Build it and they will come...must mean the cockroaches!

China Is the Biggest Short ever

by Chris Hamilton • June 2, 2016

http://wolfstreet.com/2016/06/02/china-is-the-biggest-short-ever/

Inescapable consequences.

By Chris Hamilton, Hambone’s Stuff

Over the next 2 decades, there will be an average of 7.5 million fewer 0-55yr/old Chinese every year vs. an average annual increase of 9.5 million 55+yr/olds. And the wealthy minority of the elderly have stashed their reserves in a whole lot of expensive, vacant real estate that they intend to pass along (rent or sell) to the declining young population. What could go wrong since housing prices only go up…right!?!

China, a story of a massive population and population growth. As the adult population growth began to wane, debt was substituted for the waning growth. Population growth turned to outright depopulation among the young, while all remaining population growth was among the “pig through the python” elderly.  But as the Chinese gained wealth, (particularly among the wealthy of the tier 1 & tier 2 cities), the wealthy soon to be elderly didn’t trust banks or the stock market. Instead they piled their savings primarily into real estate. The top quintile of Chinese purchased the bulk of the new speculative inventory of high-end housing, typically buying multiple apartments and condos.

The vacancy rate among the housing segment in these cities is supposedly in excess of 20% (compared to a peak of 3% during the US subprime crisis). There are roughly 500 million households in China and best guestimates suggest that there are 50 million or so vacant housing units…or 10% of the national housing stock.  To put this in perspective, I’ll compare it to the US subprime crisis…a crisis that was likewise triggered by the demographic deceleration of population growth. But still, despite decelerating in the US, there was (and still is some growth…see below). The Fed was determined to use (ok, abuse) interest rate cuts as a substitute for decelerating population growth among adults. The chart below outlines the decelerating 20-64yr/old annual population growth through 2025 (this includes all permanent residents…legal or otherwise).

And on a percentage basis (below), the declining growth among the adult population correlated to the Federal Funds rate and federal debt. The introduction of nothing down, NINJA and liar loans was simply because there was a collapsing number of potential buyers to support a speculative bubble, particularly in the “tier 1” US cities and locations.

And the changing nature of US net new job creation vs. US new home creation (below). A 2.5 to 1 ratio has inverted since ’00 with more houses being created than full time jobs to support them. Further evidence that US subprime crisis was triggered by a demographic collapse (here).

So, back to the biggest bubble leading to the biggest short (ever?). The chart below highlights China’s annual adult population change, the Bank of China discount lending rate, and China’s moonshot of total debt. The decelerating population growth offset by declining lending rates leading to excessive debt and asset bubbles. Pretty standard central bank stuff.

And just in case you didn’t quite catch why China is the biggest bubble and China’s housing market is the biggest excessive vacant inventory the earth has ever seen…a population boom followed by bust…and the bust concurrent with interest rate cuts to substitute debt for decelerating organic growth.  Below, China population and debt change from 1980 to 2008. And $5 trillion of the $7 trillion increase in debt has been incurred since 2000…just as the population deceleration became very noticeable.

And below, the substitution of debt for the absence of any population growth among the 0-55yr/old Chinese population since ’08.

Below, over the next 20 years, China’s 0-55yr/old population is set to collapse. A 20%+ fall over the next two decades. And the 55+yr/old population is set to more than double this same time with the vast majority among the 65+yr/old population. Again, there will be an average of 7.5 million fewer 0-55yr/old Chinese every year vs. an average annual increase of 9.5 million 55+yr/olds. This in a nation with net emigration.

So, to summarize, China’s retirement age is 60 (50 to 55 for women)…and the wealthy 55+yr/olds (especially the 65+yr/olds) hold huge numbers of speculative, vacant apartments across China’s cities. These apartments / condos are intended to supply the wealthy elderly Chinese with rental income and/or be sold to fund their later years. But the fly in the ointment is the whole collapsing population of buyers vs. a swelling quantity of elderly sellers.  And funny thing, according to the World Bank, the declining Chinese employment ratio divided by the 15+yr/old Chinese population yields the below annual job growth in China. A 70% deceleration in annual job creation since 1990. This probably matters.

And finally below, the mismatch of 0-55yr/olds vs. 55+yr/olds from 1990 through 2050; and for jiggles, I include the Chinese M2 monetary supply. From ’99 through ’15, the Chinese M2 has increased 1400% compared with a 260% increase for the dollar…and that was while the 0-55yr/old Chinese population was only decelerating. Now that the 0-55yr/old population begins its rapid decline, my estimates for China’s M2 and China’s debt are likely to be hit decades early.So, ok, where’s the short? Well, it probably isn’t housing or construction or even commodity suppliers. If China follows the same path as every other quasi-capitalist (er-communist?) state, we can expect a flood of money like the world has never seen. Bailouts across industry and state buyouts of investors. And the Yuan, swallowing all this debt and spewing all this bailout cash, is probably the short of a lifetime. And how does this fit into the global macro picture? Here........

And there may be a few implications for the US since the Chinese have been net Treasury sellers since July of ’11. Here. By Chris Hamilton, Hambone’s Stuff

And yet, China’s debt goes parabolic. Read…  China’s Population Dooms the Transition to Consumer Economy......

ort…EverChina’s Population Dooms the Transition to Consumer Economy

by Chris Hamilton • May 7, 2016

http://wolfstreet.com/2016/05/07/china-population-decline-dooms-transition-to-consumer-economy/

And yet, China’s total debt goes parabolic.

By Chris Hamilton, Hambone’s Stuff

If a business could foresee that it would have a declining consumer base (declining number of total potential customers), that would likely be a pretty good reason for serious concern and significantly lower growth expectations. However, when it comes to China, the shrinkage of its under 65yr/old population and particularly of the 20-59yr/old population is somehow coinciding with the story of China transitioning from an export-based to a domestic consumption-based economy?  To wit, with a declining population, China will transition from exporter to consumer, while all those grown one-child-policy adults support their 65+ year-old parents, and still grow 6%-7% annually? Inquiring minds wonder how it’s possible a declining base of consumers would consume more.  In a word…CREDIT! And, the growth of credit in China has gone parabolic. It’s highly unsustainable and likely ruinous.

The Details:

Each bar in the chart below represents annual growth or decline of the Chinese adult population. The blue line is a 4 period moving average of the population change. From 1973 through 2008, an additional 12.5 million Chinese adults entered the Chinese economy every year. That meant 12.5 million more consumers, home buyers, car buyers, potential job seekers, etc.  But since 2008, annual population growth has decelerated by 95%. By 2017 or 2018, it will begin a long decline. Every year from 2018, the adult 20-59 year-old population of China will decline by millions for at least two decades and likely far longer. This is no forecast or “gloom-n-doom” fantasy, but simply counting the number of people born and tracking them through the population (plus, China has net emigration).  All this means the charts below likely show a best case scenario although the population data could be lower if greater emigration occurs or a higher mortality rate ensues due to illness, environmental, or global disturbances (aka, war).

The People’s Bank of China has been pushing rates down since the Chinese population growth peaked and began decelerating (just like the majority of the developed nations central banks).

In China, the adult consumer population growth peaked in 1989 and rates peaked in the early ’90’s and have been declining since (chart below) to incent a slowing rate of population growth to consume more — and consumer above the level wages and savings could support.

And the impact of the lower interest rates above combined with China’s capability to push loans out has had an amazing impact on credit creation! The hockey stick chart below of total Chinese credit creation is a monument to the mantra, “build it and they will come.”

The problem is the Chinese have used the lower rates and massive credit bubble (aka, debt) to build out infrastructure, apartments, factories, shopping malls, etc., for a population base that is never coming!

Credit has been used to build millions of generally unaffordable apartments for a middle class and overall population that has already peaked and is fast receding. Building out somewhere from 50 to 100 million excess apartments and likely trillions of excess retail square footage for a population of under 65-year-olds in fast decline is the insanity only award-winning PhD economists could applaud.

The chart below puts all the pieces together so the inter-relationship can be clearly understood. Population growth slows and credit is made cheaper to incent a level of growth via debt beyond the populations general capability. As the population growth slows more dramatically, rates must be lowered in kind and debt ramped up to maintain “growth.”  What happens next as the adult consumer depopulation begins (simple fact…not forecast) should be obvious: NIRP, QE, and all the kings horses, and all the kings men will try to put Humpty Dumpty back together.

Beginning in 2018 and accelerating thereafter, there will be millions fewer adult consumers in China every year. On the flip side, the needy 65+ year-old population will swell until China’s total population peaks around 2030 and begins its Japanese style long-term depopulation. All this while interest rate policy plus debt creation are both already effectively exhausted.

There simply is nothing more to build when there is already such overcapacity and growth in non-performing loans. The Chinese determination to add new credit fuel in excess of $1 trillion alone in the first quarter of 2016 is the stuff of hyper-monetization — with money fleeing China and creating bubbles the world over — and potential hyperinflation. Sometimes reality bites…but pretending all is well is simply no longer a viable option. By Chris Hamilton, Hambone’s Stuff

The export and manufacturing powerhouse of the world, the locomotive – along with the US – of the global economy, and an indicator of the global economy itself, disappointed economists once again. The operative word in the media was “unexpectedly.” Read…   China’s Furious Stimulus-and-Debt Binge Backfires