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China’s Evergrande Crisis and Slowing Economy Are Rattling Markets – So What Happens Now?

Markets are finally waking up to what’s going on with troubled Chinese property developer Evergrande…

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This article was originally published by Money Week

Before we get started this morning, I just wanted to let you know that early bird tickets for this year’s MoneyWeek conference are now available! Grab yours now! Given what’s going on in markets this very day, I think you’ll want to make sure you attend: here’s where to book.

So now onto the main topic – you might have noticed that markets were feeling a bit jittery last week. Turns out that they’re finally waking up to what’s going on with troubled Chinese property developer Evergrande.

The collapse has been a long time in the making, but now we are very much in “push comes to shove” territory.

Whatever the Chinese government has planned, we’re likely to find out this week.

Why the Evergrande situation is likely to come to a head this week

Evergrande has been described as China’s Lehman Brothers. It’s a big, heavily-indebted company whose debt has trickled into lots of parts of the economy in a fairly opaque manner. That debt is tied to property markets and house prices, which have been sliding in recent months as China has cracked down on speculation.

So the fear is that if China just let Evergrande go bust then we’d have something similar to what happened after 2008 in the US.

The obvious retort to this has been that 2008 set the strategy book for every other possible crash – for governments and central banks to step in and bail everyone out. That eventually happened after 2008. It eventually happened after the eurozone crisis. It happened during the pandemic (see below). And the assumption has been that it would happen for Evergrande.

However, while Beijing has been doing some stuff behind the scenes (injecting money into the system on Friday for example, and lining up some restructuring specialists for Evergrande), a grand bailout plan hasn’t been unveiled yet. And markets are now getting nervy.

One problem with these things is that it’s much better to step in before a run gets going. The Federal Reserve’s actions in 2020, at the height of the pandemic panic in markets, show that the US central bank has taken that lesson to heart. At the first sniff of credit markets shutting down, the Fed just went all-out to underwrite the entire market, and not just in the US.

Yet the problems with Evergrande are starting to creep into the rest of the Chinese property sector, because people are waking up and realising that this is not just about Evergrande – lots of companies build or sell houses, and houses just aren’t selling right now.

So why does it seem likely that a solution will come this week? Well, as Eoin Treacy of points out, the Chinese holidays (the market is shut on Monday and Tuesday) make this a pretty good week for the authorities to step in – while markets are shut – to make their move.

But more importantly, Evergrande has interest payments to make on two notes on Thursday. They’re not expected to be paid, but some sign of the Chinese government erecting a firebreak to prevent “widespread contagion” might be forthcoming.

John Authers puts it well when he says in his latest Bloomberg newsletter that Evergrande is more likely to be an LTCM moment rather than a Lehman one. He’s referring to the US bailing out giant hedge fund Long-Term Capital Management in the late 1990s, rather than letting it collapse.

Don’t go selling everything

I still think this is probably the most likely outcome. That said, people might well be overestimating the power of the Chinese government. It’s worth remembering that one key reason we favour capitalism and free markets over communism and central planning  is because the former is more efficient than the latter.

This is not even politics, it’s just logic. If one person tries to guess what 1,000 people are likely to need for the coming five years and plans supply and demand accordingly, you’re going to get a worse outcome than if those 1,001 people can just interact freely to adjust supply and demand in real-time. 

This centralised nature means that Beijing has an awful lot of competing and conflicting priorities, and there’s a lot of complexity to deal with here. Lots of stuff could go wrong. So that’s why I’m loath simply to rule out something more akin to a Lehman Brothers moment, even if it’s not my central scenario.

But what does it mean for you as an investor?

As I said last time, I still don’t think there’s any point in you making big changes to your portfolio over this. To be clear, when I say this, I’m making some big assumptions. I’m assuming that a) you have a clear view of your own asset allocation; b) that you have a clear long-term investment plan (ie how much do you need, what for, and by when?); and c) that you are up to date with these things.

If you’re not nodding along to all or any of those points, then you should take some time to resolve them. You certainly shouldn’t be trying to second-guess the Chinese government when your own investment housekeeping isn’t in order.

That’s not me guilt-tripping you about your admin, it’s just that if you don’t know what your plan is, then you’ll make short-term mistakes and you’ll almost certainly lose money by doing so.

With all that said, there are probably two main ways this can go. One is that China – through overconfidence or recklessness or a surfeit of communist joie de vivre – simply steps back and lets the cards fall where they may. Put bluntly, that would terrify everyone.

That said, if you’re living and investing largely outside of China and its sphere of influence (which you most likely are) then you have to remember that even if China’s authorities don’t step in, then our own are likely to do so if it looks as though there’s a serious risk of contagion outside China.

Moreover, if China does step in with a convincing bailout package, then there’s every chance that investors decide it’s “off to the races” time again, just as they did when the eurozone crisis finally had a line drawn under it.

In the longer run, a slowdown in the Chinese economy is something that global markets will have to contend with, but we can discuss that at a later date.

For now my point is this: Evergrande might be scary and you will see some scary headlines. But if you have a plan you’re happy with, there’s no reason to change it. And you certainly shouldn’t flog everything and jump to 100% cash because if you don’t have a crystal ball – that’s pretty much never a good idea.

If you haven’t already, book your ticket for the MoneyWeek Wealth Summit in November – it’s virtual, but I’ll be there with Merryn, so we’re likely to have a better idea of the outcome by then – so you can ping me all your difficult questions on it, on the day.

Author: John Stepek

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Visualizing The World’s Biggest Real Estate Bubbles In 2021

Visualizing The World’s Biggest Real Estate Bubbles In 2021

Identifying real estate bubbles is a tricky business. After all, as Visual Capitalist’s…

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Visualizing The World’s Biggest Real Estate Bubbles In 2021

Identifying real estate bubbles is a tricky business. After all, as Visual Capitalist’s Nick Routley notes, even though many of us “know a bubble when we see it”, we don’t have tangible proof of a bubble until it actually bursts.

And by then, it’s too late.

The map above, based on data from the Real Estate Bubble Index by UBS, serves as an early warning system, evaluating 25 global cities and scoring them based on their bubble risk.

Reading the Signs

Bubbles are hard to distinguish in real-time as investors must judge whether a market’s pricing accurately reflects what will happen in the future. Even so, there are some signs to watch out for.

As one example, a decoupling of prices from local incomes and rents is a common red flag. As well, imbalances in the real economy, such as excessive construction activity and lending can signal a bubble in the making.

With this in mind, which global markets are exhibiting the most bubble risk?

The Geography of Real Estate Bubbles

Europe is home to a number of cities that have extreme bubble risk, with Frankfurt topping the list this year. Germany’s financial hub has seen real home prices rise by 10% per year on average since 2016—the highest rate of all cities evaluated.

Two Canadian cities also find themselves in bubble territory: Toronto and Vancouver. In the former, nearly 30% of purchases in 2021 went to buyers with multiple properties, showing that real estate investment is alive and well. Despite efforts to cool down these hot urban markets, Canadian markets have rebounded and continued their march upward. In fact, over the past three decades, residential home prices in Canada grew at the fastest rates in the G7.

Despite civil unrest and unease over new policies, Hong Kong still has the second highest score in this index. Meanwhile, Dubai is listed as “undervalued” and is the only city in the index with a negative score. Residential prices have trended down for the past six years and are now down nearly 40% from 2014 levels.

Note: The Real Estate Bubble Index does not currently include cities in Mainland China.

Trending Ever Upward

Overheated markets are nothing new, though the COVID-19 pandemic has changed the dynamic of real estate markets.

For years, house price appreciation in city centers was all but guaranteed as construction boomed and people were eager to live an urban lifestyle. Remote work options and office downsizing is changing the value equation for many, and as a result, housing prices in non-urban areas increased faster than in cities for the first time since the 1990s.

Even so, these changing priorities haven’t deflated the real estate market in the world’s global cities. Below are growth rates for 2021 so far, and how that compares to the last five years.

Overall, prices have been trending upward almost everywhere. All but four of the cities above—Milan, Paris, New York, and San Francisco—have had positive growth year-on-year.

Even as real estate bubbles continue to grow, there is an element of uncertainty. Debt-to-income ratios continue to rise, and lending standards, which were relaxed during the pandemic, are tightening once again. Add in the societal shifts occurring right now, and predicting the future of these markets becomes more difficult.

In the short term, we may see what UBS calls “the era of urban outperformance” come to an end.

Tyler Durden
Sat, 10/23/2021 – 22:00

Author: Tyler Durden

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Precious Metals

JPMorgan Turns Positive On Crypto, Sees “A Bullish Outlook For Bitcoin Into Year-End”

JPMorgan Turns Positive On Crypto, Sees "A Bullish Outlook For Bitcoin Into Year-End"

The launch of the first Bitcoin ETF, BITO, even if based…

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JPMorgan Turns Positive On Crypto, Sees “A Bullish Outlook For Bitcoin Into Year-End”

The launch of the first Bitcoin ETF, BITO, even if based on futures, was the culmination of seven years of anticipation for bitcoin bulls and it certainly did not disappoint: the leaks and the actual news propelled the cryptocurrency to a new all time high above $66,000 (with some profit-taking to follow).

Yet despite the clear impact on the price of bitcoin, which has more than doubled from its July lows, not everyone is uniformly bullish on the impact of the first bitcoin ETF. As JPM’s Nick Panigirtzoglou writes in his latest widely-read Flows and Liquidity note, “the bulls are seeing this ETF as a new investment vehicle that would open the avenue for fresh capital to enter bitcoin markets” while the bears “are seeing the new ETF as only incremental addition to an already crowded space of bitcoin investment vehicles including GBTC in the US, ETFs listed in Canada since last February which have been already accessible to US investors, regulated (CME) and unregulated (offshore) futures, and plenty of direct investment options using digital wallets via Coinbase, Square, Paypal, Robinhood etc.”

For its part, JPM – not surprisingly – falls into the skeptics’ camp (we say not surprisingly because for much of 2021, the largest US bank has been publishing bearish note after note, as we have repeatedly detailed, urging clients to ignore the largest cryptocurrency and if anything, to take profits. In retrospect, this has been a catastrophic recommendation for anyone who followed it). 

According to the JPMorgan quant, the launch of BITO by itself will not bring significantly more fresh capital into bitcoin due to “the multitude of investment choices bitcoin investors already have. If the launch of the Purpose Bitcoin ETF (BTCC) last February is a guide, as seen in Figure 1, the initial hype with BITO could fade after a week.”

Here, once again, JPM’s superficial “analytical” approach shines through and we are confident that Panigirtzoglou, who has been dead wrong about bitcoin for the past year, will once again be wrong in his take on BITO. Instead, for a much more nuanced – and accurate – view of the daily happenings in bitcoin ETF land we recommend Bloomberg’s inhouse ETF expert, Eric Balchunas who points to what is clearly an unprecedented, and rising demand for crypto ETF exposure (one can only imagine what will happen when Gensler greenlights an ETF based on the actual product not spread-draining and self-cannibalizing futures). Indeed, as Balchunas pointed out on Thursday, BITO – which is “maybe too popular for its own good”, has already “used up 2/3 of its total bitcoin futures position limits, only about 1,700 contracts ($600m) left bf it hits 5k total. Could hit in next day or two.”

But what about the ramp in bitcoin prices in recent weeks? Surely the anticipation of the ETF launch was the main catalyst? Well, according to JPM the answer is again no, and instead the JPM strategist writes that “while we accept that bitcoin momentum has shifted steeply upwards since the end of September, we are not convinced the anticipation of BITO’s launch was the main reason.”

Instead, as the Greek quant explained before (see “JPMorgan: Institutions Are Rotating Out Of Gold Into Bitcoin As A Better Inflation Hedge“) he believes that rising inflation concerns among investors “has renewed interest in inflation hedges in general, including the use of bitcoin as such a hedge.”

As he further explains, “Bitcoin’s allure as an inflation hedge has been strengthened by the failure of gold to respond in recent weeks to heightened concerns over inflation, behaving more as a real rate proxy rather than inflation hedge.” This is actually correct, and as we have shown previously gold indeed correlates much more closely to real rates that nominals, although in recent months, even real rates suggest that gold prices should be notably higher, perhaps confirming ongoing precious metal price suppression of the kind we have previously documented to be emanating from the BIS.

In any case, JPM also updates a chart we showed previously, the shift away from gold ETFs into bitcoin funds, which was very intense  uring most of Q4 2020 and the beginning of 2021, has gathered pace in recent weeks.

In turn, by putting upward pressure on bitcoin prices, JPM argues that this shift away from gold ETFs into bitcoin funds likely triggered mean reversion  across bitcoin futures investors which had reached very oversold conditions by the end of September. This is shown in Figure 3 via the bank’s position proxy based on CME ethereum futures. Looking at Figure 3, JPMorgan now claims that “there had been a steep decline in our bitcoin futures position proxy” which pointed to oversold conditions towards the end of September triggering a bitcoin rebound. This rebound appears to have accelerated over the past days ahead of BITO’s launch with the blue line in Figure 1 fully recapturing all the previous months’ unwinding. In other words, the price ramp into the bitcoin ETF launch was just a coincidence. Yeah right, whatever.

Where JPM is however right, is in its assumption that a significant component of bitcoin futures positioning encompasses momentum traders such as CTAs and quantitative crypto funds. Previously, the bank had argued that the failure of bitcoin to break above the $60k threshold would see momentum signals turn mechanically more bearish and induce further position unwinds; it also claims this has likely been a significant factor in the correction last May in pushing CTAs and other momentum-based investors towards cutting positions. At the end of July, these momentum signals approached oversold territory at the end of July and have been rising since then in reversal to last May-July dynamics. The shor-tterm momentum signal has exceeded 1.5x stdevs, a z-score that we would typically characterize as overbought for other asset classes but still below the exuberant momentum levels of January 2021.

So with both With Figure 3 and Figure 4 pointing to exhaustion of short covering and more crowded bitcoin positioning in futures, Panigirtzoglou sees bitcoin relying more on other flows outside futures to sustain its upswing. To him, this elevates the importance of monitoring Figure 2, i.e. the importance for the current shift away from gold ETFs into bitcoin funds to continue for the current bitcoin upswing to be sustained.

In our opinion, the main problem for bitcoin over the previous two quarters had been the absence of significantly more fresh capital as shown in Figure 5 and Figure 6. Figure 5 shows our estimate of retail and institutional flows into bitcoin with an overall downshift in Q2 and Q3 of this year. Similarly, Figure 6 shows that the previous steepening in the pace of unique bitcoin wallet creation has largely normalized returning to pre-Q4 2020 norms, again implying an absence of significantly more fresh capital entering bitcoin.

And yet, despite this latest (erroneous) attempt to downplay the impact of the bitcoin ETF, which JPMorgan says “is unlikely to trigger a new phase of significantly more fresh capital entering bitcoin”, by now too many JPM clients are invested in the crypto asset as Jamie Dimon (whose opinions on bitcoin have been an absolute disaster for anyone who traded on them) recently admitted, and so while tactically staying bearish on the impact of BITO, not even JPM’s house crypto “expert” can objective stay bearish in general, and as he concludes, “istead, we believe the perception of bitcoin as a better inflation hedge than gold is the main reason for the current upswing, triggering a shift away from gold ETFs into bitcoin funds since September.”

So with Bitcoin now perceived as the best inflation hedge among non-traditional assets, Pnaigirtzoglou concludes that this gold to bitcoin flow shift “remains intact supporting a bullish outlook for bitcoin into year-end.”


Tyler Durden
Sat, 10/23/2021 – 19:10

Author: Tyler Durden

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Different CPIs

A recent exchange [1] on Econbrowser regarding forecasts of CPI reminded me that — even among the official series — there’s more than one CPI. Figure…

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A recent exchange [1] on Econbrowser regarding forecasts of CPI reminded me that — even among the official series — there’s more than one CPI.

Figure 1: CPI-all urban (blue), and CPI-wage earners and clerical workers (red), s.a., in logs 2020M02=0. NBER defined recession dates shaded gray. Source: BLS, NBER and authors calculations.


Figure 2: Year-on-year inflation rates for CPI-all urban (blue), and CPI-wage earners and clerical workers (red), s.a., calculated as log-differences. NBER defined recession dates shaded gray. Source: BLS, NBER and authors calculations.

Inflation for the bundle that wage earners/clerical workers has outpaced that for all-urban, by about 0.6 ppts by September.

Interestingly, the weights for the two CPI bundles indicate that wage earners/clerical workers have a higher weight on food, food away from home, and private transportation, and less weight on housing, than all urban consumers. As elevated housing costs feed into the CPI housing components, the places might switch.

Author: Menzie Chinn

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