2020-05-31

Fed Balance Sheet Versus Total Debt

Total debt outstanding (TCMDO) divided by the Fed's balance sheet (WALCL). TCMDO is quarterly and lags, right now the Fed's balance sheet is approaching 10 percent of TCMDO, down about 8 percentage points from the end of this chart. Inverse (WALCL/TCMDO) peaks around 7 percent in 2014, drops to 5 percent at the end of 2019, and now closing in on 10 percent. This is not close to what was done in 2008 yet. The numbers are larger thus far because they have to be.

Here We Go Again: Chinese Land Sales Soaring

The past 20 years of economic history has been a series of ever larger credit bubbles. There was organic growth alongside credit bubbles in the run-up to the first 2007 peak, mainly in China and emerging markets. Since then, the U.S. economy has grown slower than it did during the Great Depression. China has also experienced a series of credit bubbles following it's massive stimulus effort in 2008. Each time, the real estate and financial sector showed signs of weakness, the yuan depreciated (or was defended at great cost in forex reserves and reversal of economic reforms), and another wave of credit growth bought time at the expense of an even larger bubble. And it's happening again.

First a little history. The last major economic slowdown was in 2014-2015. The government started loosening credit about 6 to 9 months before global markets would bottom in February 2016, perhaps because of global coordination by central bankers. MW: Did central bankers make a secret deal to drive markets? This rumor says yes China had blown a massive stock market bubble that peaked in 2015. Shenzhen home prices started rising that summer as capital chasing the stock market bubble fled back to real estate. With credit loosened, it became another bubble. By summer 2016, the evidence was clear. See: Reform Can Wait: 4 Trillion Stimulus All Over Again as SOEs Pour into Land Market.

State-owned companies featured prominently: Ministry of Finance Owned Cinda Real Estate Becomes Land King. By early 2017, the government again declared that SOEs should exit the real estate market (having said the same thing for going on 5 years already).

Land prices climbed past the value of finished homes in some cities, which analysts described as "flour costing more than bread." See: Flour More Expensive Than Bread: Second Tier Land Prices Soar 180 pc. Analysts also sounded the alarm because prior speculative land bubble presaged downturns in the sector and the economy. See: Land King High Tide in 2007 and 2010 Preceded Downturns

By the summer of 2018, the government was in the middle of a deleveraging campaign. Land Market Frozen, Local Govts Have One Mission: Control Home Prices At the same time, the U.S. dollar was showing signs of strength, the Federal Reserve was reducing its balance sheet and global equity markets were about to take a tumble.

Fast forward to coronavirus and various governments, including China, going back to the inflationary credit-bubble strategy. As warned here and elsewhere, China's coronavirus stimulus flowed straight into the real estate market. A month ago it was reported businesses had taken government aid and speculated in real estate. See: Analyst Warns Shenzhen Home Prices Could Fly Out Of the Universe

Now the government is again warning about soaring land sales and credit flowing into real estate. iFeng: 50城土地出让额1.6万亿 警惕房企变相融资拿地
Recently, the overall land market in the country has continued to heat up, high-priced plots in hot cities such as Shenzhen, Guangzhou, and Beijing continue to appear, and the turnover has rapidly increased.

...Centaline real estate data shows that Beijing, Hangzhou, Shanghai and other cities have exceeded 100 billion yuan in land transactions this year. Among them, Beijing is 113 billion yuan, the land transfer amount is the highest, Hangzhou is 109.7 billion yuan, and Shanghai is 10.147 billion yuan.

At the same time, the total land transfer in 50 typical cities was 1.6 trillion yuan, up 12% year-on-year. Among them, 27 cities exceeded 20 billion yuan, and 49 cities exceeded 100 billion yuan. The above data have refreshed the records of the same period in recent years.

...The planned construction area of ​​land transfer in 23 cities exceeds 10 million square meters, and the three regions of Chengdu, Chongqing and Suzhou exceed 20 million square meters. Among them, the total planned construction area of ​​land transfer in Chengdu is 27.7017 million square meters, Chongqing's total is 23.355 million square meters, and Suzhou's is 23.334 million square meters. In the first-tier cities, the total planned construction area of ​​land transfer in Beijing is 35,643,300 square meters, with an average premium rate of 18.61%.

The scale of land transfer and transaction premium rate in hotspot areas such as Hangzhou are relatively high. On May 27, Hangzhou Xiaoshan District collectively transferred 5 residential sites with a total planned construction area of ​​14395 square meters, with a total transaction price of 6.618 billion yuan. Poly, Shunfa, Jingrui and other housing companies successfully won the bid. Among them, Hangzhou Zhongyu Enterprise Management Co., Ltd. won the plot of XSCQ 14405-04 in the Ningwei unit of Xiaoshan District with a total price of 1.334 billion yuan. The floor price was 21722 yuan per square meter, and the premium rate was 27.78%. Hangzhou Zhongyang Enterprise Management Co., Ltd. won the plot of Ningwei unit XSCQ1405-18 at a total price of RMB 800.9 million, with a floor price of RMB 21,521 per square meter and a premium rate of 26.59%.

...Watch out for disguised financing

In order to alleviate the pressure on cash flow, repay debts due, and pay the funds needed for land acquisition, housing companies have become more active in financing this year.

According to data from Centaline Real Estate, as of May 27, bond financing by housing companies has continued to blow up. Since this year, bond financing has reached 307.6 billion yuan, an increase of approximately 25% year-on-year. The total amount of industry financing in the whole year of 2019 was only 580 billion yuan. Among them, the total amount of financing in the real estate industry in April reached 97.1 billion yuan, setting a record for the monthly amount of financing in recent years. Since May, housing financing has continued to operate at a high level.

From the perspective of financing interest rates, the financing interest rates of companies such as Vanke A and Gezhouba are as low as 2%. Compared with the previous 6% -10% corporate bonds, the recent interest rate of housing companies has continued to fall.

According to data from the Shell Research Institute, a total of 18 domestic and foreign bonds were issued by real estate companies last week (May 16 to May 22). The financing (including plans) amounted to approximately 17.04 billion yuan, and the amount of financing increased by 137%. Benefiting from active financial policies, the domestic bond market has entered a period of active periods.
Barring major economic reforms, credit will not grow without real estate speculation or infrastructure development in China. The same pattern is repeating again, but the lifecycle of these bursts is growing shorter. Without synchronized credit bubbles around the world, China will likely slam the brakes on this move early. If not, the foreign exchange markets may do it. USDCNY is near completion of a major basing pattern that points to a quick rally of roughly 5 percent, with far larger gains looming.

More globally, it remains to be seen if this is a turning point for central banks and markets, or merely another rope-a-dope on commodity and emerging market bulls. This is not the start of a healthy growth cycle as seen in the early 2000s. The Asian Crisis and Chinese bank bailout paved the way for a new credit cycle, while the U.S. pumped up an unhealthy housing bubble in the wake of the doctom bear market. This time, China is starting from a position of peak prices in real estate and the U.S. at a peak in stocks, while credit is at its peak the world over. The case for commodities is stagflationary growth as investors flee financial assets for real assets amid currency devaluation.

China is stuck in the same dilemma as it has been going all the way back to 2008: let home prices run and risk currency devaluation, or cut credit growth and risk an economic downturn. In the past two cycles, the government clearly held the line on credit growth. This time it has signaled a desire to let credit run hot in response to the coronavirus pandemic. This greatly increases the risk for an "unexpected" (by mainstream economists and financial markets) depreciation of the yuan in the next couple of years. Or next week given the growing geopolitical tensions.

2020-05-26

Horror Movie Tops Box Office for Third Straight Week

The total gross is less than $400,000 though...

EW: How low-budget horror movie The Wretched became America's No. 1 film
The most successful new film, according to Box Office Mojo, has been a supernatural indie-horror movie called The Wretched, which has dominated the website's daily chart since it was released on May 1. As of Thursday, The Wretched — about a teenager who discovers that a malevolent witch is living next door to his father — had been the No. 1 film in America for three weeks.

"It’s actually been a complete shock and kind of insane," says the Detroit-raised Brett Pierce, who directed the film with his brother Drew. "We were a little movie from Michigan. We always aimed for the moon, but with an independent film you think, Yeah, we’ll come out in a few theaters, and we’ll play for like a week, and maybe ten people will see it. Most people are going to see it when we land on a streaming service at some point. Each week it just kept on getting bigger, it was one of those things where you just don’t believe it as it’s happening. We’re going to be a Jeopardy question one day, because we’re going to be the lowest-grossing most successful film."

2020-05-20

Socionomics Alert: Sports Contraction

This is a major bear market. MLB contracting 25% of minor league. Baseball is also classified as a positive-mood sport according to socionomic theory. New sports like cage fighting have grown in popularity as baseball plummets.

Forbes: Shortened MLB Draft A Reminder Of Minor League Contraction Plan—And MLB’s Post-9/11 Contraction Plan
Except Major League Baseball already has the right to cut next year’s draft to no more than 20 rounds. And even if the draft isn’t drastically shortened and the pool of professional players dramatically reduced, chances are commissioner Rob Manfred’s plans to decimate the lower levels of minor league baseball will already be complete.

Last October, in the midst of a memorable postseason, Major League Baseball began its negotiations with Minor League Baseball on a new Professional Baseball Agreement by proposing the elimination of 42 minor league teams — more than one-quarter of minor league franchises — in 2021. These proposed cuts were concentrated mostly in short-season leagues located largely in remote outposts many hours away from the nearest big league city.

...If you are a baseball fan of a certain age, this is probably beginning to sound familiar. On Nov. 6, 2001 — 56 days after the 9/11 terror attacks, which forced the postponement of six days worth of games — Major League Baseball owners voted 28-2 to contract two teams, later revealed to be the Minnesota Twins and Montreal Expos, before the start of the 2002 season.
Given the high debt levels in sports, contraction could come to the NHL as well, and potentially the NHL and NBA if the economy really tanked, though less likely given their much more lucrative TV deals.

Drowning in Oil in 1999

A follow-up to the last post.

2020-05-11

Vanke Starts Pig Farming

Global Times: With pork prices elevating, real estate giant China Vanke builds hog farms
Property developer China Vanke Co has posted a recruitment notice for hog-raising talent, a move which confirmed market rumors that the Chinese real estate giant is going to follow in the steps of some of its peers, like Evergrande, to raise hogs.

According to the recruitment notice, Vanke is recruiting people for several hog-raising related positions including veterinarians, pig farm managers and construction application specialists. The staff will work for Vanke's food business division.

The recruitment has confirmed market speculation that Vanke is broadening its business avenues to raise hogs, since Vanke's chairman reportedly asked Liu Yonghao, chairman of agribusiness company and hog-raising giant New Hope Group how much money Liu made in raising hogs in 2019.

Chinese Reseves Rise in April, M2 Grows 11.1pc

M2 climbed 11.1 percent in the past 12 months, well above the prior target range of 8 to 9 percent. The 3-month rolling growth rate declined from 20.1 percent to 14.5 percent.

FX reserves climbed $30 billion. Reuters: China FX reserves unexpectedly rise to $3.091 trln in April

Why did reserves rise? The country exported much more than it imported. Reuters: China's April exports rebound but outlook remains grim
Overseas shipments in April rose 3.5% from a year earlier, marking the first positive growth since December last year, customs data showed on Thursday. That compared with a 15.7% drop forecast in a Reuters poll and a 6.6% plunge in March.

The increase was driven in part by rising exports of medical equipment, traditional Chinese medicine and textiles including masks. China exported millions of tonnes of medical products worth 71.2 billion yuan ($10 billion) in the March-April period, according to the customs agency. The daily export value of medical supplies jumped by more than three times last month.

...Imports sank 14.2% from a year earlier, the biggest contraction since January 2016 and below market expectations of an 11.2% drop. They had fallen 0.9% the previous month.

The soft imports reading was due to weak domestic demand and declines in commodity prices. The shutdowns outside China also dealt a heavy supply shock to the country’s importers.
No nation needs the debt increase caused by coronavirus, including China.

2020-05-07

Yield Curve Says Short Away

Is it a bear market rally or a bull market correction (a la 1998)? The yield curve head faked in 1998 and 2006, but this looks like 2000 and 2008 to me.

2020-05-05

China Collusion Narrative Has Only Begun

Consider the FBI put Michael Flynn in jail for not committing any crime, for nothing related to Russiagate. It was a manufactured crime.

Consider that U.S. government officials, included elected Senators and House members, corporate CEOs, universities and professors, journalists, medical researchers and more...have extensive ties with China. The FBI could spend years putting people in jail for actual crimes, let alone rack up thousands or tens of thousands of procedural crimes similar to Flynn.

ZH: Rabobank: "How Is This Not Front-Page News?"
the Trump White House is going to “turbocharge” the extraction of supply-chains from China, taking an ‘all of government’ approach; this including financial incentives such as tax cuts or subsidies for those firms; the US is considering higher tariffs and targeted sanctions of Chinese individuals, and even close relations with Taiwan as well; and it wishes to bring other countries with it in a so-called new “Economic Prosperity Network”, which sounds like a combination of the TPP and the Cold War. At any point during the 2018-19 trade war, this would have been front page news. Instead, it got hardly a mention. It did rightly see markets dip somewhat yesterday, but arguably not to the extent the story deserved. It also ignored Peter Navarro following up that “Buy American would soon be the law of the land” for some US government departments.
As I put it before, Russiagate Was Bootloader for China Trade War. Russiagate was one of the worst episodes of jingoism and xenophobia in U.S. history. It also looks like the greatest scandal in American history and the greatest abuse of government power. Watergate is a small thing next to the crimes of Russiagate, which looks like a modern coup attempt. (General Michael Flynn was targeted because he was independent. As NSA advisor, he could dig into who was behind the Russiagate effort.) And since "the Cathedral" doesn't want to have Russiagate blow back on them and turn into something far larger than Watergate, what better way than to redirect all the Russiagate anger into anti-China sentiment? Trump supporters will take their revenge on China colluders, and the unrequited rage of the Russiagaters can also be sated with Chinagate. Trump and the nationalists get their trade war. Globalists get to push back on China as a competitor to U.S. global hegemony. Who's going to stop this train?

Average Chinese Household Has ¥3 Million in Assets

iFeng: 中国居民家庭资产均值逾300万 负债主要是房贷
The average value of urban household assets exceeds 3 million yuan

The Survey and Statistics Department of the People's Bank of China conducted a survey of assets and liabilities of Chinese urban households in the previous year. The survey results show that the assets of Chinese urban households are dominated by physical assets, the proportion of financial assets is low, and the proportion of real estate is over 70%.

Physical assets account for 80% of total household assets

The average value of the total assets of urban households is 3.179 million yuan, and the distribution of household assets is uneven.

There are significant differences in the distribution of household assets among regions. The household assets of residents in economically developed areas are high; by province, the highest household assets are Beijing, Shanghai and Jiangsu, and the lowest are Xinjiang, Jilin and Gansu. Among them, the total assets per household of Beijing residents are about 7 times that of Xinjiang. High-income families have more assets, and the average household assets per household with the highest income of 10% are 12.048 million yuan, which is 13.7 times that of the households with the lowest income of 20%.

In addition, the age, educational level and occupation of the head of the household all affect the distribution of household assets. The total assets of the household show the characteristics of increasing first and then decreasing with the age of the head of household; the higher the education level of the head of household is, the more the total assets of the household are;

The household assets of Chinese urban residents are mainly physical assets, with an average household income of 2.53 million yuan, accounting for 80% of the total family assets. Housing is an important component of the family ’s physical assets, and the household ownership rate of residents ’households is relatively balanced. The housing ownership rate of urban households in China is 96%, the proportion of households with one set of housing is 58.4%, the proportion of households with two sets of housing is 31%, the proportion of households with three sets or more is 10.5%, and all households own housing 1.5 sets. Operating assets such as shops and factories are an important reason for the large gap in household assets. The average total assets of households with operating assets is 7.768 million yuan, 3.4 times that of households without operating assets. The more total household assets, the higher the ownership rate of operating assets.

How about the ownership of financial assets of Chinese urban households? The survey data shows that 99.7% of households own financial assets, and the average financial assets per household are 649 thousand yuan, accounting for 20.4% of total household assets, which is relatively low. The survey results show that the degree of differentiation of Chinese urban households ’financial assets is more obvious; residents’ investments are relatively stable, and the risk-free financial asset holding rate is high; high-asset and highly educated families have a stronger willingness to participate in risky financial markets, and financial asset performance More diverse.

2020-05-04

Time to Go Mobile

No position, but could be a great bearish setup here. Same logic as buying March 2020 PetroChina puts in July 2019. Only downside is puts are more expensive now, but still cheap if there's a major yuan deval or economic crisis on the way.

2020-05-03

CNYJPY 20

USDCNY 10 and USDJPY 200 equals CNYJPY 20. Been there before. But first a breakdown could be coming.
Update: It has broken down if CNY follows CNH above 7.15 and/or if JPY extends its gains versus the dollar (and CNY).