet was a key metric. 
“It is not appropriate to ignore quantitative metrics in this new policy environment,” Plosser said… 
Plosser is bringing the spotlight right back to the Fed’s balance sheet. 
“The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions,” Plosser said.
The former head of the Fed’s Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed’s open market operation – the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks – was quoted in Bloomberg as saying:
“Every time you tinker with this delicate system even small changes can create big ripples,” said Dino Kos, former head of the New York Fed’s open-market operations . . . “This is the impossible situation they are in. The risks are that the government’s $700 billion purchase of assets disturbs markets even more.”
And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:
Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint. 
In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said. 
The current situation at the Fed seems eerily similar, he said. 
“What is discipline – where are the hard choices – when does Fed say our resources are exhausted?” Poole asked.
But the strongest criticism may be from the former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout could signal corruption. As ABC writes:
Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.
“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.
Of course, former Fed chairman Paul Volcker has also strongly criticized current Fed policies.

Global Agencies Slam Bernanke

The Bank of International Settlements (BIS) – called “the central banks’ central bank” – has slammed the Fed for blowing bubbles and then “using gimmicks and palliatives” which “will only make things worse”.
As the Telegraph wrote in June 2007:
The Bank for International Settlements, the world’s most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood…
The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system…
The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances …
“Sooner or later the credit cycle will turn and default rates will begin to rise,” said the bank.
A year later, in June 2008, the Telegraph wrote:
A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate…
[BIS economist] Dr White says the US sub-prime crisis was the “trigger”, not the cause of the disaster.
Indeed, BIS slammed the Fed and other central banks for blowing the bubble, failing to regulate the shadow banking system, and then using gimmicks which will only make things worse. As the 2008 Telegraph article notes:
In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to “clean up” once property bubbles have burst…
Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”
“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” he said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
In other words, BIS slammed the easy credit policy of the Fed and other central banks, and the failure to regulate the shadow banking system.

More dramatically, BIS slammed “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.

But Bernanke and the other central bankers (as well as Treasury and the Council of Economic Advisors and Barney Frank and Chris Dodd and the others in control of American and British and French and Japanese and German and virtually every other country’s economic policy) ignored BIS’ advice in 2007 and 2008, and they are still ignoring it today.

Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other “second sets of books”) and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!

“The world’s most prestigious financial body”, “the ultimate bank of central bankers” has condemned Bernanke and all of the other G-8 central banks, and stripped bare their false claims that the crash wasn’t their fault or that they are now doing the right thing to turn the economy around.
As Spiegel wrote in July 2009:
White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market…
As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the “villain” in the global economy…
In the restrained world of central bankers, it would have been difficult for White to express himself more clearly…
It was probably the biggest failure of the world’s central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space…In their report, the BIS experts derisively described the techniques of rating agencies like Moody’s and Standard & Poor’s as “relatively crude” and noted that “some caution is in order in relation to the reliability of the results.”…
In January 2005, the BIS’s Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being “fully appreciated by market participants.” Extreme market events, the experts argued, could “have unanticipated systemic consequences.”
They also cautioned against putting too much faith in the rating agencies, which suffered from a fatal flaw. Because the rating agencies were being paid by the companies they rated, the committee argued, there was a risk that they might rate some companies too highly and be reluctant to lower the ratings of others that should have been downgraded.
These comments show that the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments…
The Fed chairman was not even impressed by a letter the Mortgage Insurance Companies of America (MICA), a trade association of US mortgage providers, sent to the Fed on Sept. 23, 2005. In the letter, MICA warned that it was “very concerned” about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled “This Powder Keg Is Going to Blow,” there was no secondary market for these “nuclear mortgages.”…
William White and his Basel team were dumbstruck. The central bankers were simply ignoring their warnings. Didn’t they understand what they were being told? Or was it that they simply didn’t want to understand?
The head of the World Bank also says:
Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the ‘real economy’ of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.
A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
By failing to break up the giant banks, governments are forced to take counter-productive emergency measures (see this and this) to try to cover up their insolvency. Those measures drain the life blood out of the real economy … destroying national economies.

Indeed, instead of directly helping the American people, the government threw trillions at the giant banks (including foreign banks; and see this) . The big banks have – in turn – used a lot of that money to speculate in commodities, including food and other items which are now driving up the price of consumer necessities [as well as stocks]. Instead of using the money to hire Americans, they’re hiring abroad (and getting tax refunds from the government).

Economists Slam Bernanke

Stephen Roach (former chief economist for Morgan Stanley, and now director of Morgan Stanley Asia) is one of the most influential and respected American economists. Roach told Charlie Rose recently that we have had terrible Federal Reserve policy for the past 12 years under Greenspan and Bernanke, that they concocted hair-brained theories (for example, that we should let the boom and bust cycle occur, but then “clean up the mess” once things fall apart), and that we really need to reform the Fed.

Specifically, here’s the must-read portion of the interview:
STEPHEN ROACH: And what’s missing in the debate that drives me nuts is going back to the very function of central banking that’s at the core of our financial system. Do we have the right model for the Fed to go forward? And, you know, I think we’ve minimized the role that the custodians, the stewards of our financial
system, the Federal Reserve, played in leading to this crisis and in making sure that we will never have this again. I think we’ve had horrible central banking in the United States for the past dozen of years. I mean, we elevate our central bankers, we probably .
CHARLIE ROSE: From Greenspan to Bernanke.
STEPHEN ROACH: We call them maestro, and, you know, we make them
sound larger than life. And, you know, and the fact is, they condoned
policies that took us from one bubble to another. They failed to live up
to their regulatory responsibility granted them by law. They concocted new
theories to explain why these things could go on forever, and they harbored
the belief, mistakenly in my view, that monetary policy is too big and
blunt an instrument, and so you just bring it in to clean up the mess
afterwards rather than prevent a mess ahead of time. Well, look at the
mess we’re in right now. We need a different approach here. We really do.
Leading economist Anna Schwartz, co-author of the leading book on the Great Depression with Milton Friedman, told the Wall Street journal that the Fed’s entire strategy in dealing with the financial crisis is wrong. Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.

Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:
“I am convinced that the misbehavior of some would have been much rarer — and far less damaging to our economy — if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities …
Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.
“Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior,” Kaufman said. “It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective.”
Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were “too big to fail” have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.
“Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities,” he said. “The Fed failed to rein in the problem.”…
“Much of the recent extreme financial behavior is rooted in faulty monetary policies,” he said. “Poor policies encourage excessive risk taking.”
Economist Marc Faber says that central bankers are money printers who create bubbles, and that the system would be much better now if the Fed hadn’t intervened. Specifically, Faber says that – if the Fed hadn’t intervened – the system would be cleaned out, the system would be healthier because debt load and burden on taxpayers would be reduced.

Economist Jane D’Arista has shown that the Fed has failed miserably at its main task: providing a “counter-cyclical” influence (that is, taking the punch bowl away before the party gets too wild).

The Fed has also failed miserably in its role as regulator of banks and their affiliates. As well-known economist James Galbraith says:
The Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.

The Federal Reserve is mandated by law to maximize employment. The relevant statute states:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
But the Fed has apparently decided to fight inflation instead of unemployment.

No wonder we’re suffering depression-level unemployment.


The Fed says that we should reduce leverage, but is doing everything in its power to increase leverage.

Specifically, the New York Federal published a report in 2009 entitled “The Shadow Banking System: Implications for Financial Regulation”.

One of the main conclusions of the report is that leverage undermines financial stability:
Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.
And as a former economist at the New York Fed, Richard Alford, wrote recently:
On Friday, William Dudley, President of FRBNY, gave an excellent presentation on the financial crisis. The speech was a logically-structured, tightly-reasoned, and succinct retrospective of the crisis. It took one step back from the details and proved a very useful financial sector-wide perspective. The speech should be read by everyone with an interest in the crisis. It highlights the often overlooked role of leverage and maturity mismatches even as its stated purpose was examining the role of liquidity.
While most analysts attributed the crisis to either specific instruments, or elements of the de-regulation, or policy action, Dudley correctly identified the causes of the crisis as the excessive use of leverage and maturity mismatches embedded in financial activities carried out off the balance sheets of the traditional banking system. The body of the speech opens with: “..this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.”
In fact, every independent economist has said that too much leverage was one of the main causes of the current economic crisis.

Federal Reserve Bank of San Francisco President Janet Yellen said recently that it’s “far from clear” whether the Fed should use interest rates to stem a surge in financial leverage, and urged further research into the issue.“Higher rates than called for based on purely macroeconomic conditions may help forestall a potentially damaging buildup of leverage and an asset-price boom”.

And yet, the Fed has been and continues to be one the biggest enablers for increased leverage. As anyone who has looked at Mr. Bernanke and Geithner’s actions will tell you, many of the government’s programs are aimed at trying to re-start securitization and the “shadow banking system”, and to prop up asset prices for highly-leveraged financial products.

Indeed, Mr. Bernanke said in February 2009:
In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF).
And he said it again in September 2009:
The Term Asset-Backed Securities Loan Facility, or TALF … has helped restart the securitization markets for various types of consumer and small business credit. Securitization markets are an important source of credit, and their virtual shutdown during the crisis has reduced credit availability for many borrowers.
As I noted in 2009, the economy is not getting better because government’s policies are strengthening the parasite and killing the patient.

Two fundamental causes of the Great Depression, and of our current economic problems, are fraud and inequality.

Fraud was one of the main causes of the Great Depression and of our current economic problems,, but the Federal Reserve has done nothing to rein in fraud today.


Inequality was another major cause of the 1930s Depression and today’s lousy economy, but the Fed has done nothing to even things out. Indeed, inequality is currently worse than during the Depression

Bottom Line

The reason for the weak economy is obvious to anyone paying attention.

If Bernanke can’t see it – or won’t admit – he should be fired.
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Are We in the Middle of a New Tech Bubble?

By Kerri Shanno

When career-networking site LinkedIn Corp. (NYSE: LNKD) started its first day of trading May 19, its shares zoomed 109% from its initial public offering (IPO) price of $45 a share to close at $94.25, and reached a market value of $9 billion - fueling rumors that we're in the middle of a new tech bubble.

Groupon Inc. filed for an IPO on June 2 and analysts said it could be valued as high as $30 billion, sparking more talk that sizzling tech IPOs are little more than a repeat of the dot-com bubble that burst in March 2000.

And many investors are eagerly awaiting another batch of Internet IPOs. Social networking sites Facebook Inc. and Twitter Inc. and gaming site Zynga Game Network Inc. are all thought to be hitting the market this year. 

Some analysts say these companies have uncertain profit potential, and pouring money into them would be following the same tragic trajectory as the previous tech bubble. Investor interest piqued at any dotcom business and threw billions of dollars at companies. When returns didn't live up to promises, most investors were left empty-handed.

"We have a lot of echoes of 1999," Lee Simmons, an industry specialist at Hoover's Inc., a company that tracks IPOs, told NPR. Simmons said he found it hard to believe LinkedIn could be worth $9 billion with 2010 profits of just $15.4 million.

Groupon's recent losses also leave many analysts questioning its profitability. Groupon lost $413.4 million last year and another $113.9 million in 2011's first quarter.

"It's totally like 1999," Sucharita Mulpuru, an online-commerce analyst for Forrester Research Inc. (Nasdaq: FORR), told The Wall Street Journal. "To lose this money? What's crazy about these numbers is that this should be a highly profitable model."

But some argue this time is different.

Money Morning Managing Editor Jason Simpkins last week told readers how too much has changed between the dotcom bubble and now for the situations to be seen as the same. Tech companies today benefit from the dramatically increased popularity of the Web, as two billion people regularly search the Internet. Companies that launch IPOs now also have better business models and proven earnings than the dotcoms in the 1990s.

"The companies going public now are fairly large companies, with real users, real customers, real revenues, multiple revenue sources," venture capitalist Michael Aronson, who taught at the University of Pennsylvania's Wharton School of Business during the last tech boom, told NPR.
Even if several of this year's IPOs help investors win big, not all of them will be the next Google Inc. (Nasdaq: GOOG) or Inc. (Nasdaq: AMZN). Some analysts worry that investors' pent-up demand for tech start-ups will cause them to put money in less profitable options.

"If you're dying of thirst, you'll accept iced tea even if you really want lemonade," Max Wolff, senior analyst at GreenCrest Capital, told CNNMoney. "It's a perfect storm of fury, frustration, excitement and delay."

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Multiple contraction not limited to gold stocks

There has been plenty written in recent months about the so-called “disconnect” between gold bullion and gold equities. There is no question that as gold prices have gone up, earnings multiples have contracted and the stocks have underperformed.

All sorts of reasons have been tossed out about why this is happening, including the rise of exchange-traded funds and a belief that these high gold prices are not sustainable.

That all said, Analysts at TD Newcrest offered a new explanation: that multiple contraction in gold reflects multiple contraction in the broader equity markets.

They took a detailed look at earnings multiples of the six largest companies in each of several broad sectors: technology, consumer stocks, diversified miners, energy, industrials and financials. They then compared those multiples to the six largest gold companies.

The results showed that earnings multiples have contracted in every single sector, from anywhere from 10% (consumer stocks) to 45% (gold stocks) over the last four years. So while gold companies have experienced more multiple contraction than the other sectors, the issue is clearly not limited to gold. In fact, the technology stocks had nearly as much multiple contraction as the gold stocks.

The TD analysts’ view is that contracting multiples are a leftover byproduct of the credit crisis, which created a “flight to safety” to government bonds and gold bullion.

“While the equity markets have had a significant bounce since the low of March 2009, they remain below their pre-crisis highs amid an overall climate of economic uncertainty and fears of a double-dip [recession] as unprecedented monetary and fiscal stimulus are ultimately withdrawn,” they wrote in a note.

They remain bullish on gold stocks, and believe the equities are poised to outperform bullion as multiples stabilize. Their top picks are Goldcorp Inc., Eldorado Gold Corp. and Iamgold Corp. among gold producers, and Canaco Resources Inc. and Rubicon Minerals Corp. among the junior developers.

Historic copper prices may be on horizon as inventories drop to critical levels--RBC

by Dorothy Kosich

RBC says China remains the main driver of growth in global copper demand with forecast growth of 8.9% this year, as Western World growth is expected to slow to 2.9%.

RBC Capital Markets forecasts an annual average copper price of $4.25 per pound this year, also predicting that global copper demand growth will slow to 5.2% in 2011, down from 8.2% in 2010.

In the latest issue of Metal Prospects, H. Fraser Phillips, RBC metals analyst, noted, "The copper market remains tighter than the other base metals. Inventories are relatively low, there is little excess mine capacity, and utilization rates remain high, supporting strong pricing."

RBC forecasts a deficit a deficit in copper inventories in 2011 for the second consecutive year, and "for inventories to finish the year below critical levels." However, a predicted surplus in 2012 is expected to push inventories back above critical levels and should result in a price correction.

"In 2013 and beyond, we expect renewed deficits will draw inventories down to minimum levels, driving prices to levels that will restrict demand in order to balance the market," said Phillips.

RBC anticipates that refined copper production will remain constrained by mine supply throughout the forecast period, supporting historically high prices. 

However, by 2015, RBC's analysis suggests production will increase at existing copper operations as previously approved new projects come on line, contributing a total of 6 million tonnes of new copper supply.

"While the number of very large projects is limited, there are a large number of smaller projects," RBC observed. "Our forecast makes provision for new supply from some projects that have yet to be approved. In aggregate, these projects could contribute 2.6 million tonnes in new supply by 2015."

Despite their optimism on future production, RBC's base case supply demand/balance assumes that only 25% or 642,000 tonnes should actually come on line by 2015. "Mine capacity remains the bottleneck."

Nonetheless, Phillips stressed that copper remains "our preferred base metal. We forecast an average price of $4.25/lb in 2011, $3.75/lb in 2012, $4.00/lb in 2013, $4.25/lb in 2014 and $4.59/lb in 2015. Our long-term price forecast is $2.25/lb in 2011 US$."

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Morning markets: corn prices attempt to find the floor


Just how much selling pressure went unspent in corn in the last session, when the grain closed down the exchange limit in Chicago?
Synthetic trading suggested the July contract would have lost about 5-7 cents a bushel, had it not hit the floor.
And that's where the lot settled down – if only after, in opening deals, falling by twice that much, to $6.65 ¼ a bushel, its weakest since mid-May.
Indeed, there were some signs of buying on weakness, after the carnage of the last session, which also saw wheat touch its lowest for nearly 11 months.
Buyers back?
Lynette Tan at Phillip Futures noted the prospect that "livestock feeders, ethanol producers and countries that are worried about short supplies in corn could step in to take advantage of tumbling prices in the next few days".
She added that "the correction in corn could be brief, as underpinning the corn market are bullish factors that signal tight supplies in the market", pointing to the firmer US ethanol production data out on Wednesday, and a forecast by the US Grains Council that China could import up to 5m tonnes of the grain this year.
(There is still, though, no confirmation of a Chinese purchase of US corn on the current break.)
And, after all, in wheat, Egypt stepped in after the close of the last session to unveil its second tender in 10 days. (Again, Russia need not apply, after blotting its copy book in Cairo by imposing an export ban last year.)
'Liquidation theme'
But will buyers face yet more selling pressure?
As Australia & New Zealand Bank said, "June has clearly been a month where fund liquidation has been the theme in across the grain markets with wheat losing almost 20% in the month to date".
There is plenty of talk of complete exits by some funds from agricultural commodity positions.
And, as Benson Quinn Commodities said, "funds may have more liquidation to do", especially "if additional points on the chart are taken out".
This month's slide has taken grains down through a series of technical points, itself a factor encouraging selling.
Russian danger?
And there is always the risk of further scares of bargain sales of Russian wheat, a factor which played a big part in the last session's debacle, after Black Sea grain heavily undercut European alternatives.
"Some trade houses were specifically targeting Russia as a source for lower milling as well as feed quality wheat, as [producers] could be looking to unload old crop inventories ahead of this year's harvest," Jon Michalscheck at Benson Quinn said.
"We would assume that if the Russian news in fact is true it could be an indication that they are feeling somewhat comfortable with their projected new-crop tonnage expectations."
That said, with lower quality, feed wheat seen as on offer from Russia, it may be corn that feels the pinch rather than the higher grade wheat which, given a disastrous spring sowing campaign in northern US and Canada, may be in short supply.
Cotton leads
And certainly, in early deals, it was wheat which fared the better, adding 0.6% to $6.41 ¾ a bushel in Chicago for July delivery as of 07:50 GMT (08:50 UK time).
Corn's selling wave from the last session continued to play out, taking the grain down 4.0 cents, or 0.6%, to $6.73 ½ a bushel.
Soybeans, which with less speculative interest have proved less volatile, added 0.1% to $13.31 ½ a bushel for July.
Cotton continued to be a far better bet, with the prospect of the expiry of New York's July contract encouraging further short covering by investors attempting to avoid being caught out, as with the expiry of May, and paying richly to close positions.
The July lot stood 2.2% higher at 164.70 cents a pound, although December cotton remained more tardy, up 0.05 cents at 121.50 cents a pound, especially with some rain falling in drought-hit Texas.
Data later
As for later, Thursday will bring US weekly export sales data, expected to see a figure for wheat in line with the previous figure of 455,500 tonnes.
Corn should match, or beat, the latest sales figure of 895,000 tonnes, and soybeans are forecast to double the 185,000 tonnes achieved last time.
Furthermore, Statistics Canada is to unveil updated acreage estimates, although given that they are seen based on survey data from last month, since when a lot of rain has fallen, traders are downgrading their importance.
And, back in the US, official data on the soybean crush are expected to usage of 127.5m bushels last month, in line with the April figure.
Furthermore, external markets will need watching, as the Greek sovereign debt crisis lurches through its latest dark episode, which provided a spur to the dollar, up 0.5% against a basket of currencies, and a potential headwind to prices of dollar-denominated assets.

Analysis: China economy resilient, for now

By Kevin Yao

(Reuters) - China's growth is slowing under the weight of Beijing's anti-inflation campaign and weaker global demand, but any investors betting on a hard landing would be underestimating the resilience of the world's second-largest economy.

China's relentless urbanization continue to drive expansion even as Beijing seeks to check unfettered investment by growth-obsessed local authorities, while stronger domestic consumption is providing a firmer cushion against external shocks.

China bears may have been emboldened on Thursday by a purchasing managers' survey showing growth in the factory sector nearly stalled in June as new export orders fell.

But skeptics who are expecting an abrupt economic slowdown may have miscalculated Beijing's resolve to act quickly if needed to revive growth, especially if inflation eases later this year as expected, reducing the need for fresh monetary tightening measures, analysts say.

"The economy is set up for growth. You've still got urbanization and industrialization to come and all the incentives at local government levels are still to do with encouraging growth," said Stephen Green, an economist at Standard Chartered Bank in Hong Kong.

"People always over-worry about a China hard landing. Clearly there are a lot of problems with the economy but people may underestimate the government's ability to muddle through."

Green expects some policy relaxation later this year as price pressures start to moderate.


Global investors are unnerved by any sign of a slowdown in China, a key global growth engine, even as the U.S. economic recovery loses momentum and Europe struggles with a sovereign debt crisis. An abrupt slowdown in China could hammer international financial markets and stifle demand for commodities from iron ore to soybeans.

The economy has expanded at an average annual pace of 10 percent in the past three decades.

Fears of a hard landing have gained traction as a recent stream of data showed the turbo-charged economy is cooling, but for now China shows no signs of following the West with growth levels falling well below long-term trends.

Indeed, most market watchers typically define a hard landing in the Chinese context as a sudden dip in quarterly GDP growth below 8 percent, a level advanced economies can only dream about.

The 8 percent threshold is, more importantly, a political line in the sand for Beijing, which it deems to be the minimum level needed to create enough jobs to ensure social stability.

The last time the economy showed signs of a sudden slump, during the depths of the global financial crisis in late 2008, Beijing announced a 4 trillion yuan ($600 billion) stimulus plan, quickly returning to double-digit growth.

While few argue with the success of that scheme, many economists say the spending binge also sowed the seeds of inflation and created excesses such as unrestrained lending and property bubbles which are aggravating imbalances in the economy, leaving it more vulnerable if the current "soft patch" in Western demand turns out to be a prolonged downturn.


Policymakers will certainly have more room to consider fresh pump-priming if inflation peaks in June or July near 6 percent, as widely expected, and then moderates steadily in the second-half of the year.

Dong Tao, an economist at Credit Suisse, believes the central bank will not rush to relax policy for fear of fueling further property price rises, but said the government will unleash its spending power to prevent growth from slowing too much.

"Should the threat of a hard landing emerge, we would expect fiscal stimulus to come to the rescue, instead of monetary easing. Providing funding to policy housing and speeding up infrastructure projects would be the easy options," he said.

China has already announced an ambitious plan to start building and upgrading 36 million affordable homes between 2011-2015, with 10 million to be completed this year, to quell growing public discontent over rapidly rising house prices.

Many economists, while trimming their growth forecasts for China, don't believe the current slowdown will amount to a slump akin to that during the global financial crisis.

Most still expect GDP growth of more than 9 percent in the second quarter from a year earlier compared with 9.7 percent in the first quarter, with full-year growth seen at about 9 percent.

"I'm not worried about the risk of a hard landing in China. It's a low-probability event this year and next year," said Gao Shanwen, chief economist at China Essence Securities in Beijing.

After all, a gentle easing in growth is exactly what Beijing wants and is in line with its policy to priorities' efforts to cool inflation.

"The slowdown is essentially part of the deal. you need to a slowdown to reduce excesses and control inflation," said Kevin Lai, economist at Daiwa Global Markets in Hong Kong.

U.S. economist Nouriel Roubini, who foresaw America's housing crisis, said China faces a "meaningful probability" of a hard landing after 2013, mainly due to over-investment.

Roubini said investment was already 50 percent of China's GDP and that 60 years of data had shown that over-investment led to hard landings, citing the Soviet Union in the 1960s and 70s, and East Asia before the 1997 financial crisis.

China does face a host of risks, including a property bubble, mounting local government debt and potential rises in bad loans.

But there is little sign they would explode soon. China has in the past repeatedly defied predictions of a crash.
"Typically, they grow out of them -- they make good loans, the good loans finance the bad loans and eventually they write off the bad loans," said Tim Condon, head of Asia research at ING.

Andy Xie, an independent economist, argues for a soft landing in China, noting Chinese households are not highly indebted and most bank loans have been channeled to government projects.

"When a borrower is in technical default, it usually doesn't lead to asset seizure followed by liquidation, which is the cause of a hard landing," he wrote in an article.

"Instead, in the Chinese context, both lender and borrower are usually government owned. Debt rescheduling is almost automatic. Hence, as long as money supply grows, it will be spent and translate into demand."

Nevertheless, China must overhaul its growth model by reducing the reliance on investment and exports, and push financial reforms to head off potential risks, analysts say.

"The global crisis has brought urgency to China's rebalancing need. It is also a great opportunity," Xie said.

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