First, Bloomberg News [BN] ran a story yesterday, “Spain Lenders’ Bad Loan Ratio Reached Record 11.61%.” This is up from 9.65% a year earlier. All we continue to read and hear from the press and financial pundits is how the Spanish economy has turned the corner and it is time to buy the Spanish banks and Spanish sovereign debt. The non-performing loans are a problem in any economy, but the 25%-plus unemployment rate makes the NPL data a much greater problem. Again, I’d rather miss the first part of a European rally than get caught when the perceptions fail to become reality.
Second, Rick Santelli discussed a piece last Thursday that was a reiteration of an old theme: Don’t trust the Chinese data. Christopher Balding, a professor at Peking University’s HSBC Business School, maintains that, “there is strong evidence indicating the real Chinese GDP growth, and ultimately total real GDP, may be significantly overstated.” Balding maintains that the Chinese inflation data had been manipulated and/or “willfully fraudulent.” Professor Balding finds the housing data during an 11-year period comical as it shows housing prices rising 0.53% on average and in rural areas the rate was three times faster. Be skeptical of the call from the pundits who claim that markets move on Chinese economic releases. The more skepticism, the less influence. Transparency is a great disinfectant of contrived data.
Third, tomorrow’s Financial Times reports that German Finance Minister Schaeuble has admitted that the Greeks will need a third bailout. The article is titled, “Schaeuble Breaks Campaign Taboo on Greece.” Now that the holiday period in Germany has ended, the election campaign is in full swing. Early in the week, SPD leader Peer Steinbruck accused the Merkel government of silencing all discussion on the EU debt crisis. It seems Schaeuble wanted to get out front of any more debate and admit that Greece would need more funds, but promised that the agreement on Greek restructuring would not be softened. We will watch the polls to see if the Steinbruck attacks are gaining traction for the Alternative for Germany Party (AfD).
***The most important story of the week is the speech given by RBNZ Governor Graeme Wheeler. This is an important speech as the New Zealand monetary chief has shown that central banks will use macro-prudential regulation to limit leverage when it perceives a bubble developing. In the speech, “Introduction of Macro-Prudential Policy,” Governor Wheeler explains why New Zealand must utilize regulatory tools to curtail lending in the overheated housing market. Whereas New Zealand has higher interest rates than the other developed economies, raising the Official Cash Rate (OCR) would only move to attract more hot money into the economy and drive the New Zealand dollar higher, which the RBNZ claims is already significantly overvalued.
“New Zealand bonds, with their relatively high yields compared to other advanced economies, remain attractive to foreign investors who own 68 percent of government bonds on issue.” But, the overvalued housing market worries the governor because it risks destabilizing the entire domestic financial system. Thus the RBNZ has moved to force banks to curtail the leverage in loans on home buying. This is an important development as it begins the process of central banks utilizing tools besides the power of interest rates. If the KIWI begins to rally, look for the RBNZ to enact more onerous regulations. This is a very important development in the realm of financial stability, interest rates and regulation. Anybody in Jackson Hole paying attention?