China's Credit Bubble Bursting

ZH: BofA Notices Something Troubling: China's Debt Bubble Has Burst
While it is sometimes difficult to get the data around just how significant a problem NPL defaults have become for China, and more specifically how the shadow banking lenders are faring, Bank of America has done some work to help give clarity around just that.

As BofAML shows below, defaults in the shadow banking sector have accelerated sharply, growing in both size and volume since late 2011.
We have noticed a sharp jump since mid-2015 in the total value of reported defaults of shadow banking products, defined here as non-bank-loan debt instruments that include bonds, trusts, and credit products offered by peer-to-peer (P2P) and various offline wealth management companies (WMCs). While the government and some involved parties are busily trying to suppress defaults, risk exists that at certain point the scale and scope of the task may overwhelm their efforts; which may trigger a credit crunch, in our view. Although the exact timing is difficult to forecast, as defaults pile up, the risk of the debt market reaching a psychological turning point should keep on rising by our assessment.

Chart 1 (above) shows the trend of defaulted value in the shadow banking sector, based on data we gathered on noticeable default cases since late 2011 as reported by the media. As of June 2015, the accumulated amount was Rmb53bn; by now, it’s reached Rmb214bn.
Markets are driven by psychology 100% of the time. Sometimes it lines up with fundamentals and sometimes it doesn't. Crashes are caused by changes in psychology, sometimes solely due to psychology, but also when people ignore changing fundamentals. As the stock market rises and seems to shake off a negative fundamental, people become confident it isn't a problem.

On the other side of the world, the U.S. cannot afford a recession, but most investors have stopped worrying about U.S. finances:
Mauldin: These 2 Charts Show the Next Recession Will Blow Out the US Budget

Then there's the long-term forecast of U.S. equity returns, based on valuation: Run-Of-The-Mill Outcomes vs. Worst-Case Scenarios
The essential thing to notice is that the relationship between valuations and total returns hasn’t deteriorated at all in recent years. Yes, the period since the mid-1990’s has repeatedly taken stocks to richer valuations than we’ve seen in the post-war period (associated with troughs on the chart, since valuations are shown on an inverted scale), but those valuation extremes have ultimately been associated with predictably dismal outcomes.
Current valuations predict a 12-year return of less than 2%, which calls for a negative index return after adjusting for dividends. In 2028, the S&P 500 Index is likely to be about where it is today.

1 comment:

  1. The bubble will blow. The next crisis will destroy the money we know.