Henan Has the Solution to Housing Inventory: Encourage Farmers to Buy Homes

I guess they're out of ideas.
Henan Provincial Department of Housing and Urban Minister 裴志扬 steady growth in the province by the end of September, Paul situational experience exchange meeting said that to promote the purchase of farmers into the city, to expand housing consumption, government departments will complement funds from the provincial finance affordable housing projects and special awards separate part of the funds used to encourage farmers to arrange the purchase of the city, for better implementation of the policy tilt counties.

Yesterday, the Henan Chinese Commercial News reporters Cong Henan and Xing Zhujian Office learned that the provincial government intends to introduce incentive policies and support measures to promote the purchase of farmers into the city.

Encourage farmers into the city to purchase not only actively and steadily promote the new urbanization needs, but also improve farmers' living conditions, effective measures digestion housing stock.

iFeng: 政府出大招化解库存高:鼓励农民进城买房

Sausage Maker Can't Pay the Bills, But China's Economy Won't Crash

I've seen a lot of crash talk lately, mostly about how China won't crash. Such as this one from Deutsche Bank economists: Here's where you're wrong about China, which includes yuan devaluation as part of the mix. It calls for a turnaround in the next quarter or two and Chinese economists basically agree with that forecast.

I think much of this discussion misses the mark though. The economic contraction in the United States in 2008 was a bad recession, the whole crisis was about a 3% reduction in GDP. Yet it led to a 50% plus drop in the stock market and the failure of major banks. The risk in China isn't an economic crash, it's a financial/debt market panic that spills over into the economy. Given China's penchant for intervention, I suspect the markets would close and limit the downside risk (as long as you're OK with buy and hold). The major losses would be felt overseas in the free markets.

Bloomberg: China Sausage Maker Says May Miss Bond Payment as Defaults Mount

Maybe the ChinNext vs Nasdaq analog will break down, but the amazing similarity to this point tells me this time not only isn't different, history is painting a picture of itself repeating. If the analog holds and multi-month bear market with nearly continuous losses greets the start of 2016, the pain won't be contained to the stock market, nor to China.

From February 2014, China's Volatility Machine
This makes China's economy very fragile. Even without these commodity backed loans, China's economy is at risk from a downturn in commodity prices that weakens demand in emerging economies. With these loans backed by commodities in place, commodity prices are now at risk from Chinese loans souring. If these commodities flow back into the world market, it will be the very trigger event for China's own bust.

On top of all this, much of the shadow banking credit flowed into investments in coal mines and real estate, the former of which is tied to global commodity prices and the latter to China's credit boom.

In conclusion, China has experienced a very long boom phase thanks to reckless lending taking over from 2008-2013, when global growth slowed. Instead of developing an internal market and making counter-cyclical investments, China bet everything and then leveraged up in order to bet on the China/emerging market/commodity cycle.

The one big counter-cyclical asset on China's balance sheet is its vast holdings of U.S. Treasuries. It is one asset that will surge if there is a global emerging markets crisis. Gold will likely be another. Considering the Chinese are likely to devalue the yuan if a deflationary crisis breaks out, those Treasuries and gold holdings will allow China to avoid a complete currency collapse—but it still may devalue the yuan by a significant amount by the end of the bust. That will set the stage for the next great boom......
I see some data points that give me pause, such as the pickup in home sales and land sales, but it's not enough to change my long-term expected outcome for China's credit bubble.


Deflation in China Clearly Seen, But Ignored

Markets run on psychology and most investors take their cues from the herd. When something bad happens and the market keeps rising, this is evidence that the bad thing is not important. When the market turns and heads lower, often a scapegoat is sought after, such as a fat fingered trader, malicious shorts, or some other nonsense. The source of the next crisis is a familiar one, and already in full bloom: credit inflation combined with malinvestment of said credit. China's investment binge from 2009 to 2013 added massive amounts of productive capacity, while the country failed to shutter excess production. Even today, excess capacity is being funded as a way to keep employment and GDP elevated.

FT: Emerging Asia: The ill wind of deflation
For these reasons, evidence of a deepening deflationary spiral in Asia — sparked by manufacturing overcapacity, an evaporation of trade demand and anaemic productivity — is a major cause for concern. That anxiety is amplified because of the structural nature of the problem. That it is taking place just as the EU and Japan are slipping back into deflation while the US is struggling with weak corporate earnings, makes Asia’s falling prices a pivotal issue.

“There is a chance that we are moving towards global deflation,” says Alberto Gallo, head of European macro credit research at RBS, the bank. “We have overleveraged everywhere and, instead of reducing capacity, we are creating a prolonged state of industrial overcapacity that is driving down prices. China is the biggest example.”

FT: Indebted Chinese maize processor taken over by Jilin province
It has been taken over by Modern Agricultural Industry Investment Ltd, which is ultimately owned by the Jilin Provincial government together with a city in the province also named Jilin. Over the past decade Jilin Province, China’s largest corn producing province, has encouraged the rapid development of companies that process corn into feed, starch, corn syrup and biofuels in order to create an industrial base for its predominantly rural economy.

WSJ: China’s Middle-Class Dreams in Peril
Zhao Cui’e, chief executive of Xinxiang City Dacrotized Metals Coating Co. says some state-owned home-appliance or auto-parts makers delay payment for up to 11 months after placing their orders. “What small company can afford to lay out millions of yuan to support these big companies,” said Ms. Zhao.

Meanwhile, Xinxiang’s aging factories for iron, steel and polyester fiber—the ones whose role is supposed to shrink under China’s new growth model—continue to pump out unwanted inventory with the help of cheap credit, said Yang Yuzhen, a business professor at Henan Normal University. “When growth slows, the Xinxiang government keeps supporting traditional industries to preserve jobs,” she said.

This slowdown is still in its early stages, this is 2007 in the housing bubble. Clearly there's a problem, the effects are being felt by those in the direct path of the oncoming storm, but the rest of the world is acting as if it doesn't really matter.

Behold the Wonder of the Analog

CNBC: China stocks surge after PBOC says correction 'almost over'
Equity markets in China outperformed the region on Monday, following a report by the China Securities Journal that quoted a senior central banker saying that the country's stock market correction is "almost over."

China Daily: Stocks surge on PBOC's move to expand relending plan
In the latest move to support the economy, Shanghai, Beijing, Chongqing and six other provinces and municipalities will allow banks to refinance high-quality credit assets rated by the People's Bank of China, said the central bank, as the program was first introduced in Guangdong and Shandong provinces last year.

Such policy tool, poised as supplements to the current collateral rules, aims to promote the efficiency and flexibility of the policy management, support smaller firms and bolster the real economy, said the statement.

Put This Analog In Your Pipe and Smoke It

If the analog holds, the ChiNext is going to peak in the next 10 days. If there's a similar double peak, the market has until December before it turns south and doesn't look back.

Think of the different the responses of the American government the Chinese government. There was virtually no intervention in the market at this point in the U.S., Bush's tax cuts were a year away. Interest rates weren't even cut until January 2001. On this chart, the Nasdaq is in July 2000. In China, the government intervened incessantly, and yet the path of prices is shockingly similar to that of the Nasdaq in 2000.

Exit question: was Chinese market regulation completely meaningless and merely an expression of the Chinese political response to the same mass psychology/social mood effects that caused nearly the exact same changes in the Nasdaq market 15 years ago?


Ebola Remains in the Human Body, Mutating

Wonderful. Ebola isn't cleared from the body, instead it lies dormant in the body, mutating until it can create a newly infectious strain. The headline is a little misleading, she wasn't reinfected, she was never fully cured.

DailyMail: Family and friends of British nurse to be tested for Ebola after she contracts the virus again: Glasgow medic returns to London hospital isolation unit in 'serious condition'
Parts of the body such as the eye, central nervous system and testes can harbour the virus, which can also behave in an unpredictable way.

Professor John Edmunds, from the London School of Hygiene and Tropical Medicine, said: 'The Ebola virus can occasionally persist for some months in certain tissues within survivors.

'The risk of transmission from these individuals appears to be very low. However, with so many survivors in West Africa now, there is a risk that further outbreaks can be triggered, which is why authorities have to remain very vigilant.'
The virus is now in the West as well and governments are politically unable to stop it.

Drudge Discusses the Future of the Internet and America


Social Mood Preparing to Slump in the West

Mood is currently positive. These protests will swell several fold when the stock markets and economy turn down.

Talk of Negative Interest Rates Picks Up

ZH: Santelli & Hunt Warn About "Dire Consequences" Of Negative Rates
As Lacy Hunt tells Rick Santelli in the brief clip below, "the evidence is overwhelming that QE was more of a negative than positive," and warns the consequences of NIRP are dire (and The Fed has the tools to enginner it) as "to make it effective they would effectively have to call in the currency."
Calling in the currency is destruction of the monetary base. The monetary base of the global financial system.

PBOC Chief Economist: Exclusion from TPP Could Cost 2.2% of GDP

iFeng: 央行首席经济学家:不加入“大TPP” 会因此损失2.2%的GDP
Simulation results show that, with China's accession ("big TPP") compared to the scenario of China not joining, China will lose 2.2 percent of GDP. TPP is assumed that the transitional period of four years, the average annual opportunity cost in this stage of slightly more than 0.5 percent of GDP. If China does not join a number of other countries will also result in the loss of opportunity cost. For example, South Korea, Japan and other countries with close trade China will bear the equivalent of 1.5 percent of GDP and 0.6% of the GDP of the opportunity cost, while the European Union, Singapore, Vietnam and other countries and regions will benefit because the Chinese do not join.

...If the 16 potential member states have joined the Trans-Pacific Partnership Agreement, the Agreement (the "big TPP") implementation will boost GDP by most member states, which benefit from Korea's GDP accumulated 2.2%, Vietnam 2.1%, China 2.0 %, Japan 1.3%, Australia 1.2%, US 0.3%. Instead of "big TPP" countries will suffer some negative impact, which will also involve non "big TPP" countries in the corresponding free trade negotiations. On the industry level, the main beneficiaries of TPP, including Vietnam, Thailand and China's textile and garment industry, Australia's food processing industry, as well as China and South Korea's electronics industry. Japan and South Korea in the agricultural sector, the United States and Australia textile, garment industry will suffer a greater negative impact.

Related: The Logic of Strategy: Yuan Devaluation and the Road to Trade War
The ultimate containment strategy for the U.S. and regional partners (who all have access to U.S. markets) then, is an economic strategy. Yes, these nations will suffer slower growth, but they will retain their sovereignty.

Crude Soars, EM Currencies Rally: 1998, 2011, 2001, 2008 or All Clear?

Over at Solar Cycles, a case for 2001 and sort of 2008 after comparing with 1998 and 2011.
Short Biotech – I see the mania as burst, the parabolic broken and the second chance done. Therefore, I expect hard and fast falls to resume here promptly.

Short R2K – the R2K reached its highest ever valuation at this peak and history suggests small caps should retrace their full gains under a bear.

Short Dow – more likely to hold up than the others but a lower high or sideways range trade are the most bullish outcomes that I can conceive.

Long Gold – has been unnervingly weak but I continue to believe it must be the beneficiary once stocks are more clearly cemented in a bear.

Long gold miners – new position as indicators depict washed out and positive divergence. A position on which I will rigidly use stops, however, due to uncertainty as to how this asset performs if stocks break lower.
Click through for the charts.

ZeroHedge posted WTI Crude Tops $50, Energy Stocks Soar To Biggest Week Since 2008 (But Credit Ain't Buying It). When in doubt, go with the bond market.

Over at the Slope, Tim Knight gives some targets for bears to throw in the towel, at least in the short-term: Twenty-Twenty Hindsight
The Dow Industrials has a huge top between 17,100 and 18,400, and the 1700 point rise in the Dow (!!!) since the August crash puts us just beneath that big top.

The S&P tells a similar story, but as with most indexes, there may still be a little room left to go higher before things really truly worrisome for the bears. 2020 (hence the post’s title) is an important level of resistance. If that is crossed, I’d say that approximately 2045 becomes key.
Click through for the charts.

Over at Slope, there are a lot of topping patterns. The spike in oil is also steep, but still leaves oil below the $60 level it hit in May and held for two months. Many oil stocks remain "toppy" and have risen to points that have bears salivating. They may quickly dump those positions if the charts fail, but the rally to this point hasn't busted the bearish outlook. The main line in the sand for me is the emerging market ETF, EEM. It fell slightly below the support line before the very sharp bounce this week. Were it to break that support line, I think 1997/98 is the template. Nothing yet screams bullish and the bounce has all the hallmarks of a bear market rally. A bull rally is not impossible in the face of seemingly negative fundamentals. Largest counterpoint for me: Chinese H-shares have gone nowhere for nearly a decade. Nevertheless, I'm quite firm in my belief that the market is way too optimistic about China. The IMF is now "predicting" China's slowdown to 6% GDP growth.
Here's a high-yield corporate bond ETF, HYG, showing how the recent rally, while strong, has not broken the larger downtrend.
Here's the Chinese Enterprises Index:

Golden Week Confusion: It's Hot and It's Cold

Beijing home sales and prices up solidly in October, following on the recent trend. The article below says sales were up 50% and prices up 16%, but the data set from CREIS disagrees.
Statistics also show that, as of October 6, Beijing existing housing contract has reached 142,900 units, far more than 104,800 units in last year. This continues the September "hot": September's statistics show that Beijing existing housing transaction price continued to rise to reach 35,100 yuan per square meter, compared to August of the average price of 34,200 yuan per square meter, a 2.6% increase.

iFeng: 十一北京楼市均价同比涨16% 商品房签353套

CREIS saw a 10% drop in sales in Beijing.

The first chart is Golden Week sales (through the 6th). Second is September data, all from CREIS. The September data shows the deceleration from August and in the case of the third-tier, contraction.

Land sales recovered in Q3, but mainly due to more valuable plots of land being sold.

Yingshang: 黄金周房地产总结:银十开端成色亮 同比增幅近五成

Sohu has a different spin, with the headline focused on the continued deceleration in the market: 930新政首周:成交同比上涨但不及九月
Although many developers eye-catching in the "golden nine silver ten" fat pushing plate, but "2015 edition 930 New Deal" of the first week of market performance, not as imagined. Now it seems that, compared with last October "National Day", the volume around the property market are at a high level, but the chain of daily trading volume in September there is continued downward trend, and the decline is also large.   China Index Research Institute monitoring of 23 major cities in October 1st to the 7th housing data show that average daily turnover area than in 2014 rose 64.76 percent over the same period; the average daily turnover of the area 19 cities rose.
One reason for a less than optimistic view is the amount of easing in the prior weeks, including the lowering of first-time homebuyer down payments to 25% in most of the country, local easing policies and central bank rate cuts.

Another article at iFeng calls September "sad" (一线城市"金九"黯然 楼市新政助推"银十"发力), but with a turn during Golden Week thanks to policy easing.

China Boosts Copper Smelting Capacity

Economic Times: China to keep expanding copper smelting capacity

America's Establishment Fractures

Right-wing activists on social media torpedoed the election of John Boehner's deputy, opening up the House speakership to a candidate further to the right.

The mainstream take is that this is chaotic (NYTimes: Kevin McCarthy Withdraws From Speaker’s Race, Putting House in Chaos), but the deeper issues is the chaos is destroying the establishment starting with the loyal opposition. For example, McCarthy would have likely brought the Senate's amnesty for illegal aliens to a vote, allowing Democrats to join with moderate Republicans and pass the bill. He would have worked to avoid a debt ceiling conflict in another month or so. Now there may be a repeat of 2011 or worse.

The fact that social media and Twitter are destroying the GOP establishment is lost on the media. The GOP provides the appearance of opposition to the establishment's goals, but for the most part, establishment Republicans and Democrats are on the same page about where to take the country. The only disagreement is over the speed. Now the GOP has lost its ability to control its part of The Narrative, with candidates such as Trump and Carson running into opposition from even Fox News.

The Wild West of the Internet is replacing old media as the main tool for grassroots conservative activism and this is highly disruptive to the political order. The establishment is fragile, being taken down by a handful of keyboard jockies on Twitter. This is all happening with the stock market near a peak, not a bottom. Social mood is relatively positive. The real battles begin when social mood turns negative once more.

Countdown to Disaster: Now There's A Bond Bubble

Thanks to the commenter on the previous post who tipped me off to the SCMP article below. The quick summary: Chinese investors have warmly embraced wood chipper investing. A wood chipper investment can turn stack of RMB into confetti. First it was housing (over the course of about 2 years), then stocks (in about 11 months), and now bonds (about 2 months into the bull run). Pressure on the yuan will rise as interest rate differentials mount; the endgame remains the same.

SCMP: China’s bond market bubble may be unsustainable
The equity rout has been a boon to China’s bond market. As fears linger over stocks, yield-hungry capital has headed into bonds, building a bubble that analysts say cannot be sustained. China’s prodigious bond market, the third-largest in the world after US and Japan, has been aided by several factors and started to take off this year.

...Meanwhile, bond trading has also prevailed at the Shanghai Stock Exchange. On September 30, bond trading accounted for over 70 per cent of total turnover in the Shanghai bourse, with less than 30 per cent in stocks, reversing the traditional dominance of scrip in the exchange.
Before I even read this article, the headline reminded me the Jiangsu bond that immediately traded at a discount after issuance. One bond, the 15江苏04, traded down to about ¥96 rather quickly. I covered it here and here.

What do you think the bond trades for today?

This quote from the article sums it all up.

“To some extent, authorities hope to see a thriving bond market, similar to how they pinned hopes on the stock market before,” Zhou said.

Update: If You Thought China's Equity Bubble Was Scary, Check Out Bonds
While an imminent collapse isn’t yet the base-case scenario for most forecasters, China’s 42.1 trillion yuan ($6.6 trillion) bond market is flashing the same danger signs that triggered a tumble in stocks four months ago: stretched valuations, a surge in investor leverage and shrinking corporate profits.