Sunday, September 6, 2015

China Gamma

Weekend reading worth investing in; 
If we don’t understand both sides of China’s balance sheet, we understand neither

UH OH ... Michael Pettis explains in the above,

The longer the miracle, the greater the tendency. That’s because in periods of rapid growth, riskier institutions do well. Soon balance sheets across the economy incorporate similar types of risk.
…Over time, this means the entire financial system is built around the same set of optimistic expectations. But when growth slows, balance sheets that did well during expansionary phases will now systematically fall short of expectations, and their disappointing performance will further reinforce the economic deceleration. This is when it suddenly becomes costlier to refinance the gap, and the practice of mismatching assets and liabilities causes debt, not profits, to rise.
 
Thing is China is NOT unique, just take a look at the recent leveraging of US corporations to fund share buy backs. For starters.




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