China M2 Drops Below Stall Speed in April

China's M2 growth rate slowed to 8 percent in spring 2018 and briefly (barely) had a 7-handle at one point leading into 2020.

Troubles in China: Developers Going Down, Province Needs a Bailout

Here we are again, at the starting line for a crisis: Chinese Developers Going Down Like Dominoes

China Prints at Devaluation Speed

China Printing At Devaluation Speed

The annualized three-month growth rate of M2 money supply growth hit 24.1 percent in March. The last time it hit 24.1 percent? July 2015. The “surprise” yuan depreciation was in August 2015 under similar economic circumstances.

Everything is not the same, but the key component in this mix is the U.S. dollar...

The Ride Never Ends: China to Inflate Housing Again

It seems like the world is out of ideas.

iFeng: 楼市重磅！央行、银保监会：新房价格连降3个月，可放宽首套房贷利率下限

Reuters: China property shares firm on more policy support, easing curbs

The central bank said on Thursday that for cities where the selling prices of new homes fall month-on-month and year-on-year for three consecutive months, the floor on mortgage rates can be lowered or abolished for first-time home buyers in phases.

China is also planning to relax restrictions on borrowing for property developers by dialing back the "three red lines" policy, Bloomberg News reported on Friday.

The property sector, which accounts for a quarter of China's economy

Gold and Total Loans and Leases at Banks

The ratio uptrend is broken.

Where Are We in the Credit Cycle?

When you zoom into a hyperinflation the chart is fractal. A constant collapse in value. The past 50 years is a slow-motion inflation of credit. History says there's no way to abort this trend without major damage. The peak in the total credt-to-GDP ratio 2009 was a result of the financial crisis. Is this a giant base with 2020 pointing the way north? Or was 2020 an overthrow creating a complex double top?

One Path to a Market Crash: Credit Spreads

High yield credit is outperforming government debt as it did into the 2007 peak. What's amazing is credit has been deteriorating unlike in 2007. The low in 2007 was below the 1997 low, and it produces a peak in the HYG/TLT ratio. The current high is being made with credit risk sitting at the "get out of stocks now" line.

TLT isn't an appropriate comparison fund for HYG in most cases because there's a big duration mismatch, 20 years versus about 5 to 7 years. U use it because it is volatile and these two funds are sort of companion ETFs for income investors the past 13 years. You buy TLT in the corrections, and HYG at the lows. With that in mind, here's another way of expressing this relationship. The high-yield srpead divided by the 10-year and 5-year treasury yields. They're both approaching lows seen in September 2018.

Think of it this way. The decline in interest rates this year has taken companies up to the starting line of panic in the credit markets. Any follow through will trigger the type of fear normally associated with recessions and credit events. At that point, it doesn't matter if treasury yields fall except that falling yields will keep panic limited to corporate bonds.

High Yield Debt Still in Positive Divergence

Amazing that high-yield is diverging positively from investment grade bonds even as it has been moving lower. Positive divergence the past few days as well.

Global Margin Call

ATimes: Global margin call hits European debt markets

Risk gauges in Germany’s government debt market rose last week to levels higher than recorded in the 2008 world financial crash, as margin calls forced the liquidation of derivatives positions held by banks, insurers and pension funds.

Big institutional investors that spent the past ten years insuring their portfolios against falling interest rates now face massive losses as hedges blow up. A key measure of market risk, the spread between German government bonds (Bunds) and interest rate swap agreements jumped above the previous record set in 2008.

The cost of hedging German government debt with interest-rate options, or option-implied volatility, meanwhile rose to the highest level on record.

Stability is the Problem

The one aspect of this bear market that is misunderstood: stability was the problem. The market right now is in a mild bear market. Most bear markets aren't mild, they eventually get worse. Time-wise, the bear market is moving slowly, which suggests a larger magnitude bear move. The economy is holding up well, credit risk still hasn't broken out yet. People want to blame the Federal Reserve and they do deserve blame for pouring gasoline on the bubble. They deserve blame for quantiative easing because they suppressed volatility for more than a decade. Yet they didn't shut down the global economy and spend trillions as a response.

All of which is to say, there's no way this was going to end well. The Federal Reserve's rate hikes are arguably having very little effect on the markets and in hindsight, will merely be a symptom rather than a cause. Suppressing volatility is like adding dry wood to a forest floor year after year, while preventing all forest fires. Eventually, all it takes is a spark for a forest-killing fire. The governments of the world started helicopter dropping gasoline in 2020. Western governments and China haven't stopped.

Crash Line on HY Credit Approaches

Expect accelerated selling in stocks if this line breaks.

Debt Forgiveness: Inflationary or Deflationary?

For the moment, potentially inflationary. On the whole, deflationary. Just The News: Penn Wharton says Biden student loan plan could exceed $1 trillion

Researchers found that students may be incentivized to borrow more money because the Biden administration is capping loan repayments at 5% of borrowers' income

The largest potential cost-driver Penn Wharton identified is the Biden administration's new income-driven repayment plan, which includes capping monthly student loan payments at 5% of a borrower's discretionary income and reforming the repayment guidelines to guarantee that no borrower who makes "about the annual equivalent of a $15 minimum wage" will have to make monthly loan payments.

Debt cancellation alone will cost the United States up to $519 billion, Wharton found in an analysis published Friday. Loan forbearance, which allows borrowers to temporarily stop paying, will cost an estimated $16 billion. The income-driven repayment plan will initially cost $70 billion, however, specific details have yet to be released and the price may be significantly higher.

The income-based portion of Biden's plan needs further analysis, but it may cost $450 billion or more, bringing the total cost of student loan forgiveness to more than $1 trillion, economist Junlei Chen wrote in the Budget Model.

One possible problem researchers found with the income-driven repayment plan is that students may be incentivized to borrow more money because the Biden administration's plan caps loan repayments at 5% of the borrowers' income.

My hunch is debt levels will not increase because there will be losses borne by lenders. Even if the amount of outstanding debt increases, the value of that debt will decline because repayment is less certain. When a bond goes from AAA to B, it deflates. The money supply declines because lower quality bonds do not function as money. If the Biden admin makes enough rules that favor borrowers, at some point the value of student debt will decline faster than new lending increases.

Chinese Cities Step Up Credit Guarantees

JS China: 扬州市政府性融资担保规模破百亿

Government financing guarantee institutions play a "booster" role in financial services for the real economy. Recently, the reporter learned from the Municipal Local Financial Supervision Bureau that as of July, the scale of government financing guarantees in our city has exceeded 10 billion yuan. In recent years, our city has accelerated the construction of a government financing guarantee system, increased credit enhancement support for small and micro enterprises, "agriculture, rural areas and farmers" and other entities, and is committed to providing high-quality, convenient and low-cost services for the city's small and micro enterprises and "agriculture, rural areas and farmers" entities. Financing guarantee services with high rates, focusing on alleviating the problems of difficult and expensive financing for enterprises.

It is understood that the scale of government financing guarantees in the city has jumped from 4.47 billion yuan at the end of 2020 to 10.249 billion yuan in July 2022, and the number of small and micro enterprises and "agriculture, rural areas and farmers" customers in insurance has increased from 2,315 to 4,804. The average guarantee rate From around 1% in 2020 to below 0.5% in 2022.

Cash vs Debt, Not Different This Time

Cash is higher in 2022, but net cash is not. Adjust for debt and...

If Bonds Break Down

I believe credit risk has peaked. That will weigh on HYG. If bonds drop across the board, HYG will accelerate down.

IEI has a similar duration to HYG, the best comparison for growing credit risk.

Fog of War: Treasuries

Long-term treasuries have pulled back along with Eurodollar futures. Assuming a larger rally unfolds, this looks like a "fog of war" technical move where the bounce in commodities and stocks is naturally triggering some selling in bonds. Fed rate hikes also loom in three weeks. A continued move lower would accompany new lows in stocks eventually...

I have an alert set for TLT at the red horizontal below. I don't expect it will get there, but that would be about as far as a pullback should go. If it's going to new lows, the rally in stocks will be ending soon enough. If that turns into something like an inverse H&S, it targets to around the $130 area

The 1s10s spread almost went negative today. The Fed will force the yield curve into deeply negative territory if it continues with rate hikes and long-term bonds resume their rally.

High yield credit bounced today, impressive given the drop in treasuries. I suspect the spread has fallen near to or below the "sell line." Falling yield is necessary for a continued stock rally, otherwise it will start signaling stress and that will spill into the stock market.

Wild Day; Watch HY Credit Spreads

Still long XBI, IBB and ILMN. Still long XLC calls. Went long META calls and EWG calls. Added more JPY calls. Added HG calls (copper futures). Still holding GE calls (Eurodollar futures).

Traded QQQ calls intraday.

Closed more TLT calls, still have some ZB calls.

Closed USO puts. Got out of long USO daytrade.

The next line in the sand is 3850 for the S&P 500 Index. Get above that and the rally can start taking shape, but there could still be a smackdown. The fact that JPY hasn't moved is not good, nor is the breakdown in the euro. I don't think those are necessary components for a rally, but they are potential nuclear bombs for the market should they collapse. The worst thing I see is HYG and credit spreads, also a big nuclear warhead hanging over the market. HYG was up today, but since treasuries popped far more, that indicates high-yield spreads are blowing out. My take is a rally requires those credit spreads to drop, then the trap door will slam on the bears. If high yield spreads keep rising and HYG breaks down, it'll be time to dump longs and go short for a plunge-o-rama.

Time to Short Residential Real Estate?

Or go long the inflation? If prices keep rising, I want to go long bans on corporate ownership of single-family homes, bans on foreign ownership of homes, and regulations making it difficult for individuals to own more than a couple rental properties.

FWIW, the home construction ETF looks like a giant top like the rest of the market.

Double Bottom on ES

These are the gut-check times because if there's to be a geyser in VIX, there have to be a lot of trapped bulls who throw in the towel. To get there, there has to be enough doubt among bears too.

There is a spike in junk bonds, but HYG has a gap at $76.44...

The euro is rallying.

Treasuries are rallying, but that doesn't tell me anything because I expect bonds will rally alongside a sell-off in stocks, as happened yesterday.

Is this bullish?

Home Affordability

"Rates are up across the board, including 30-year fixed rates, 15-year fixed rates, and 5/1 adjustable-rate mortgage (ARM) rates. As of April 2022, the median home price in America stood at $344,141, a 20.9 percent leap from a year before, Zillow states."

Last year, a 30-year fixed rate mortgage was around 3 percent. The monthly mortgage payment on the average $270,000 home, assuming a 20-percent down payment, would have been $1,200 per month. (I'm not touching any of the assumptions in the mortgage calculator.)

This year, this down payment would be $14,000 more and the monthly mortgage payment $1,760, an increase of 47 percent.

If the homebuyer could only afford $1200 per month, they can only afford a house that is around $210,000, a decline of about 22 percent.

Home affordability is in a death spiral.