On November 8, China shocked markets with its latest targeted stimulus in the form of an "unprecedented" lending directive ordering large banks to issue loans to private companies to at least one-third of new corporate lending. The announcement sparked a new round of investor concerns about what is being unsaid about China's opaque, private enterprises, raising prospects of a fresh spike in bad assets.
A few days later, Beijing unveiled another unpleasant surprise, when the PBOC announced that Total Social Financing - China's broadest credit aggregate - has collapsed from 2.2 trillion yuan in September to a tiny 729 billion in October, missing expectations of a the smallest monthly increase since October 2014.
Some speculated that the reason for the precipitous drop in new credit issuance has been growing concern among Chinese lenders over what is set to be a year of record corporate defaults within China's private firms. As we reported at the end of September, a record number of non-state firms had defaulted on 67.4 billion yuan ($9.7 billion) of local bonds this year, 4.2 times that of 2017, while the overall Chinese market was headed for a year of record defaults in 2018. Since then, the amount of debt default has risen to 83 billion yuan, a new all time high (more below).
Now, in a new development that links these seemingly unrelated developments, Bloomberg reports that debt cross-guarantees by Chinese firms have left the world’s third-largest bond market prone to contagion risks, which has made it "all the tougher for officials to follow through on initiatives to sustain credit flows", i.e., the threat of growing threat of unexpected cross- defaults is what is keeping China's credit pipeline clogged up and has resulted in the collapse in new credit creation.
The risk of cross-defaults is what also appears to be behind the recent official directive for banks to boost lending to private corporations.
While this was not a concern when times were good, now that China is going through a record run of debt defaults, these often opaque and hard-to-follow links pose the risk of "a daisy chain of distress" with price moves are reflecting that.
“Large cross-guarantees could set off a chain effect that could quickly spread from one firm to another,” said Clifford Kurz, a credit analyst from S&P Global Ratings in Hong Kong, who probably rues the day he was tasked with figuring out which company is linked to which other company in cross-default obligations.
Oil, copper and lumber are all telling us the exact same thing, and it isn’t good news for the global economy. When economic activity is booming, demand for commodities such as oil, copper and lumber goes up and that generally causes prices to rise. But when economic activity is slowing down, demand for such commodities falls and that generally causes prices to decline. In recent weeks, we have witnessed a decline in commodity prices unlike anything that we have witnessed in years, and many are concerned that this is a very clear indication that hard times are ahead for the global economy.
Let’s talk about oil first. The price of oil peaked in early October, but since that time it has fallen more than 25 percent, and the IEA is warning of “relatively weak” demand out of Asia and Europe…
The International Energy Agency said on Wednesday that while US demand for oil has been “very robust,” demand in Europe and developed Asian countries “continues to be relatively weak.” The IEA also warned of a “slowdown” in demand in developing nations such as India, Brazil and Argentina caused by high oil prices, weak currencies and deteriorating economic activity.
“The outlook for the global economy has deteriorated,” the IEA wrote.
Meanwhile, the price of copper has been declining for quite some time now. The price of copper also fell substantially just before the last recession, and many analysts are pointing out that “Dr. Copper” is now waving a red flag once again…
The message of weakening demand on the oil front was reinforced by the falling price of copper. The base metal is often referred to as “Dr. Copper” on its presumed ability to forecast the peaks and troughs of business cycles since it is used in different areas of the economy such as homes, factories and electricity generation. Copper has served as a leading indicator of both recessions and economic booms.
The price of lumber is a “third witness” that indicates that big trouble is looming.
Last month, lumber dropped more than 10 percent, and that was the biggest monthly drop that we have seen in more than 7 years…
If oil, copper and lumber are all telling us the same thing simultaneously, don’t you think that we should be listening?
At this point, even Bloomberg is admitting that the global economy is heading toward “a generalized slowdown”…
How many signs is it going to take before people start understanding what is happening?
Wells Fargo just notified about 1,000 employees that they will be laid off. Job losses are starting to mount, and it is likely that we will start to see these sorts of news stories on an almost daily basis now.
And as the shaking on Wall Street accelerates, we are going to see more financial firms get into trouble. In fact, we just witnessed the total collapse of OptionSellers.com. The following comes from a notice that they sent to investors informing them that they lost all their money and that the firm is being liquidated…
Global economic activity is slowing down, and things are shifting very rapidly now. The weather is already getting very cold, the mood of the nation is very dark, and it would only take a very small push to send us completely tumbling over the edge.
As Upton Sinclair once famously said:
"It is difficult to get a man to understand something, when his salary depends on his not understanding it."
But, after a couple of years of exuberant ignorance, Homebuilders have finally started to face reality - or admit reality - slashing their optimism about the US housing market dramatically...
Against expectations of a 67 print, NAHB's optimism index crash from 68 to 60 in November - its biggest drop since 2014 (to its lowest since Aug 2016) as the highest borrowing costs in eight years restrain demand, adding to signs of a cooling housing market.
Of course the 'hard' housing data has been collapsing for months...
“Rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall,” NAHB Chief Economist Robert Dietz said in a statement accompanying the data.
“Given that housing leads the economy, policy makers need to focus more on residential market conditions.”
Under the covers, the NAHB sub-index measuring current sales fell seven points to 67, the lowest since August 2016, while the index for the six-month outlook for transactions dropped 10 points to 65, the lowest since May 2016. A measure of prospective buyer traffic declined eight points to 45, also the lowest since August 2016.
U.S. stocks lurched lower Monday, deepening an autumn slump that has shaken many investors’ confidence in the technology titans that had led the bull market higher for much of the past year.
The day's declines were accompanied by a broad retreat from risk across financial markets. Bitcoin prices crashed below $5,000 for the first time this year and Google parent Alphabet Inc. closed in bear market territory: a drop of at least 20% from a recent high.
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