Where Are We Headed?

Under the directions of the government banks in China are recapitalizing at a fast rate. At times, when private interest was lacking these banks have turned to sovereign funds to ensure the success of their IPOs. This follows an unprecedented lending by Chinese banks over the last two years, again under the encouragement of the government. I can only think of three reasons this urgent and large capitalization is taking place. The first would be an equally large expansion that would require increased lending activities. I am not sure this is what the Chinese government had in mind when it ordered this massive recapitalization, not when it took steps to cool down the economy and its own lower GDP projected growth rate. The second, and more likely reason, is that the Chinese government expects an increase in the banks' nonperforming loans portfolio and therefore the need to have enough capital on hand to meet the necessary reserve requirements. The third, which is closely related to the second reason, is to hurry up and recapitalize before the capital markets shut them out.

Today (7/7/10) the Financial Times reported that European banks are using their gold holdings to raise cash in swap agreements with the Bank for International Settlements. This can't be a good sign, not at a time when Europe is still experiencing a severe debt problem. This move is very negative for the European economy because it indicates deteriorating values of European debts, especially those on the banks books. On the other hand, depending on the magnitude of these swap agreements, this may be bullish for gold prices.

We are certainly facing huge uncertainties with respect to the global economy but the above mentioned examples add an element of urgency and increase the odds that we are headed toward something truly big that will leave a deep impact on our lives. I don't know when or what but I am not very optimistic about the state of the economy.