2018-09-25

The Missing Debt is the Crisis

A growing theme in recent years is the rise in debt and the risk it poses.

ZH: Nomi Prins: 10 Years Later, A Debt Crisis Is Building Again
That’s because the last financial crisis was about debt and debt levels have increased substantially since 2008. The entire “recovery” was built on debt.

From 179% before the financial crisis, the global debt-to-GDP ratio has jumped to 217% today. Companies and governments have piled on more debt than before. Emerging-market debt, led by China, is also at a record. The big banks are even bigger, and remain “too big to fail.”

...Now, ten years after the financial crisis, there are major complications building with the deluge of debt created on the back of quantitative easing policy.

When the next shoe drops from our inflated bubble markets, it will be the debt markets that lead the way. Whether the financial bubble begins to pop in emerging markets, over-leveraged corporate sectors or from over-stretched consumers — the reality is that a storm is brewing.

All of this is a recipe for another crisis.
There are sharp increases in subcategories such as student loan debt, but overall the domestic U.S. credit market is stuck what we would call a recession before 2008. The post-2008 depression is the result of slower than "normal" credit growth.
The next crisis won't be caused by U.S. debt levels and it won't be caused by there being too much U.S. debt creation post-2008. It might be that the entire post-2008 period is an intermission in this Great Depression, an extended intermission purchased by central banks. Many of the gains from increased central bank balance sheets will evaporate when the stock market declines and/or interest rates rise. Maybe the debt increase since 2008 was particularly inefficient. However, the absolute increase in domestic U.S. debt post-2008 is not a crisis in and of itself.

China Targets Developer Presales

Chinese developers use presales to finance construction. This avenue of funding is now gone in six cities.

SCMP: Chinese property stocks hit as housing ministry instructs six provinces to conduct in-depth study of pre-sales
Chinese property stocks fell on Tuesday after a long weekend break amid reports of possible property pre-sale restrictions in Guangdong and five other provinces, while the ongoing US-China trade war continued to hurt the overall market sentiment.

...According to a Reuters report on Tuesday, citing housing ministry document, six Chinese provinces – Hubei, Sichuan, Jiangsu, Henan, Guangdong and Liaoning – have been told to reconsider the pre-sale system, which is a key source for builders to finance projects.

The ministry has instructed local housing bureaus of these provinces to make an in-depth study of the pre-sale system, and set out reasons why it should be retained or scrapped, the report added.
Although the government asked for a study, Guangdong's real estate industry is preparing for a phaseout. iFeng: 卖楼花模式将终结?广东住建厅:现售是趋势
On September 21, following the new policy of shared property housing, the Guangdong housing market once again became the focus of the outside world: the Guangdong Real Estate Association issued an "Emergency Notice on the Relevant Opinions on Providing Pre-sale Permits for Commercial Housing" to the vice presidents (hereinafter referred to as "Notice"). The "Notice" stated that the Guangdong Provincial Department of Housing and Construction has cooperated with the Ministry of Housing and Urban-Rural Development to conduct a survey on the pre-sale system of commercial housing and to formulate relevant materials. It is proposed to "phase out the pre-sale system of commercial housing and fully implement the current sale". The material is scheduled to be reported to the Ministry of Housing and Urban-Rural Development on September 25.

...A related person from the Guangdong Provincial Housing Association told the reporter of China Business News: "The document is only for consultation and is not really implemented.
The biggest losers are the marginal developers who need this source of capital:
Song Ding, director of the Tourism and Real Estate Research Center of China Comprehensive Development Research Institute, said in an interview with Time Weekly that the current development funds for housing enterprises mainly come from three aspects: self-owned funds, bank loans and pre-sale backflow. "There is a very big test for the strength of housing enterprises." Song Ding said: "China's pre-sale system is the practice of studying Hong Kong's 'completed building' in the early years when developers' funds are tight but supply demand is high and development pace needs to be accelerated. After more than 20 years of implementation, the Chinese real estate market has changed. In the course of many years of implementation, the pre-sale system has also incurred most of the capital risks for buyers and the disputes over the board when the building was repossessed. The problem, overall, the current sale is the future trend."

For the impact of the cancellation of pre-sale on the survival of real estate companies, Yan Yuejin said that under the pre-sale system, if the developer builds a house, if it is a 30-story house, it can be pre-sold after 5 floors. The funds will be returned and the follow-up investment will be made. However, if the current sale is made, it may take 30 floors of the houses to be completed before the sales can be resold. This will put pressure on the funds of the housing enterprises. “The weak capital enterprises will not be able to develop. investment".

Song Ding said that the full implementation of the housing sales system, "will eliminate at least half of the housing enterprises, leaving some large, strong enterprises." For the supply tension that may be brought about by the sale, Song Ding believes that supply is tight in policy The promotion phase will definitely exist, but it depends on how the relevant cooperation methods are handled. "The market will gradually adapt to the future and eventually form a non-pre-sales pattern."
Others believe the system won't change for a couple of years:
Xiao Wenxiao concluded that the draft of the consultation will inevitably lead to a strong rebound in the industry, and the high intensity of the rebound should be within the expectations of the relevant departments. “Why do you still have to do such a temptation? A big possibility is to retreat and try to improve the threshold of pre-sale of commercial housing, which means that the pre-sale system is likely to be retained, at least not in two or three years. It may be canceled, but the threshold will increase. Currently, the supervision of the pre-sale system of commercial housing in the first- and second-tier cities is relatively in place, but some third- and fourth-tier cities need to be vigilant.” Xiao Wenxiao said, “If the big development encounters the market downturn, sell it’ There will be big problems in the uncompleted building.
Developer presales are a weak point in China's housing market. In several cases, such as in Handan, presales at the peak of a cycle led to partially constructed abandoned buildings and home buyers losing deposits. Presales are a form of leveraged home speculation and removing them is a positive for the market in the long-term, particularly for larger developers who will see their weaker competitors exit.

2018-09-23

EM Decline: India Next

The next leg of EM decline should see India complete its topping pattern.

ZH: India's NPL Crisis Erupts: A Major Shadow Bank Defaults On Three Debt Payments
With the meltdown of IL&FS in motion, another unit, IL&FS Transportation Networks, reported that its chief financial officer, Dilip Bhatia, was demoted to chief strategy officer, for the goal of divestment of assets. The regulatory filing said Bhatia would relinquish his responsibilities as CFO with immediate effect, and the company will search for a replacement.

The shockwaves spread further on Friday, when IL&FS Financial Services, another unit of the IL&FS group, said its managing director and chief executive had resigned.

Why is this important? IL&FS’s outstanding debentures and commercial paper account for 1% and 2% respectively, of India’s domestic corporate debt market as of March 31, according to Moody, while its bank loans made up about 0.5% to 0.7% of the entire banking system loans.

And while bad loans in the Italian banking system have received a ton of attention from investors, India is not far behind and India's economic recovery is built on an even shakier foundation.
India ETFs in U.S. dollars are tracing out a topping pattern, but the Sensex is still in an uptrend.

Vatican Submits to CCP Control

Chiesa: Submission. The Phantom Accord Between the Holy See and China
What is not said is that the Chinese authorities will still be first in line in the selection of future pastors, with only a feeble right of veto granted to the pope on any candidates who may not be to his liking.

In this sense, the accord can rightly be defined as “historic,” because it marks a sensational about-face in the journey that the Catholic Church has made over centuries of history to free itself from submission to political powers, particularly in the “investiture” of its pastors.

2018-09-21

Shorting AMD

I shorted AMD when it hit its long-term resistance line. I got stopped out and reopened the position. There's no fundamental thesis for the trade. If AMD breaks through that trendline, it's over.

With that said, here's a bearish take AMD: Dangerously Overpriced, Here's Why

On the broader semiconductor sector, from Slope of Hope: One Possible Future (by Piano Man). The focus in on testing company Teradyne (TER) as an indicator of the sector's direction.
The best trades come when short-term indicators line up with a fundamental shift. For now it's a short-term trade that could get stopped out as soon as today given recently volatility in AMD.

2018-09-20

2018 Midterm Election Prediction as of Sept 20

I made a simplistic model that looks at generic ballot polling versus number of seats. My forecast based on a normal election year is Democrats pick up between 14 and 17 seats. If the Democrats enjoy a wave similar to Republicans in 2010, the may pick up as many as 50 seats. If they enjoy a wave as in 2006, 21 seats. The average of the past four midterms, which includes the GOP outlier blowout of 2010, projects 23 seats. Democrats need 23 to take the House.

Individual House races can swing on the quality of the candidates. Turnout plays a huge role. Democrats have a demographic advantage in states such as Texas and Arizona, states that will likely turn blue over the next decade. Big turnout could make that shift come earlier.

I'm a little surprised at the projection because it says the House is close to a tossup today. Republicans typically surge late in polling though (and they usually outperform 2 to 3 percent on Election Day). FiveThirtyEight forecasts 80 percent odds of Dem takeover with an average gain of 37 seats.

If the Dems widen their polling lead in the next few weeks, the odds of a House takeover will be solidly in their favor. If the polling tightens, a GOP hold starts looking possible.

Federal Reserve Rolls $2.7 B Off Balance Sheet

The Federal Reserve reduced its balance sheet by $2.7 billion last week, all of it MBS. The Fed has two weeks left in September (the second week ends on October 3). On September 30, $19 billion in treasuries will mature, but the Fed is scheduled to reduce $24 billion this month and because of a slower pace in July and August, it actually should reduce by $27 billion. Either $5 to $7 billion in treasuries will be sold next week or there's going to be a monster reduction in the final week of September. All together, the Fed has $34 billion left this month.

On a percentage basis, the Fed is set to reduce its balance sheet by 0.8 percent over the next two weeks. It reduced by similar amounts 3 times this years, twice across two weeks and once over three.

The first was the last two weeks of February. The S&P 500 gained for this whole period, even though it fell on February 27 and 28.
The second major reduction period came in late June and into early July. Again, the S&P 500 Index rose, but it was a bumpy ride.
The last period was the last two weeks of July. I included the next two weeks because the week ending August 15 saw the largest single-week reduction in percentage terms at 0.68 percent.
If you're bullish on the market, then you can expect prices will be higher following the next couple of weeks. If you have shorter time frames, the couple of days heading into September 30 could be a shorting opportunity.

Now It's a Trade War: China to Increase Imports

A few days ago in Trade War Lessons from Ancient China, I wrote:
What can China do to mollify Trump? The CCP doesn't want an open the economy, it has been ratcheting up its control. It would have already granted its own citizens greater economic freedom if this was an acceptable solution. Thus, the only politically acceptable option that will get China back on its long-term track is greatly increased imports. And if they study Guan Zhong, they would know that's the best way to fight an economic war.
Instead of importing from everywhere, however, China will cut tariffs on non-U.S. goods.

ZH: In Latest Trade-War Escalation, China Will Cut Tariffs On Imported Goods
China is planning to cut the average tariff rates on imports from the majority of its trading partners as soon as next month, two people familiar with the matter said, in a move that will lower costs for consumers as a trade war with the U.S. deepens.

Premier Li Keqiang said Wednesday that China would further reduce the tariffs, without elaborating. The two people who spoke on the new reduction asked not to be named as the matter isn’t public yet.

By cutting duties on goods even as it retaliates against President Donald Trump’s trade war with higher charges on some U.S. goods, China is following through on long-stated goals to boost imports. The move comes as the nation is trying to stimulate domestic consumption to support a slowing economy, and follows similar cuts to tariffs in July on a wide range of consumer goods.
This will boost China's soft power, but it won't end the trade tensions with the United States because falling exports to China is a politically acceptable result for Washington if the offset is larger declines in Chinese imports.