A fake Libor rate, the scandal involving global benchmark interest rates that has raised the level of distrust in major banks and markets, is nothing compared to the damage that could be done if China’s true economic growth figures were revealed, according to Larry McDonald’s newsletter.
“Is Chinese GDP the new Libor?” asked McDonald, author of “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers,” in a much talked about note to clients last week. “More and more investors are starting to question the Chinese math on GDP.”
Annual gross domestic product came in at 7.6 percent in the second quarter, according to China’s government on July 13th. The report was better than investors expected, easing concern of a dramatic slowdown for the world’s second-biggest economy and sparking a bid in risk assets like stocks that has lasted for two weeks.
But slowing imports and industrial production, as well as harder-to-fudge electricity usage data, points to much slower growth, according to McDonald and other investors. Barclays believes the number should have been more like 7.15 percent.
What worries McDonald, a former vice president at Lehman, is that lying by governments and banks — be it Libor rates or GDP statistics — raises the systemic risk to the markets, which is much worse than just economic risk.
“As difficult as economically driven market sell offs are, they do not compare to 2011, 2008, 1929 and 1907,” wrote McDonald. “A look through history shows traditional economically driven sell offs range from 5-15%, or one standard deviation. Systemic risk sell offs, 2008 and 2011 are 25-50%, or two standard deviations.”
Governments not being forthright is happening right now in Europe, with the Bank of Spain the latest to update its number of actual bad loans.
“One of the primary reasons for Japan’s lost decade was their government’s cover up of bank losses,” said McDonald. “The faster pain is taken, the faster the return to healthy markets.”
For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:00 ET on CNBC. Follow @CNBCMelloy on Twitter.
For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:00 ET on CNBC. Follow @CNBCMelloy on Twitter.
______________________________________________________
Got something to say? Send us an e-mail at fastmoney-web@cnbc.com and your comment might be posted on the Rapid Recap! If you'd prefer to make a comment, but not have it published on our Web site, send your message to fastmoney@cnbc.com.
