Monday, March 21, 2016

Government statistics are notoriously unreliable.

I’d say looking at SEC filings and other corporate data is more useful.
I was recently looking at official corporate data from China and my reaction was “My God, are we already so down the rabbit hole?”.
COFCO is a giant Chinese State-owned corporation which mostly focuses on food products, from cooking oil to sweets. It present debt to EBITDA ratio is a headache inducing 52x. It means for every yuan it earns (before inflation, ammortization etc) it has 52 yuan in debt.
I find it telling the central planners in Beijing saw no need to embellish COFCO’s balance sheets despite the power to do so.
But one can always say “COFCO is State-owned, it has no need to be careful with money because Beijing will always bail it out”.
So let’s look at Fosun, a privately owned Shanghai-based conglomerate which reminds me more and more of the Korean chaebol in the Park era.
Fosun has a debt to EBITDA ratio of 55x, worse than COFCO. It’s literally an empire built upon a mountain of debt.
I find these statistics telling and a perfect explanation of the reason why so many people feel the 2008 depression has never ended despite rosey government statistics: savers, who invariably belong to the so called Main Street, are being punished to reward big spenders, who invariably reside in the local equivalent of Wall Street.
Without the stealth taxation of savings, there’d be no way even China could sustain those debt to EBITDA ratios.
No savings mean no capital accumulation, meaning the small guy will have to work twice as hard just to stay in the same place.
Of course we are daily told there’s no need for savings because, thanks to the “heroic” monetary policies implemented by the ECB, the BOJ and the PBOC credit will flow like a river. Each time the ECB cut rates (and trust me on this: we haven’t seen anything yet), the propaganda machine gets into high gear and hammers home banks will open the spigots and bring about a new age of prosperity.
They’ve been doing this for seven years and counting and the only thing they managed to is reversing the household deleveraging trends we had across Europe after 2008, with that new debt going in just two sectors: cars and housing. Neither are capital assets and neither can generate wealth. In fact cars can be considered consumer goods, as their value plummets the instant a registration plate is riveted onto them or the new model hits the market.
In short that freshly printed money which trickles down into Main Street goes into buying non-productive assets whose value is completely at the mercy of a million factors (houses) and rapidly depreciating consumer goods (cars).


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