Capital Flight

Image Credit: MorgueFile.com

Capital Flight
Sentiment Change
Momentum Collapse

My thanks to Michael Pettis and his August 27, 2012 coverage of Capital Flight

Michael's ideas are worth presenting here as they relate directly to the historic run up in Canadian housing prices and the now evident trend change across Canada in collapsing sales, sentiment and price momentum. [square brackets] are mine.

"Flight capital is both a major result of declining credibility and a major cause of further declining credibility, and because it is so intensively reinforcing it is a major warning signal."

"Countries whose growth depends either on growth in Chinese investment [Canadian Resources] or growth in European demand are going to see significant deterioration in their trade accounts.　This will almost certainly lead to even more trade intervention, currency wars, and all the other beggar-thy-neighbor polices typical of a global demand contraction."

"Of course borrowing money to fund a real estate bubble is an important source of bad debt, but I have argued for many years, and continue to believe, that economically non-viable infrastructure investment has been a much greater source of bad debt, by which I mean debt whose servicing cost (excluding of course interest rate repression) exceeds the debt servicing capacity created by the investment (excluding subsidies and including externalities)."

"There are only three things you can do with your debt.　If you are solvent you can service it out of operating income.　If you are not, you can either default, or you can transfer income from some other source to cover the difference.　The cost of the debt, in other words, one way or another must be borne by someone."

"Since investors are aware of the risk, the worse the debt-enhancing impact of a devaluation, the more likely the devaluation is to occur, and the higher the external debt, the greater the actual devaluation will turn out to be." Read Michael Pettis' complete article.

And here is The Vig Shot (you are on the hook). Chart from Ben Rabidoux: theeconomicanalyst.com.

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Chart from Ben Rabidoux: www.theeconomicanalyst.com CLICK TO ENLARGE