The collision of global markets and social mood

Tuesday, May 31, 2016

Tuesday -- Rainy Weekend NoteFest

S&P E-mini Futures:
Continued choppy pullback from Friday.

A rainy long weekend here in San Juan allowed me to catch up on a ton of deep reading which I haven't indulged in for a long time. Late post because there's so much going on around the world, and ended up with a ton of notes.

Most of it pertained to debt, sentiment, and China, which ironically had another flash crash last night yet ended up over 3%.

Bloomberg reported that "Chinese stock-index futures plunged by the daily limit before snapping back in less than a minute, the second sudden swing to rattle traders this month. Contracts on the CSI 300 Index dropped as much as 10 percent at 10:42 a.m. local time, recovering almost all of their losses in the same minute."

They also noted short interest on the Shanghai Composite. Seems "the last time bearish bets were so elevated, such pessimism proved well-founded as China’s bull market turned into a $5 trillion rout."

Also, the yuan fell to within "0.2 percent of its five-year low in January, as a gauge of the greenback’s strength traded near a 10-week high."

The move in the yuan was flagged a day ahead of time by Bitcoin, which increasingly seems to act as a leading indicator for all things China.

Ninety percent of the Bitcoin’s exchange volume is in Chinese yuan, according to

Other leading indicators worth watching are China's dwindling FX reserves, increasing currency outflows, iron ore futures, and AUD.

Why is it important to watch the yuan? Because continued yuan devaluation "adjustments" will likely spur continued EM turmoil which could cause continued USD strength (with an estimated $3 trillion in emerging market dollar denominated debt).

Perhaps this is why the "pro trader" that I often like to fade has changed his tune on the dollar from "it's toast" to "it's a problem." He's been saying the dollar is toast since 2014.

In the bigger picture, and more troublesome outside of China, China will likely continue to export deflation the more they stimulate.

Its "One Belt One Road" project is one such example, yuan devaluation is another.

OBOR seems to be an attempt to absorb China's excess capacity, and could easily ensure many more ghost cities and ghost projects throughout Southeast Asia.

Although, if it translates into actual infrastructure, it could be a long-term game changer. See:

Onto debt now. China has learned the game well. And they have some cool new toys for yield-hungry investors that sounds a lot like the USA in 2005-2008.

They're called WMPs (wealth management products), and they're high-yield funds of securitized and collateralized debt gone wild.

Yes, these new toys now equal 35% of China's GDP, or about $3.6 trillion.

As much as 85% of these products may have been bought by other WMPs, according to Autonomous Research via Bloomberg, which speculates that "in some cases the products are being 'churned' to generate fees for banks."

"We’re starting to see layers of liabilities built upon the same underlying assets, much like we did with subprime asset-backed securities, collateralized debt obligations, and CDOs-squared in the U.S.," said Charlene Chu, a partner at Autonomous.

Fitch analysts Jack Yuan and Grace Wu wrote in March: "The most common source of funds for repayment of WMPs is the issuance of new WMPs."

This is otherwise known as a Ponzi scheme.

It's not just China where things have gone wild. It's happening here in the USA too, with a toxic mix of rising debt amid lagging profits and mounting defaults. A few comments from Bloomberg caught my eye here as well:
  • Consumers were the Achilles’ heel of the U.S. economy in the run-up to the last recession. This time, companies may play that role.
  • Corporate borrowing has ballooned by $2.8 trillion since 2009.
  • In 2015 alone, corporate liabilities jumped 50 times the increase in cash by S&P’s reckoning.
Impaired balance sheets as the market closes in on all-time it.

Elsewhere, Lili Bayer at noted that "across southern Europe is a trend that should be triggering alarm bells. Southern European economies have been grappling with the problem of non-performing loans, which stand at around 18.1 percent of all debt in Italy, 12 percent in Portugal, and 10 percent in Spain.”

The global debt story can't be concluded here without a nod to this amazing revelation.

"While oil’s collapse has deepened concern that Saudi Arabia will need to liquidate its Treasuries to raise cash, a more troubling worry has also emerged: the specter of the kingdom using its outsize position in the world’s most important debt market as a political weapon, much as it did with oil in the 1970s."

Perhaps another reason why treasuries have acted so weird of late.

Now onto sentiment. It's a mess. In my opinion social mood has been deeply distorted by gross central bank interference.

This is what central bank interference looks like in two charts.

First, simply back out the day of plus the day before a Fed meeting back to mid-1997 and the market has gone nowhere.

Then, as real wages have fallen due to Fed meddling, consumers have turned to indebtedness to maintain their standard of living.

Both charts explain the paradox of why people are getting progressively more pissed off as the market heads higher.

That's why mixed social mood is rampant. Those that continue to look for saturated euphoria to signal "The Top" will continued to miss the real story.

Case in point: the latest Barron's cover. People will leap on this as a reason why sentiment is excessive. I'm not so sure. I think the headline is rather neutral.

However, excessive sentiment has been alive and well and living in NYC, Miami, LA, up in the sky, and on the high seas . . . but is showing signs of imploding.

“The problem is that investors are no longer buying, and now they’re going to be looking to sell."

"Bombardier Inc., General Dynamics Corp.’s Gulfstream unit and other planemakers are cutting output and chopping list prices to cope with a glut of new and used business jets."

"The era of aspirational pricing is over." Let that sink in a bit. Aspirational pricing...

An amazing thing also occurred in the article: Superyachts crossed the lexicon.

"Still more nine-figure homes are on the way. Real estate agents and developers say a home under construction in Bel Air is likely to have more than 50,000 square feet of living space, with finishes rivaling a superyacht’s. The price will be yacht-like, too, at around $300 million. Among the home’s amenities: the world’s largest safe."

I'll be having a lot more to say about the Superyacht Industry soon, an industry that is the result of a global central bank super cycle starting with the collapse of the Bretton Woods system in response to the 1971 closing of the US gold window.

The Superyacht Industry is an extreme form of real estate, and therefore should be monitored as an extreme manifestation of social mood. The fact that Superyachts appeared in an article about topping real estate is a warning.

Elsewhere, in social media, found some stunning comments. Granted they're just a couple of peeps, and there are loads of bears out there too, but the message is clear: markets only go up.

If only it was that easy.

Slight Risk On thus far today with AUD, CAD, and EUR strength. CHF could be signaling caution however.

Continuing to trade lame.

WTI crude has not backed off 50. NG ripping.

Gold trying to make a stand above 1200, but silver, platinum, and copper not helping. Palladium higher.

S&P Outlook:
All things considered, especially the market's internals, a new high would be most welcome.

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