2020-07-02

After All That We've Been Through, It All Comes Down

Well, here we are again
I guess it must be fate
We've tried it on our own
But deep inside we've known
We'd be back to set things straight



Continuing Claims Holding at Elevated Level

The Department of Labor estimates unemployment was 13.2 percent in week ended June 20. Continuing claims still had a 1.4 million handle, indicating no hiring surge that would explain the BLS estimate of 11.1 percent unemployment. Unless millions of people not on unemployment were not working and have since returned to work. The two data sets cannot be reconciled, as the BLS uses a model, but roughly speaking, BLS is saying a net 4 million people returned to work who were not on unemployment. My sense is the DoL is far more accurate. The BLS model was criticized during normal times. I have a hard time believing current events haven't broken the model.

Dumping the BLS report, the DoL report shows improvements in the labor market, but no V-shaped recovery.

2020-07-01

Demographic Headwinds Arrive

The U.S. fertility rate is below replacement. Population growth is about 50 percent immigrants, and higher if you include native born children of immigrants because recent immigrants have higher average fertility. The current ban on immigration, likely to be a permanent policy, will eliminate the majority of population growth. A decline of 0.6 percent from economic growth gets one close to a target of around 1 percent GDP growth per annum. Even if there is some population growth, the marginal impact on sectors such as housing will be much larger than a linear extrapolation from population. Add in other factors such as aging of the population and the inefficient healthcare sector consuming ever more reasons as the country ages and the long-term outlook is not great for growth.
The chart below from RealInvestmentAdvice.com is far closer to a potential reality than is understood today. Their long-term growth forecast is 1.07 percent. My hunch is the coming decade will be more volatile than the last, and that the current recession will last longer than anticipated. Average growth could be around 1 percent, but it will come from much bigger losses early on and stronger growth in the later years. Either way, forecasting sub-1.8 percent growth is a high probability forecast until there is a deflationary credit collapse or a jubilee/currency collapse that wipes out debt.
ZH: The Decade Long Path Ahead To Recovery, Part 1: Debt

2020-06-30

Hong Konked

August tends to be negative for emerging markets. Stocks such as HSBC are right at major support. Some such at LFC have similarly large topping patterns. CHL looks primed for a breakdown with support maybe around $25. I don't think the March 19 low at $29 and change will hold if tested.

Miners Ready For Big Move

I'm hedging with puts on large miners and GDX. Long small juniors and explorers. Here are the top-10 holdings in GDX. I don't know which miner could fall the most.

In general, I see a lot of bullishness in the stock market and metals, but aside from gold itself and some of the small caps, everything is at lower highs including the FANGs. I remain long-term bullish on gold and miners, but it seems like the time to exit everything was 3 weeks ago. The island reversal on $SPX is intact.

2020-06-28

Nasdaq Listed Kingold Borrowed $2.8 Billion Backed by Gold-plated Copper Bars

Caixin: The Mystery of $2 Billion of Loans Backed by Fake Gold
Well, plenty, as at least some of 83 tons of gold bars used as loan collateral turned out to be nothing but gilded copper. That has left lenders holding the bag for the remaining 16 billion yuan of loans outstanding against the bogus bars. The loans were covered by 30 billion yuan of property insurance policies issued by state insurer PICC Property and Casualty Co. Ltd. (PICC P&C) and other smaller insurers.

The fake gold came to light in February when Dongguan Trust Co. Ltd. set out to liquidate Kingold collateral to cover defaulted debts. In late 2019 Kingold failed to repay investors in several trust products. Dongguan Trust said it discovered that the gleaming gold bars were actually gilded copper alloy.
It wasn't a surprise to locals:
“We knew for years that he doesn't have much gold ― all he has is copper,” said the source, who declined to be named.

Local financial institutions in Hubei have avoided doing business with Kingold, but they don’t want to offend him publicly, the source said.

“Almost none of Hubei’s local trust companies and banks has been involved in (Kingold’s) financing,” he said.

Public records showed that most of Kingold’s creditors are from outside Hubei.
Not great timing given the increased U.S. scrutiny on Chinese shares.

Shenzhen Rents near Hong Kong Fall 20pc

As one commuter explained, Hong Kong and Shenzhen are 100 meters apart, but it takes 28 days to travel because of a 14-day quarantine rule in Hong Kong and a 14-day quarantine in Shenzhen.

iFeng: 深圳房租罕见下调20%,租房市场要“凉凉”?长租公寓还好吗?
As usual, Zhou Jin’s house is not only next to the Luohu port, but also a “subway room”. Such a house is generally very popular among practitioners who travel between Shenzhen and Hong Kong and the student groups who come to Hong Kong to study. "It was very good to rent a few years ago, and sometimes the next tenant takes over in less than a week." Zhou Jin said, but this year, this is the first time that the rent price has been reduced by nearly 20%. And not only their own houses, but due to factors such as port closures and Hong Kong's anti-epidemic measures, the rental prices of the entire district are affected.

..."It is 100 meters apart and it takes 28 days to travel." A driver who commuted to work in Shenzhen and Hong Kong described his isolation experience to reporters. Although geographically, Shenzhen and Hong Kong are less than 100 meters apart, they started from mid-April. To go to Shenzhen for work, Hong Kong needs to be isolated and observed in Hong Kong for 14 days. After arriving in Shenzhen to work, it needs to be isolated in Shenzhen for 14 days before returning to Hong Kong. One month has passed.

...In addition to the Luohu District, which has been greatly affected, the reporter, as a tenant, successively asked landlords and intermediaries in Nanshan District, Futian District, Baoan District and Longhua District, and found that Nanshan District and Futian District, which are at high rents, occupied themselves. Type rental apartments (different from public rental housing and low-rent housing) generally have a year-on-year increase in vacancy rate and a reduction in rent, but the range is not as high as that near Luohu Port, basically between 5% and 10%.

The rents in Bao'an District and Longhua District are relatively stable, and the rents of some apartments with prices not exceeding RMB 2,500 have even increased slightly. "It can be said that it is a kind of rental downgrade. Several tenants have asked me to find a cheaper house because of unemployment and a sharp drop in income." A rental agency told reporters that there are areas in Baoan District and Longhua District. The rent price is relatively low, such as a one-bedroom less than 2,000 yuan, so it has become a popular choice for tenants.
While the overall rental market in Shenzhen isn't as bad, the trend there and nationally is still down.
As of early June, the decline in rents in key domestic cities has not stopped. According to the data from Shell Search, in the first week of June, the rent level of the key 18 city rental market was 41.7 yuan/square meter, a decrease of 4.3% from May and a decrease of 5.2% from the same period last year.

2020-06-27

Chinese Developers Dump Property to Repay Debt, Issue High Interest USD Bonds

iFeng: 降价清盘!楼市再现抛售潮,刚需上车的机会到了!
June-July is the life-and-death robbery of many developers. The debt of 1.46 trillion yuan due in 2020 will reach its peak in July, with an amount of 149 billion yuan due.

Debt service pressures are occurring year after year, and this year is particularly heavy. Hurry, hurry, hurry!
Since 1.46 trillion divided by 12 equals 122 billion, it sounds like repayment pressure is a near constant this year.
Without one-size-fits-all, without flooding, developers' financing channels are tightened. Either cut prices and sell, or compress projects to cut people and lay off staff, or go overseas for financing.

Or, only one fell apart!

Under heavy pressure, all developers this year, whether it is discounts or sales policies, have revealed a taste of selling.

I monitored the frequency of "zero down payment" and "instalment down payment" in the national real estate field through the public opinion monitoring system.

From mid-March to mid-June, 11,859 new messages were detected across the network, compared with 7,666 in the same period in 2019, a year-on-year growth rate of 54.7%.
Overseas debt (U.S. dollar) is playing a role in the pressure:
Tens of thousands of people shake their numbers and wind up in seconds. Messages of "robbing houses" are emerging everywhere.

Friends who want to get on the bus seem to come to a suitable time node.

So, is this developer's best time to ask for "money" a thirsty time? Or is it that the debt crisis of Chinese housing companies will rise every year?

Under the environment of “no housing, no speculation” and tightening of financing channels for domestic housing companies, let’s discuss an important factor affecting the cash flow of domestic housing companies: overseas debt.
Develoeprs are also paying high interest rates to borrow US dollars as they repay existing US dollar debt.
Borrow new debt! Pay off old debts! Since June, news of overseas financing of Chinese housing companies has also frequently spread.

On June 1, Minfa Group, a developer of the Min system, issued an announcement to issue $176 million in bonds at an unprecedented 22% interest rate.

On June 5th, Fujian-based developer Zhengrong Real Estate announced the issuance of US$200 million in 3-year USD bonds with an annual interest rate of 8.3%.

In 2019, Zhengrong Real Estate ranked at the forefront of the country with 9 US dollar bonds. And this debt is already the fourth dollar bond issued by Zhengrong in 2020.
On June 10, Fujian-based developer Jinhui Group issued a $250 million, 3-year U.S. dollar bond on the SGX with a final coupon rate of 8.8%.

This is Jinhui Group’s third dollar debt in the past year and the lowest interest rate. In October 2019, a $250 million 2-year U.S. dollar bond with a coupon rate of 11.75%. In January 2020, a $300 million 2-year U.S. dollar bond was issued with a coupon rate of 10.5%.

On the same day, Minxi Rongxin China issued an announcement that it issued US$250 million in debt to refinance its existing debt, with a 2-year period of 7.35%.

On June 11, Min developer Baolong Real Estate issued an announcement to issue an additional US$250 million of 3-year U.S. dollar bonds to repay debts that are due to mature within one year at an annual interest rate of 6.95%.

This June, the radical Min real estate enterprise set off a wave of dollar debt. Borrowing debt to repay money, behind these not-so-low financing costs, reveals the developers' hot anxiety.
This chart shows the average interest rate on debt (red line), new issuance (red bar) and maturing debt (blue bar).
Even more debt is coming due:
A lot of debt this year? More debt is due in the next few years than this year!
The chart below shows the amount of foreign debt coming due each quarter.
The National Development and Reform Commission General Office Document No. 778 of 2009 stipulates that the issuance of foreign debt by real estate companies can only be used to replace mid- and long-term overseas debt due within the next year.

In 2021, the scale of US dollar debts pending for Chinese housing companies is higher than this year. Continue to borrow through 2021? The above-mentioned debts due in 2022 are already about to lift the scale of outstanding debt in 2022 to a higher level.