YouSaid · the spoken record

Brian McCarthy

lines on the record: 105
first: 2024-02-09
most recent: 2024-02-09
sittings or episodes: 1
sources: podcast

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“Heavily, heavily managing this currency. And they don't do it with intervention because they don't have the dollars to spare anymore. They can't be providing all the liquidity to the market. It'll just take everything they offer. So they literally shut down the FX market. They tell people you want to buy dollars? We don't have any this week. Come back next week and we'll see if we can help you out. So this is going to really cramp China Inc., which is the largest trading nation in the world in terms of gross trade flows. So they're impairing the domestic economy's access to foreign exchange. It's the only way they can really defend the currency. They're avoiding going to zero rates. They can't hike rates. So they're like stuck. Now they could do something crazy to pump the equity market up 15 or 20 percent, which is the problem.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“And the only way you can reset the system is to reflate and inflate away some of this debt. And you're not going to do that at a fixed exchange rate against what is currently a sort of a strong dollar. So they're stuck. And as Bearish as I am on the currency, like this ends at some point in a deep devaluation. I don't think it's going to be soon because they realize down that like that road's really, really scary for them. They tried that in 2015, 2016, delinking from the dollar was the right thing to do then, but it had already been, it was already too late. There was already too much pressure in this disequilibrium pressure cooker that they started to release it and it was going to be a nuclear bomb. And the pressures orders of magnitudes worse now. So they're sort of stuck.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Deflation like this without a currency devaluation because they can't, like if you wipe the real estate assets out in half, the national balance sheet has a huge hole in it. And then you get the slowdown in activity. And then the infrastructure starts to slow as GDP slows, all of this debt on the local government level looks more unsustainable. By the way, even if they do real GDP at four and a half or five this year, nominal might be three because they're in deep deflation. You know, we're well over a year of PPI minus three minus five. So pretty deep deflation. So in terms of debt dynamics, it's the nominal GDP that matters not the real. And so the debt math only gets worse in this debt deflation scenario.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Wants to hold these liabilities the $50 trillion of bank deposits, you know, at least you can get a percent and a half as a household. What happens if they put that at zero? A, that'll piss people off because it's going to be viewed as more financial repression, but it's just going to increase the pressure on the currency. So it's sort of a really telling data point that they still have rates above 2% despite what's going on, you know, and if this was 08, we already had rates at zero and we're trying to figure out how Kiwi worked at this point in the story. So they're in debt deflation. If the property market doesn't come back, it only gets worse. It can't really ease. So they can't drop those deposit rates. And then the bank margins are stuck. So the banks can't really drop lending rates. And I think it's just impossible to exit a debt.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Exactly. So the industrial site wasn't shut down. Now, consumers did come back and they spent some money, but I thought that was not going to be what people thought either because this is an economy of debt deflation. I mean, like, I think that while the analogy is not perfect, it's more Japan than the US because they can't ease. My thesis has been the property market's broken and it's not coming back. That became apparent to me like 18 months ago. And I think people are now coming around to that view. The fact that they can't or won't ease, I'm not sure the market's fully absorbed that you've still got rates at like 2.5% to 2.5% call it in the short end in China. Why is that? Why don't they go to zero? Because it'll exacerbate the fact that nobody...”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“The huge reopening trade in early 2023, late 2022. I pooed that for the very simple reason that they didn't really close down the way people thought. Industrial production had a blip in 2020, and then it got right back on plan. So even when Shanghai was closed, the factories were running. They had the poor bastards sleeping in tents and sleeping bags on the factory floor. So it was never shut down the way people thought.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So the bear case on Chinese equities has been predicated on, for one, I talk to a lot of investors with really deep pockets day in, day out. And I could just never really get my client base to be nearly as bearish as I was throughout this thing. So there was, you know, I think at least until very recently, there was what I all along thought was a misplaced hope in a reversion to stimulus. So people thought Xi Shinpeng's not going to be able to take the pain and, you know, the Chinese Communist Party sort of promised growth. And I just, again, I don't think he really, I don't think Xi Jinping really is as worried about that as some others. Gradual slowdown in growth. People are unhappy. I think he feels he can handle that. Going right back to the reopening, which was so we have.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I don't want to downplay that China has some great technology companies and has done some great things. It's been a big round. That we've seen from China in the last 10 or 15 years. It's just macroeconomically, it doesn't add up to much compared to the amount of steel and cement that's wasted in just building stuff, basically. To your point, I think taking central planning to the next level, I'm skeptical.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Well, there are some remarkable technologies in China in which I would say China may be even ahead of the US and the West, particularly when it comes to smartphones and using financing, getting loans and paying people like in America, we think we're so high tech because we have Venmo, but China is they've got Venmo++. Likewise, when it comes to TikTok, I mean, Instagram's good, but TikTok is better. I don't use TikTok, by the way. So there are some examples of where Chinese is ahead, but you're right. They do tend to copy and take a lot of technology without respect to intellectual property, which, by the way, America did a ton of when it was the rising power in late 1800s.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Almost by definition, no, right? Almost by definition, they're like the system can only copy, right? If you don't have entrepreneurship, you can sort of only copy. So I'm very skeptical on the efficacy of central planning. It's very good at saying we want to build 87 bridges regardless of what the ROI is. That's easy, right? Actually, pulling off this Xi Jinbing plan of competing in higher value added and even some higher tech spaces. I wouldn't fund China on that pitch.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Can clean up all these crappy loads one more time. Okay, let's give them one more time. Like, then what? How are we growing out of this? Are you going to do it again and go back to investment-led growth? It seems not, and I don't think the more market would finance that again. So let's say the central government says, well, take care of all of it. Okay, how are you going to pay me back? And Xi Jinping's answer is this, homegrown technology. We're going to take over the semiconductor business or, you know, they've done it with EVs. They still can't build an airplane, though. And that's been a decade plus. I mean, I shouldn't say that. They're making some progress there, but I don't think non-Chinese airlines are going to want to fly them. So can a centrally planned system move up the value chain?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Everybody has always assumed that these bank deposits or government guaranteed. Everybody's always assumed that these local government debts are pretty much government guaranteed. I mean, they trade at some spreads because there's some risk they might let one go. But if they ever let one go, I mean, we've seen this with Baoshang Bank, right? They try to let something go and it becomes immediately apparent that, oh, well, every other bank in the system is going to blow up if you let one go. So they say, oh, we won't do that again. We promise. So maybe they'll let an LGF e go, a local government financing vehicle, but then no LGFE in the country will be able to raise a nickel and they'll say, oh, you know what? It's all guaranteed. So this clean central government balance sheet is a complete myth in my view because it's all one balance sheet. Secondly, even if they had capacity, if you thought they had capacity to do one more cleanup. All right.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“It to the localities, but they've never shown any willingness to really pony up that central government balance sheet in any way that would, it's really the last balance sheet. People argue that, well, China only as central government to GDP of 23%. So, you know, they can always wipe, roll all this stuff onto the central government balance sheet and take care of it. There's two problems with that. One is that”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, exactly. They actually went to 12 provinces in the last several weeks and it started sort of shutting down infrastructure projects that were a waste of money because they don't, they know these provinces have debt problems. So I've seen, you know, Xi Jinping, like they do this with the currency all the time too. It's like PBOC, you know, make sure no debts blow up. So keep the system sufficiently liquid and keep the currency stable. So they do whatever they can. They shut down the FX market. At some point, that'll cause a problem that they'll have to fix too. The infrastructure, I think, is going to be very hard to sustain given that they seem pretty clearly and legitimately to want to control debt risk at the local government level as well. And so they're increasing the central government deficit. They borrowed an extra $1 trillion RMB late last year and gave...”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“As is very common in this system of governance, the leadership tells local authorities to do two things that are completely diametrically opposed. So it's like, you know, we want to hit, I think they're going to say four and a half percent growth this year. The market's looking for another 5%. 5% would be stupid. I don't think they're stupid, but who knows? They're going to say four and a half or five and they're going to tell these local governments, you know, you need to keep up the infrastructure so we can hit this growth. Oh, at the same time, you know, clean up these local government financing vehicles that are riddled with bad debt, control your borrowing and don't have any debt risks. So these guys are damned if they do, damned if they don't. They actually want you to have short hair.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Exacerbate their trade surpluses, and I think the rest of the world now can see that, oh my gosh, to some extent China is going to make up for the lack of investment in real estate by investing in excess, excess capacity, like even more excess capacity. Like, do we need like more Chinese steel mills and, you know, cement and EVs? No, we don't. We don't. This is all they have, so this is what they're going to rely on. And they actually were able to pump up infrastructure in 2023, despite the fact that 30 to 40 percent of local government revenues are the sale of land to property developers, which is completely dried up. So the infrastructure is going to be more difficult to fund. And beyond that,”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Four year sum of sales in red and floor space under construction in blue. So the volume of construction is basically four years of sales tallied up. Now, the years three and four of those sales were not bad. Like four years ago, sales were booming, right? So they're just completing those apartments now. And the fact that sales have collapsed the last two years is only going to start to really heavily influence this construction variable next year and the year after. So you can almost pencil in with certainty three years of sharp decline in the degree of real estate construction activity. They've been able to make up with it by sharp increases in manufacturing FAI that's fixed asset investment, which is only going to”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Percent and change real estate investment is down, but it's going to get much worse because, you know, the blue line in these two charts is floor space under construction. So sales started collapsing a little over two years ago. And floor space lags that because the way it turns out, the chart”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“The this time is different factor is that the property bubble is burst. It's fallen and it ain't getting up. I mean, that's my contention. And I've been saying this for over a year now. And I think one of the things investors keep looking for them to reflate that asset. And I think it's just not happening. I think sentiment is broken in that market now. So this is different from any downcycle we've seen since we've all been watching China. I mean, even in 2008, they pumped credit and they reanimated the property market. So if that's not on the menu, then we are definitely in a different experience than any of us have seen in this sort of Chinese growth cycle the last couple decades. But to talk through the charts, we're in the very early innings of it because eight, eight, eight.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“A growth model towards, oh, let's actually produce electric vehicles and let's create create stuff, basically not have it just be so dependent on real estate. A corollary of that, though, is that sales, as you can see in the red line here, have collapsed. So tell us about the correlation between real estate sales in the red to real estate under construction, which is in the blue. And real estate under construction, the blue line, that factors heavily into GDP. So when you say that you think that there will be a severe Chinese recession and 5 trillion, maybe tens of trillions of dollars will be lost. Take us how you get there.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Based on actual statistics, like at last, this is finally coming to pass. So let's put this chart up from you and your work at macro lens. You can see that in 2020 and 2021, investment in Chinese real estate started to actually fall. Not just the growth rate went down, but it actually started to contract, which is pretty rare in finance to have an outright series contract. Meanwhile, manufacturing and infrastructure have risen above trend, at least when it comes to manufacturing. So part of this is she should pick the leader of China, his willingness to move away from basically a real estate bubble.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“If all these assets just fell by half in value, what the hell is on the other side of the balance sheet? What is backing these liabilities I'm holding? It's a Ponzi scheme. So, you know, increasingly people want to diversify. And, you know, there was another article in the FT over the weekend about outsized buying of gold from China. I think it was 60-something billion. It's like not huge amounts. There's just, they'll buy anything they can access, but there's only so much gold that can get their hands on. Our Chinese people bidding up Bitcoin through whatever means possible, VPNs. I would imagine, I would imagine, because if I was in China and I had a lot of wealth, I would want it in anything but RMB right now. So, you know, we're seeing that dynamic. And I think it's only going to get worse.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Housing bubble real quick. Like when housing was going up, A, there was something to do with this money. And B, people could sort of convince themselves that this is the genius of this Chinese Communist Party. They've figured out this great growth machine. And it all sort of made sense. It seemed justified when the housing prices were going up. And we're going to cut housing prices in China by half at least. At least probably already 25, 30 percent, you know, sales already in January are down precipitously. You're going to cut this asset. You're going to cut this. Possibly a hundred trillion dollar asset market in half. And then I think people are going to look at these liabilities they hold in the form of Chinese bank deposits and say, well,”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“The equity market's gone nowhere for two decades, despite all this GDP growth, you know, the stock indices have gone nowhere. Now there's been dividends and there's been a total return. But the indices have gone nowhere and they've grossly underperformed the rest of the world despite China's really high GDP rates. So to me that's pretty strong evidence that their GDP is fake to some extent because it's they're just measuring you can have great GDP if you if you borrow if you have a state-owned banks make a loan for 10 trillion dollars and spend it on didn't holes and filling them in again you got to have 10 GDP next year right the problem is everybody would see that you know the money you're printing is going to end up not being any good so back to that”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Because they're going to dominate the world in EVs. If you don't calculate the ROI, we have no idea what the ROI is. We don't really know how much money they've wasted. But yes, if you throw a gazillion dollars at an industry, you can build a global leader. So they force the external sector into deficit and they help the household sector, they facilitate the surplus there with the weak social safety net artificially suppressed interest rates and returns on your savings and the like. So, you know, the households are stuck with all these liabilities. Part of the reason you had a housing bubble was because there's really nothing else to do with the money.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Trade barriers on both sides, right? They subsidize their exports as again the EV thing is in the press. They've thrown oodles of money at electronic vehicles. There was an FT article today debating this. It said it was like immensely wasteful but spectacularly successful or something. Well, you know, we don't know how much money they wasted, right? You can look at it as spectacularly successful.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, the shaven trait is sort of a forced function of the way the system is built. Because again, somebody has to hold this $50 trillion in M2 deposits they've created, right? And via various trade barriers, they force the foreign sector into surplus. They run trade surpluses. So the foreign sector is in deficit. We're in deficit with them. The corporate sector is in deficit. They're borrowing. The government sector is in deficit. They're borrowing. The entire surplus has to, the other side of all those deficits has to rest with households, just the accounting identity. So, you know, they forced the foreign sector to be in deficit by all kinds of trade barriers on import of goods. Is in surplus the external sectors.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“As long as they can continue to do that, this can go on forever. Again, ultimately, it does all come down to they're relying on their ability to force their citizenship to hold these liabilities. And I think that to me, the interesting thing about the property bust is when property was going up 10, 15% a year, Oh, all the, you know, it was like any bubble. There were like narratives to explain it, right? It was urbanization had stopped growing. But, you know, it was going to be urbanization and everything had a circularity to it, right?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“It's that simple. Now, why do they have capital controls? Because there's not unlimited demand for these liabilities, right? If there was unlimited demand, they would lift the capital controls and everybody would be fine holding this $50 trillion worth of Chinese yuan, right? But obviously they're not fine holding it, which is why they have to tell people you can't sell those and buy dollars. So, I mean, the existence of the capital controls is ipso facto evidence of a disequilibrium, right? That's why they're there. We all know that. So this is the ultimate tug of war. So they can roll all this debt till kingdom come as long as the banks can continue to print R&B liabilities, create those liabilities at 10 to 12 percent a year or more. So these are big numbers now compounding at double digit rates.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“We're now at the point where two thirds of the government bonds issued are purchased by banks. What are they buying it with? They're creating deposits. It's fractional reserve banking, basically. So as long as they have unlimited ability, if there's unlimited demand for these deposit liabilities, they can do this forever.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“State owned banks make these loans, whether it's the state owned enterprise or for property speculation or loan to the local government of XYZ province to build the third airport and all this stuff, right? Ultimately, that is funded by the creation of bank deposits. Bank makes a loan and they credit that entity with the deposit. They spend the money and those deposits are in the system. Those deposits are now in excess of $50 trillion, like nearly three times China's GDP. It's really how almost all of Chinese credit gets funded. You know, we have a very big non-bank financing system in the West, whether it's pension funds buying bonds or private credit or whatever. The Chinese corporate bond market is fairly well developed, but the bulk of the bonds are bought by banks.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Right, right, right. And so that would be someone telling the ICBC that industrial commercial bank of China how much to lend and the big four banks, the four biggest banks in the world are all Chinese and the fifth biggest is JPMorgan, just to put that in perspective. And when you say R&B, that's the Chinese currency also referred to sometimes as the Chinese Yuan. So you're saying that the only way that this can really play out is Chinese devaluation of the Chinese currency.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Right, so in the name of this program, forward guidance is a tool where the central bank gives hints to the market about its interest rate policy so that it can allow the market to tighten interest rates kind of for the central bank. What you're referring to is a much stronger policy called window guidance, popular back in the day in Japan, I believe, and very popular in China according to you, that basically the government and the central bank tells the banks how much to lend. Although in this case it is not the People's Bank of China, it's PBOC, the Chinese central bank telling the banks how much to lend. It's the”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“In China has already told the market what its behavior, the lenders what they're going to lend and the borrower's borrow. So the PBOC is just a sort of an actor behind the scenes trying to make it all work, you know, again, with the constraint that they also are tasked with keep maintaining the currency's value, which can be very, very tricky.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“But most times there's not because the lending volume and the rates have already been predetermined. The PBOC is just responding to something that's happened in the market that says, in order to hit that loan target, the banks need more liquidity because maybe they don't want to lend to each other or there's some pressure in the interbank market, often stemming from banks not wanting to lend to each other. So ICBC, let's say, has to lend, I don't know, $20 trillion in RMB and Bank of China is $18 trillion in RMB. And the interbank markets breaking down. So they're like, oh, we need more liquidity. The PBOC will give them more liquidity, but it's not an easy. It's just a response to something that happened in the market so that they can hit the target that's already been set. So again, it's completely different. Where the Fed is trying to motivate the market to change its behavior, the NDRC.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So that's done. I mean, you know, I think that the management of ICBC basically knows how much money they're going to lend out this year. So then what the heck is the PBOC doing? They're just accommodating it. They're just, they just need to keep the system liquid enough to accommodate that central plan for lending volume without having the currency fall apart. That's basically the magic trick. They've been assigned, which when the dollar is strong, is a really tough trick to pull off. People see things like a cut in required reserve ratios in China or the Chinese Central Bank making a lot of loans to banks and injecting liquidity. And they infer that there's some easing going on.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Less credit because they want to tighten. So that's sort of the transmission mechanism, ultimately the most powerful transmission mechanism that they're trying to utilize. So they have buttons and levers and they're trying to get more credit creation or less. That's not the PBOC's job in China because the degree of credit creation is decided by the NBRC and late in the year they'll tell ICBC and Bank of China these are the largest banks in the world. They'll tell them we want you to make X trillion RMB in loans this year with like around about this much to go to this industry and we want you to keep funding the developers who have pre-sold apartments and already blown the money because we need to get those apartments done.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Households were just sitting empty, and they don't rent them now. Some might not even be furnished, they might be shelves, but clearly wide, widespread speculation. But let me bring it back to the banks because I think there's a really important subtlety about China watching that a lot of people miss, which is people look at things that the Chinese central bank, the People's Bank of China, what they do on a day-to-day basis. And they think about those actions in the framework of how we analyze the Fed or the ECB. And it's just, it's completely incorrect because think about the Federal Reserve. They manipulate interest rates and maybe the quantity of reserves and the assets in the system through QE or QT. And because they're trying to incentivize lenders and borrowers to either create more credit because they want to ease or create...”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Can't tell you how many times this happened to me more than once, and this is 10 years ago, eight years ago, six years ago, the taxi driver would tell you he owned an extra apartment, at least one, and say, well, why are you going to rent it? He'd say, no, I'm, you know, saving it from my daughter. My daughter's going to move into it. I'm like, oh, how old's your daughter? Is she getting married? No. She's six. This is the kind of thing that you just heard all over the place. The bulk of the speculation was people making more money than that, though. You know, like local industrial bosses, coal bosses buying dozens and dozens and dozens of apartments, just rampant speculation. Professor Art of A&M, this goes back six or seven years ago. He does this wide spread survey of household finances in China. And the number he came up with was 23% of the apartments that had been purchased by”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, the nominal example is, oh, you know, when you're in America, when you're driving, taking a taxi cab and taxi driver tells you about the latest IPO or tech stock, that is the time to sell. So what is the taxi driver in China talking about?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“They lend enormous sums to real estate to build property that appreciated in value rapidly. I mean, you can tell us the numbers on just how much your median worker in Shanghai would have to earn to actually buy some of these properties. I mean, tell us, you know, when you were, you know.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So the Chinese growth model was investing in real estate from the banking system, not China's central bank, but from banks, the Bank of China, the commercial industrial bank, all of these giant banks that are state-owned enterprises, some of them trade on publicly traded markets, but a lot of the share in some cases, a majority of share are owned by the Chinese Communist Party, by the state, and they are directing state credit. This for me, Brian, and I imagine for a lot of viewers, hard to wrap our heads around this though Nominally private banks, but they really are controlled by the government.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Is negative. Real rates, you can't lower real rates. People don't want to borrow money, and it's all a self-reinforcing situation. So I do believe there is a nonlinearity out there somewhere, but they're going to fight like hell because this is what they do. They rig markets. We're seeing it at equities. We see it in FX. And all this market rigging was designed to prevent the market from seeking equilibrium. So it's just an unbelievable pressure cooker.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Communist name for the central planners basically. Like they're now in the tech firm. So they've gone to the tech firms and asked them like, you know, what venture deals have you done? What worked? What didn't so that the central planners are going to learn how to do venture investment in tech? And then properties the same thing. They let the market run wild in property, never going to happen again. You're going to end up with, I don't know, anywhere six, eight, twelve, fifteen developers, most of them state-owned, a few big private ones that are very close to the state, like the big tech companies now are, right? The state has their hooks into them. So this is all going to be very, very, very heavily controlled. The debt deflation process always goes nonlinear at some point because, you know, as asset prices fall, people get reluctant to lend money.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Like we've just seen them do in electric vehicles. So that's going to happen. But it's just, you can't, there's not enough technology work happening to throw enough money at that to make up for even a fraction of what's going to stop as the real estate bubble unwines. There's a lot to unpack because this is a completely different system. So we've seen housing busts in the US. We saw Japan. This is orders of magnitude larger. The two industries where they really let the private sector do it, do their thing was tech and property. And they decided they didn't like it in either case, right? So tech has had to be brought into the fold and they're now part of the team and they're going to be getting their people from the NDRC, the National Development Reform Commission, which is a good thing.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So they can build nothing for 10 years and still have enough housing. So there was a massive misallocation of real resources that's going to be reckoned with. Now to the extent Xi Jinping and those close to him really understand how difficult this is going to be, I don't know. Really, it's impossible to know. I do know he's signaled to the populace that tough times are ahead. I think Xi Jinping and those clothes to him have much greater faith than I do that he can, that they can pivot to this sort of move up the value chain and engage in homegrown technology and that kind of stuff. Now, even if they can pull that off, there's just not the volume of investment. They are going to throw gobs of money at high tech in China. That's definitely going to happen.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Of credibility, people want to hold the liabilities of that government, which is effectively the RMB. So orders of magnitude bigger than anything that went on in the U.S. I think similar to Japan, but a lot bigger than that as well. Japan had a price bubble, but they didn't have the volume of mail investment that we've seen in China. Just staggering. There are tens of millions of empty apartments. either on the balance sheet of the developers or having been purchased.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“really in the US really can't be the paradigm here because that blew up on us because the counterparty risk and you know sort of credit channels fell apart and we went rapidly into debt deflation so China can completely prevent that so all of the credit is allocated through the state-owned banks the vast majority of it by central plan So the government can say, you know, this deadbeat entity is going to get sufficient credit to keep them going. So the first place, which is why this thing is so gigantic, because if there were any market mechanisms overseeing these processes, it would have broken down a long time ago. But again, it was all fostered on this sort of this moral hazard. And what's happened is all of the risk rolls up to the government. And then it ultimately becomes a question.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think the scale in terms of the, I mean, two, three, four times larger orders of magnitude larger. You know, we went a little crazy with subprime mortgages and built a lot of stuff that wouldn't have gotten built otherwise for four or five, six years. China has really been doing this for two decades plus. And again, at the beginning, some of these investments made sense, but it's been, again, in my view, I went there 10 years ago and I said it was abundantly clear to me then that more bad investment was the only way they were holding up GDP. So it's going to be extraordinarily difficult for them to continue to hold up GDP as investment falls. Now, we're in the very early stages of this story. I think the first thing you need to understand is that 2008”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So, you think that what China is going to undergo is not just a vanilla recession, but really a structural headwind. I mean, how big do you think what's going to occur in China is, or what you're seeing has already started, how do you think what's going on in China compares to the bust of Japan, 30-some odd years ago, the 2008 grave financial crisis, how would you sort of map this? Tell us the scale of what you see to come.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT