Juggling Dynamite

Thanks to the leadership of Elon Musk and Tesla–who history will undoubtedly record as a hero–the world is moving into an ICE- free (internal combustion engine) future at last.

Germany-the country who has led the world in automotive engineering since the 1870’s- has voted to embrace the superior efficiency, speed, and clean air of alternative fuel vehicles.  See: Germany votes against the internal combustion engine. The ramifications for oil demand are game-changing:

Whatever OPEC can agree at its next meeting on November 30 in Vienna, it is likely to have an impact only in the short term. They should take note of a vote to ban oil-fired car engines in a country that has been and remains at the forefront of the development of the internal combustion engine. The climate change clock suggests a free for all, in which OPEC can only maximize revenue by maximizing volume and that means displacing non-OPEC supply through competition.

So much for price support from an OPEC agreement to freeze output near all time highs in November.  Secular demand-decline is underway.  Time for oil producers to retool themselves to a world of alternative energy options.  This is happening, might as well get on board.  Also see  Quebec becomes latest market to adopt ZEV market:

Some countries, like Norway and the Netherlands, are exploring much more aggressive ideas for ZEVs (zero emission vehicles) having a 100 percent market share within the same timeframe (2025). All those countries, states and provinces, including Quebec, are part of the International Zero-Emission Vehicle Alliance, which aims at making all passenger vehicles emission-free by 2050.

China has provided several forms of vendor-take-back financing for the western credit/consumption bubble 2005-2015.  First by recycling its export profits back into US and European treasury bonds (which kept rates low and allowed more borrowing in the west), then by funding the world’s largest stimulus program in 2008 to boost global demand in the short run, and lastly in recent years, with capital fleeing China (some legal and some not) to buy up property and businesses in the west.

All of these actions have helped boost official demand numbers and asset prices, but with it, also more superfluous inventories, inefficient allocations of capital, and of course debt on debt on debt.  Officially China now has a debt to GDP ratio of 275%+ as charted here.  Fitch estimates that loans are going bad in China today at 10x the officially reported rate.

As with all extend and pretend strategies that throw good money after bad, they delay, but also magnify, the underlying fundamental problems which require structural reform, debt write-offs and lower prices to clear the excesses of the prior boom.

The below discussion focuses on the steps the Chinese government has taken to paper over growing losses in the banking system while “peer to peer” market place lending (MPL) has ballooned on top of official debt totals. Of course all of the comments made by Cornish are also words of warning to the other countries who have been adding more debt (now globally 35% higher than in 2008) rather than allowing the economy and financial markets to reprice and heal.

Jonathan Cornish, head of north Asia bank ratings at Fitch Ratings, discusses China’s latest debt for equity swap, China’s non-performing loans and the outlook for the credit market. Here is a direct video link.