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China’s Shadow-banking system is collapsing (and with its China’s economic-fuel – the credit impulse), it’s equity market has become a slow-motion train-wreck, its economic data has been serially disappointing for two years, and its bond market is starting to show signs of serious systemic risk as corporate defaults in 2018 hit a record high.

But, if you were to read the Chinese press, none of that would be evident, as The New York Times reports a government directive sent to journalists in China on Friday named six economic topics to be “managed,” as the long hand of China’s ‘Ministry of Truth’ have now reached the business media in an effort to censor negative news about the economy.

The New York Times lists the topics that are to be “managed” as:

Worse-than-expected data that could show the economy is slowing.
Local government debt risks.
The impact of the trade war with the United States.
Signs of declining consumer confidence
The risks of stagflation, or rising prices coupled with slowing economic growth
“Hot-button issues to show the difficulties of people’s lives.”

The government’s new directive betrays a mounting anxiety among Chinese leaders that the country could be heading into a growing economic slump. Even before the trade war between the United States and China, residents of the world’s second-largest economy were showing signs of keeping a tight grip on their wallets. Industrial profit growth has slowed for four consecutive months, and China’s stock market is near its lowest level in four years.

“It’s possible that the situation is more serious than previously thought or that they want to prevent a panic,”said Zhang Ming, a retired political science professor from Renmin University in Beijing.

…click on the above link to read the rest of the article…

Meanwhile in China, Implosion of Stock-Market Double-Bubble

September 18, 2018

Meanwhile in China, Implosion of Stock-Market Double-Bubble

Bubbles don’t end well for those who don’t get out in time.

US tariffs and threats of more tariffs have not been particularly well received in China, which is already being rattled by corporate credit problems, quakes in the shadow banking system, a peculiar Enron-type phenomenon at provincial and municipal governments called “hidden debt,” and the implosion of nearly 5,000 P2P lenders that have sprung up since 2015. And so today, the Shanghai Composite Index dropped 1.1% to 2,651.79.

This is a big milestone:

Below the low of its last collapse on January 28, 2016 (2,655.66)
Down 25.5% from its recent peak on January 24, 2018, (3,559.47)
Down 49% from its bubble peak on June 12, 2015 (5,166)
Down 56% from its bubble peak on October 16, 2007 (6,092)
Below where it had been for the first time on December 29, 2006 (2,675), nearly 12 years ago. That’s quite an accomplishment.

This chart of the Shanghai Stock Exchange Composite Index shows the last bubble in Chinese stocks. Note the rise from the last low in January 2016. This rise has been endlessly touted in the US as the next big opportunity to lure US investors into the Chinese market, only to get crushed again:

But what makes Chinese stocks interesting is not the collapse of one bubble and then the collapse of the subsequent recovery, but the longer view that is now taking on Japanese proportions.

The chart below shows the double-bubble and the double-collapse, interspersed with collapsed recoveries and failed excitement:

It is not often that a major stock market goes through two majestic bubbles and then revisits levels first seen 12 years earlier – despite inflation in the currency in which these stocks are denominated.

…click on the above link to read the rest of the article…

Life Finds a Way

January 14, 2016

LIFE FINDS A WAY

“The snag for them is that it happened on Monday. And all the official pronouncements in the State media were: “Well, it’s a blip. It’s a very rare event.” Well, it’s happened three days later so you then have to ask yourself, “How much of a blip is it ?” And some analysts question whether the authorities have got a grip on this, if they’re saying on Monday, “Look, don’t worry about it, it’s just a blip,” and then it happens again. The whole question arises of whether the authorities are trying to control the uncontrollable.”

– Correspondent Stephen Evans on BBC Radio 4’s ‘Today’ programme, 7 January 2016, discussing the second closure of the Chinese stock market that week.

“For [our investment process] to work we have consistently needed the following criteria to be met:

• Access to transparent and truthfully compiled data at both a macro and a company specific level..

• Logical decision making by macro-economic policy makers..

..China also presents further problems.. than just a weakening growth profile. This is the problem of the predictability (or rather lack of) of policy making. As its growth rate has slowed and as China – due to its sheer size – has become more important to the functioning of the rest of the global economy, so external scrutiny has increased. Unfortunately, instead of responding with greater transparency, which would reduce the level of enquiry, the Chinese government has responded by drawing in on itself and hiding behind a welter of official statistics that quite frankly no longer add up..”

– Nevsky Capital in a letter to investors explaining why it is closing the $1.5 billion Nevsky Fund.

Chaos theory studies the behaviour of dynamic systems that are highly sensitive to initial conditions. In a chaotic system, tiny changes in initial conditions lead to wildly divergent outcomes further down the line. Under chaos, short term prediction may yield certain benefits, but long term prediction is impossible.

…click on the above link to read the rest of the article…

7 Percent Crash Causes Emergency Shutdown Of Stock Markets In China For The 2nd Time In 4 Days

January 7, 2016

7 Percent Crash Causes Emergency Shutdown Of Stock Markets In China For The 2nd Time In 4 Days

Did you see what just happened in China? For the second time in four days, a massive stock market crash has caused an emergency shutdown of the markets in China. On both Monday and Thursday, trading was suspended for 15 minutes when the CSI 300 fell 5 percent, and on both days the total decline very rapidly escalated to 7 percent once trading was reopened. Once a 7 percent drop happens, trading is automatically suspended for the rest of the day. I guess that is one way to keep the stock market from crashing – you just don’t let anyone trade. And of course the panic in China is causing other markets to go haywire as well. As I write this, the Nikkei is down 324 points and Hong Kong is down 572 points.

The amazing thing is that trading was only open in China for about 15 total minutes tonight. Here is how CNBC described what just happened…

China’s stocks were suspended from all trade on Thursday after the CSI300 tumbled more than 7 percent in early trade, triggering the market’s circuit breaker for a second time this week.

That drop-kicked stock markets across Asia, which were already wallowing after a weaker open amid concerns over China’s economic slowdown and its depreciating currency as well as falling oil prices.

On the mainland, the Shanghai Composite tumbled 7.32 percent by at the time of the halt, while the Shenzhen Composite plummeted 8.34 percent. The CSI300, the benchmark index against which China’s new circuit breakers are set, plunged 7.21 percent. If that index rises or falls 5 percent, the market halts all trade for 15 minutes. If it moves 7 percent, trading will be suspended for the rest of the day. In total Thursday, China shares only traded around 15 minutes.

How will European and U.S. markets respond to the chaos in Asia when they open?

…click on the above link to read the rest of the article…

Oil Plunges to $32-Handle, Chinese Stocks Crash and are Halted, Whiff of Mayhem Breaks out

January 7, 2016

Oil Plunges to $32-Handle, Chinese Stocks Crash and are Halted, Whiff of Mayhem Breaks out

Why Oil Keeps Falling off the Chart

After having been through the greatest two-year loss on record, the price of oil plunged 9.6% on Wednesday and in evening trading. As I’m writing this, WTI hit $32.62 a barrel, a new low since the desperate depth of the Financial Crisis, when it very briefly kissed $30.28 a barrel on December 23, 2008, before bouncing off sharply.

This time, it’s serious. Brent, the global benchmark, has crashed to $32.75, an 11-year low. This isn’t a quick scare that happens during a Financial Crisis. It’s the result of a persistently growing glut.

Since the oil price plunge began in July 2014, every rally, every “opportunity of a lifetime” to buy oil “for cents on the dollar” has turned out to be a falling knife.

This is what the three trading-day, 15% crash of WTI looks like:

US-crude-WTI-price-2016-01-06

The contagion of the oil price plunge has been drifting into other sectors of the US economy, housing and office space in Houston, the state budget in Alaska, jobs, manufacturing…. Investments have gone up in smoke. Loans have gone bad. Defaults, restructurings, and bankruptcies are now a routine occurrence. Banks are looking over their shoulder. PE firms are licking their wounds from their mega-bets on fracking made in prior years, and they’re licking their new wounds from having tried to catch many falling knives.

This isn’t going to be an easy bust to get through. It’s a US problem. And it’s a global problem.

In the US, crude oil production started declining on a monthly basis in mid-2015, according to EIA estimates. But despite those monthly declines, production averaged 9.3 million barrels per day in 2015, the highest rate since 1972, and a 7% increase over 2014.

…click on the above link to read the rest of the article…

Market risk; model smash

September 12, 2015

Market risk; model smash

Seeing the market crash from a few weeks ago, it is clear how quickly the markets can ferociously thrust past one’s risk models. Risk models that failed to safeguard against risk when it absolutely mattered the most. Models that left many large hedge funds hemorrhaging – top funds which by definition were supposed to protect their investors during the August tumult. Instead when markets broke bad, a lot of things “went wrong”. And stayed that way. In this article, we explore a number of the large U.S. market crashes since the mid-20th century, and show how the recent bust compares. We learn why relying on tail risk models whose approximations presume to work consecutively at all times, can lead to failure. The key for investors (if they must be active) is to always remain vigilant. Professor Nassim Taleb recently expressed it nicely:

The *only* way to survive is to panic & overreact early, particularly [as] those who “don’t panic” end up panicking & overreacting late.

And there were many who wound up in panic mode, in recent weeks. Expeditiously selling at a loss, under record volume on August 24 (China’s Black Monday). Let’s first consider what an overall market crash look like. We quickly show a symmetrical V-shaped illustration here. This illustration also shows a rise in fear on the way down, with peak panic near the bottom (the orange star), then followed by up-moves that mirror the previous down-moves. We will need to review this overall shape in a future article. But for now we discuss simply the left side of the illustration (the solid brown down-arrows).

…click on the above link to read the rest of the article…

China Loses All Control, Spends 600 Billion Yuan On Plunge Protection In August, Tightens Capital Controls

September 8, 2015

China Loses All Control, Spends 600 Billion Yuan On Plunge Protection In August, Tightens Capital Controls

Back on July 20, Caijing reporter Wang Xiaolu suggested that China Securities Finance – the state-owned plunge protection vehicle – may be set to exit the market. That sent futures plunging and ultimately led to Mr. Wang’s arrest late last month. Under duress, Wang would later “admit” that he “shouldn’t have released a report with a major negative impact on the market at such a sensitive time.”

Of course Wang wasn’t the last person to speculate about how long China would be willing to spend billions propping up the market, and indeed it certainly seems as though Beijing tried to scale back the manipulation two weeks ago only to see the SHCOMP crash 8%, a move which promptly triggered a global rout of epic proportions. One additional 8% decline and a dual policy rate cut later, and CSF was back in the market desperately trying to arrest the inexorable slide ahead of Xi Jinping’s lavish military parade on September 3.

So in case anyone still harbored any doubts about the degree to which China most certainly has not wound down the plunge protection effort, Goldman has updated its analysis on the “national team’s” efforts on the way to concluding that China spent an additional CNY600 billion propping up the market in August.

Here’s Goldman:

In our note: China musings: How much has the government bought in the market? (Aug 5), we estimated potential government purchases in the stock market based on: (1) our top-down liquidity model; and (2) bottom-up analysis on fund flow changes in key investment channels based on public information released by relevant media sources.

…click on the above link to read the rest of the article…

Rolling Boulders Uphill

September 6, 2015

Rolling Boulders Uphill

As symbols of futility go, that of Sisyphus takes some beating. In Greek mythology, Sisyphus was captured by the gods after having freed humanity from Death. They punished him, of course: he would spend the rest of his days pushing a boulder up to the top of a mountain. Just when he reached the summit, as perpetual torment for his efforts, the boulder would inexorably roll back down again. Sisyphus was condemned to push the boulder uphill for all eternity. His was the original rolling stone.

The American author Henry David Thoreau would go on to echo the essential pointlessness of Sisyphus’ struggle. In his own memorable phrase,

“Most men lead lives of quiet desperation and go to the grave with the song still in them.”

Today’s Sisyphus is China. More particularly, the Chinese authorities. They are determined to roll that boulder uphill.

The path of least resistance for the boulder, however, is downward. Gravity, after all, is a bitch. The Chinese stock market is still comparatively young, and as stable as any toddler overwhelmed by parental expectations.

With their boulder beset by the giant suck of gravity, China’s Sisyphus first cut rates, and trimmed banks’ reserve ratios.

The boulder continued to roll downhill.

So Sisyphus announced plans to slash brokerage costs. But the boulder was not in a mood to listen.

Sisyphus is nothing if not persistent. Next up: a relaxation of rules on margin trading. But the boulder remained impassive, and continued to roll downhill. Sisyphus threatened to look into illegal market manipulation, and to round up the usual suspects. Bothered, replied the boulder as it kept on rolling.

Sisyphus tried to repeal gravitational laws. He banned numerous accounts from selling the market short. But the boulder rolled on down.

So Sisyphus knocked heads together on the exchange, and rustled up a package of 120 billion yuan to help support the boulder. The boulder still fell.

– See more at: http://www.cobdencentre.org/2015/09/rolling-boulders-uphill/#sthash.fiA4zCoj.dpuf

Global Economic Fears Cast Long Dark Shadow On Oil Price Rebound

September 5, 2015

Global Economic Fears Cast Long Dark Shadow On Oil Price Rebound

After bouncing around, oil prices finished off the week with just a bit less volatility than when it started the week. WTI stayed at around $46 per barrel as of midday on September 4, with Brent holding at $50 per barrel.

Aside from supply and demand fundamentals in the oil markets, central bank policymaking is another major factor determining the trajectory of oil prices. The European Central Bank hinted that it might consider more monetary stimulus to help the stagnant European economy. Oil prices rose on the news. The markets, however, are waiting on a much more significant announcement from the Federal Reserve this month on whether or not the central bank will raise interest rates. This summer’s market turmoil – the Greek debt crisis and the meltdown in the Chinese stock markets – has dimmed the prospect of a rate increase.

Moreover, the global economic unease may begin to reach American shores. On September 4, the U.S. government released data for the month of August, revealing that the U.S. economy added only 173,000 jobs, a mediocre performance that missed expectations. Although an economic slowdown is no doubt a negative for oil prices, the news could provide enough justification for the Fed to hold off on raising interest rates. A delay in a rate hike could push up WTI and Brent.

Although a slew of Canadian oil sands projects have been cancelled due to incredibly low oil prices, several large projects were already underway before the downturn. With the costs of cancellation too high, these projects continue to move forward. When they come online – several of which are expected by 2017 – they could add another 500,000 barrels per day in production, potentially exacerbating the glut of supplies not just in terms of global supply, but more specifically in terms of the flow of oil from Canada. Canadian oil already trades at a discount to WTI, now at around $15 per barrel.

…click on the above link to read the rest of the article…

The Case for Outlawing Cash

September 3, 2015

The Case for Outlawing Cash

Losing Confidence

GUALFIN, Argentina – September is here. As expected, market volatility is increasing. The Great Zombie War is intensifying. And investors are getting scared. On Tuesday, the Dow lost 470 points – a nearly 3% drop. Bloomberg:

“U.S. stocks joined a worldwide sell-off, after equities’ worst month in more than three years, amid continuing concerns that China’s slowdown will weigh on the global economy.

‘The problem is, as much as China is the catalyst for this, it’s also that we’re seeing weakness in fundamentals here,’ said Matt Maley, an equity strategist at Miller Tabak & Co LLC in New York.

‘A lot of company earnings were hurt by China in the second quarter and it’s only gotten worse. People are losing confidence with the whole situation there breaking down, not just in the stock market but in data as well.’”

Burning_Money Now they even want to do away with the State’s own scrip – because it might help you to escape the depredations of madcap central bankers.
Image credit: Stephen Krow / Getty Images

Yes, investors are losing confidence…they’re probably losing confidence in corporate managers, for instance. Who wants to own stock in companies run by numskulls who buy back shares in their companies at record prices just before a major sell-off?

The still yo-yoing DJIA – “investors” (we use the term loosely) came back out to play on Wednesday already, via StockCharts, click to enlarge.

Or maybe they’re wondering whether the world’s $200 trillion in total debt (roughly 300% of total output) can possibly be paid back? Or maybe they’re beginning to puzzle out how scammy and fraudulent the Fed’s policies are.

…click on the above link to read the rest of the article…

“The Most Astounding Credit Binge in History”

August 28, 2015

“The Most Astounding Credit Binge in History”

But is the bounce to be trusted?

“The Donald” breathed a sigh of relief. He and other rich people got a break from the beating they’ve been taking: Stocks bounced, with the Dow ending yesterday’s session up more than 600 points.

But is the bounce to be trusted? And are there better, more tangible, alternatives to investing in stocks? We’ll try to answer both questions in today’s update… We’ll also respond to a reader’s feedback on Mr. Trump in today’s Mailbag.

Stripped Gears

Yesterday’s bump confirms the mainstream view: There is nothing to worry about. The recent sell-off is just a case of nerves, not a sign of an epizootic. Here is U.S. Trust, a private bank for the ultra-wealthy, reassuring its customers:

The action in the past few days has been based on fears that we will revisit the market environment from 1997 to 1998, in which the Asian currency crisis led to a sizable correction in world equity markets. A second breakdown in energy, a continued fall to record‐low prices in many commodities, and a deep drop in emerging market currencies and equities are sparking fears that a global growth recession is coming our way. And add to that the fact that investors are worried that the Federal Reserve may tighten into a large-scale slowdown is increasing the flight to safety.

U.S. Trust, like Donald Trump and much of the media, blames the Chinese for the recent sell-off. Emerging market economies are slowing, they say, as the U.S. and developed economies are moving into “higher gear.”

Higher gear? As near as we can determine, the gears have been stripped.

…click on the above link to read the rest of the article…

China Is Pushing On A String Ensemble

August 26, 2015

China Is Pushing On A String Ensemble

Look, it’s very clear where I stand on China; I’ve written a lot about it. And not just recently. Nicole Foss, who fully shares my views on the topic, reminded me the other day of a piece I wrote in July 2012, named Meet China’s New Leader : Pon Zi. China has been a giant lying debt bubble for years. Much if not most of its growth ‘miracle’ was nothing but a huge credit expansion, with an outsize role for the shadow banking system.

A lot of this has remained underreported in western media, probably because its reporters were afraid, for one reason or another, to shatter the global illusion that the western financial fiasco could be saved from utter mayhem by a country producing largely trinkets. Even today I read a Bloomberg article that claims China’s Q1 GDP growth was 7%. You’re not helping, boys, other than to keep a dream alive that has long been exposed as false.

China’s stock markets have a long way to fall further yet. This little graph from the FT shows why. The Shanghai Composite closed down another 1.27% today at 2,927.29 points. If it ‘only’ returns to its -early- 2014 levels, it has another 30% or so to go to the downside. If inflation correction is applied, it may fall to 1,000 points, for a 60% or so ‘correction’. If we move back 10 or 20 years, well, you get the picture.

That is a bursting bubble. Not terribly unique or mind-blowing, bubbles always burst. However, in this instance, the entire world will be swept out to sea with it. More money-printing, even if Beijing would attempt it, no longer does any good, because the Politburo and central bank aura’s of infallibility and omnipotence have been pierced and debunked. Yesterday’s cuts in interest rates and reserve requirement ratios (RRR) are equally useless, if not worse, if only because while they may provide a short term additional illusion, they also spell loud and clear that the leadership admits its previous measures have been failures. Emperor perhaps, but no clothes.

…click on the above link to read the rest of the article…

China Stocks Crash, More Than Half Of Market Halted Limit Down; PBOC Loss Of Control Spooks Global Assets

August 18, 2015

China Stocks Crash, More Than Half Of Market Halted Limit Down; PBOC Loss Of Control Spooks Global Assets

China sure has its micro-managing hands full these days.

Just hours after the PBOC announced a modestly “revalued” fixing in the CNY, which curiously led to weaker trading in the onshore Yuan for most of the day before a forceful last minute intervention by the central bank pushed it back down to 6.39…

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Gregor Stuart Hunter @gregorhunter

USDCNY volumes getting a bit embarrassing now.

5:11 AM – 18 Aug 2015

… it was the local stock market spinning plate – which had been relatively stable during the entire FX devaluation process – that China lost control over, and after 7 days of margin debt increases the Shanghai Composite plunged by 6.2% in late trade,tumbling 245 points to 3748, just 240 points above its recent trough on July 8, a closing level some 27% off its June peak. The smaller Shenzhen Composite Index fell 6.6% to 2174.42. This was the biggest single-day rout since July 27.

According to Reuters, “volatility in both indexes spiked in the afternoon in what is becoming a mysteriously recurring pattern in China’s stock markets since Beijing stepped in to avert a full-blown price crash in early summer.”

There were various reasons cited for the selling: one was that with Chinese housing data coming in stronger than expected, that Beijing may limit its future interventions to promote further easing of financial conditions and thus, supporting the market as we warned last night after the housing data came out:

…click on the above link to read the rest of the article…

A Death Cross, Wild Market Swings And A Currency War – And We Haven’t Even Gotten To September Yet

August 13, 2015

A Death Cross, Wild Market Swings And A Currency War – And We Haven’t Even Gotten To September Yet

Things continue to line up in textbook fashion for a major financial crisis by the end of 2015. This week, Wall Street has been buzzing about the first “death cross” that we have seen for the Dow since 2011. When the 50-day moving average moves below the 200-day moving average, that is a very important psychological moment for the market. And just like during the run up to the stock market crash of 2008, we are starting to witness lots of wild swings up and down. The Dow was up more than 200 points on Monday, the Dow was down more than 200 points on Tuesday, and it took a nearly 700 point roundtrip on Wednesday. This is exactly the type of behavior that we would expect to see during the weeks or months leading up to a crash. As any good sailor will tell you, when the waters start getting very choppy that is not a good sign. Of course what China is doing is certainly not helping matters. On Wednesday, the Chinese devalued the yuan for a second day in a row, and many believe that a new “currency war” has now begun.

So what does all of this mean?

Does this mean that the time of financial “shaking” has now arrived?

Let’s start with what is happening to the Dow. When the 50-day moving average crosses over the 200-day moving average, it is a very powerful signal. For example, as Business Insider has pointed out, if you would have got into stocks when the 50-day moving average moved above the 200-day moving average in December 2011, you would have experienced a gain of 43 percent by now…

The Dow Jones Industrial Average has been on an unrelenting upward trajectory since its October 2011 low.

…click on the above link to read the rest of the article…

Desperate move by China a worrying sign: Don Pittis

August 12, 2015

Desperate move by China a worrying sign: Don Pittis

Instead of boosting economy there is danger China’s sudden move will hurt confidence

The father of Western medicine, Hippocrates, had some advice in 400 BC that has been passed down to today: “Extreme remedies are very appropriate for extreme diseases.”

As the world responds to this week’s extreme andunexpected devaluation by the Chinese central bank, it sounds as if Beijing was taking the good doctor’s advice. And while the obvious intent was to snap the Chinese economy back to health, the frightening thing is that Beijing’s move smacks of desperation.

The modern equivalent of that Hippocratic maxim is: “Desperate times call for desperate measures.” As the Chinese currency and world markets took a dive, investors and trade partners around the world were asking themselves: “What does Beijing know that we don’t?”

Falling off a cliff. Chinese currency saw biggest one day decline in decades. (CBC news)

It’s not the first time this year that China has used strong government action to try to counteract inimical market forces. This spring, Beijing intervened, once to encourage stock markets to inflate, and then repeatedly in an attempt to stop the irresistible plunge when savvy traders realized stocks had become unrealistically high.

The trouble is that markets do not like wild swings. And an economy that requires repeated radical intervention is one, like Russia, where no one knows what the government might do next.

Until recently, the fact that China was willing to back its own economy made it seem like an giant island of stability in a volatile world. In the darkest days of the great recession after 2007, China pumped money into its economy by encouraging borrowing and keeping the renminbi undervalued.

…click on the above link to read the rest of the article…

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