What to do in the Coming Financial Earthquake

20170627_world

I’ve written a number of articles over the past year on the looming problem of the Chinese debt situation. It’s currently just shy of 300% of GDP and this doesn’t bode well for domain investors reliant on cheap Chinese capital to purchase their domains at hugely inflated prices. So should we really panic?

Escrow.com

I saw the following charts in a recent Bloomberg article that puts the Chinese debt problem into perspective. What’s interesting about this chart is that China’s flatter line shows that it’s not getting as big a GDP bang for its debt buck compared to some other nations. Also notice that Germany is retiring debt even while sharply increasing its GDP per capita.

GDP to Debt

The USA is continuing to increase debt while getting a lot of GDP per capita from it.....but the debt still continues to increase. At some stage the piper has to be paid and if the current trends continue it will be more when not if.

The difference between China’s debt and many countries in the world is that it’s largely locally funded by huge domestic deposits. Compare this to the US where deposits are much lower. This means that China is less subject to the vagaries of the international money markets and more in control of its debt burdens.

Loans versus Deposits

What’s also interesting is the median amount of loans that Chinese banks make versus deposits is the lowest among major economies.

Deposits and loan ratio

As can be seen from the below chart, Chinese banks are also some of the most profitable.

Profitability

There is one thing for sure, the levels of debt will spark a Chinese financial crisis but given the high levels of domestic savings it looks like it may initially be manageable. There will be some financial pain but the Chinese banks can either decrease dividend payouts or alter their capital requirements to tap into additional funds. Not only that, the Chinese government is not in itself carrying a large amount of debt.

The potential sleeping time-bomb is the shadow banking market in China. No actually knows exactly what's going on in this area and some pundits try to make a guess at the size of potential defaults with zombie companies soaking up capital in unprofitable enterprises. This is going to be the real economic headache for the Chinese government.

So why did I make the comment that a crisis will be “initially” manageable? What is for sure is the large pile of debt is slowing the Chinese economy down. This will then have a flow on affect to countries supplying the raw materials to China’s manufacturing powerhouse (eg. Canada and Australia). As these economies catch the contagion the meagre European turnaround will falter and ultimately grind the US an economic downturn.

In the 2008 Global Financial Crisis the central banks dropped interest rates and pumped the world economy with easily accessible cash. Massive quantitative easing programs propped up economies around the world.

To give you an idea of the size of the US quantitative easy program, George Bush borrowed more money than all the previous presidents put together. In his presidency, Barack Obama nearly borrowed more than all the previous presidents (including Bush) put together. These are MASSIVE sized borrowings on a scale is unprecedented.

So what do the central banks do now? They can’t drop the interest rates further as in most nations the interest rates are just above zero (although a number of countries do have negative rates). The coffers are all but empty and massive stimulus packages are likely to be out of the question. Printing more money sounds like one possible option but this may unleash the spectre of high inflation.

Once again borrowing may be the answer! The problem with this solution is the world has a debt to GDP ratio of 320%....which means there just isn’t enough cash to maintain services and pay the debt. The only possible option for some countries will be to borrow like crazy and then default on their debt. This will create a seismic social upheaval as like Greece discovered…..those with the cash begin to run their country. So much for democracy.

In amongst all the doom and gloom what can domain investors do? My advice is to diversify and focus on profitability.....sounds pretty basic. Whatever you do, also pay down your loans.

Ask yourself what you will do with all of your eggs in the domain sales basket if there is a global financial crisis that makes the last one look like a tremor?

No one is going to be buying high priced assets as the demand for domains will collapse and like the resolution of the sub-prime housing bubble, good domains will flood onto the market. If you have the cash, you can ride out the tsunami, keep on renewing your own portfolio and pick up choice assets at bargain prices. If you don’t have the cash then you may have some problems.

I wouldn’t shoot for top dollar for any sales right now. I’d be looking at moving as much of my domains as possible into cash. Likewise, have some traffic domains and start building out some of your prime domains into real businesses. Above all, get some liquidity into your businesses as cash will be king…..get a bit of precious metals as well.

With the recent launch of ParkLogic Next, we’ve integrated more advertising networks to not only help extract more value from domain traffic but to diversify the risk. In a coming crisis, you don’t want all your monetisation to be locked into a single company. Firmly on our radar is a plan to assist our clients through additional diversification strategies……it’s one of the reasons why I’ve personally jumped back on the programming tools and built a quite revolutionary monetisation platform. More on that another time.

I know all of this sounds a little bit depressing but having a good plan for your business is smart thinking regardless of whether the crisis eventuates or not. The worst case scenario is you end up in a better position to react to any possible downturns.

I should finish by saying that every person is in their own unique financial position. Getting sound advice from professionals who know your finances is not only prudent but may save your skin. So whatever you do, talk to some trusted advisors and start putting some plans into action.

We Live in Amazing Times
Saturday Musings - Working to the MAX!

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Comments

HRMInc on 01 July 2017
I sure hope you're wrong...

Wow. I sure hope you're wrong Michael... but we are taking your comments very seriously and and planning accordingly.

Wow. I sure hope you're wrong Michael... but we are taking your comments very seriously and and planning accordingly.
mgilmour on 03 July 2017

I hope I'm wrong as well.....

I hope I'm wrong as well.....
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Wednesday, 20 September 2017