Housing Market

When the bubble vision stock peddlers get desperate, they talk decoupling. So by the end of yesterday’s bloodbath you would have thought China was on another planet, and that “commodities” were some trinket-like collectibles gathered by people who don’t wear long pants, drink coca cola or jabber on their cell phones. On these fine shores, of course, its all awesome from sea to shinning sea. So don’t be troubled. Buy the dip.

By turning the health of the economy into a reflection of the stock market, the Status Quo has made the stock market into the one bellwether that matters. In effect, the stock market is now integral to the economy as a measure of sentiment and evidence that all is well with the economy as a whole.

Following China's official PMI print at a 3-year low, Caixin's PMI collapsed to 47.3 - the lowest sinec March 2009. Despite another CNY150bn liquidity injection (but the biggest strengthening of Yuan since Nov 2014 and a financial conditions tightening in FX trading), China, US, and Japanese stocks are plunging... SHCOMP -4%, Dow -280, NKY -340

As Bloomberg reports, "China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter. Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales."

The biggest surprise in today's NAR release came from the following Larry Yun statement: "Uncertainty in the equity markets — even if the Fed raises short-term rates in September — could stabilize long-term mortgage rates and preserve affordability for buyers." So with China, Larry Summer and the IMF now calling for a rate hike, the NAR - of all entities - is suddenly quite happy to see the recent market rout continue, which would keep rates lower and promote "affordability." Guess nobody tell Larry that China has now started dumping bonds.

On Tuesday evening, we quantified the staggering cost of China’s near daily open FX operations in support of the yuan. In short, the new currency regime has led the PBoC to dump more US paper in the past two weeks than it had YTD. In conclusion, we asked if anyone else was set to join China in liquidating US Treasurys at a never before seen pace. Here's the answer and what it means for the US economy and monetary policy going forward.

Home prices rose 4.97% YoY in June, according to Case-Shiller's 20-City index, missing expectations for the 3rd month in a row. Price appreciation has now been flat for 5 months - despite surging home sales - as bubblicious San Francisco saw price depreciation once again. Portland amd Denver saw the most appreciation in June. This is the second month in a row of sequential seasonally-adjusted declines in home prices, and along with TOL's dismal report this morning, suggests maybe another pillar of the 'strong' US economy meme is being kicked out... and Case-Shiller warn more than one rate hike by The Fed (or a stock market plunge) will stymie housing considerably.

Anyone who listens to a mainstream media pundit, talking head, or spokes bimbo deserves the reaming they are going to receive.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

News That Matters...

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 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.

"Time is now rapidly running out," warns The Telegraph's John Ficenec as the British paper takes a deep dive into the dark realities behind the mainstream media headlines continued faith in central planning. Sounding very "Zero Hedge", Ficenec warns that from China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.

It was a quiet start to the week today with just the June Euro area trade balance (which rose €21.9bn vs €23.1 bn expected, up from €21.3 bn) in the European timezone and Empire manufacturing and NAHB housing market index for August this afternoon in the US. Under the radar, but perhaps the most news today, is the June TIC data which will likely confirm the ongoing liquidation of "FX Reserves" aka TSYs by "Belgium" aka China. Expect another $15-20 billion drop in Belgian Treasury holdings in the month of June.

It was a relatively quiet weekend out of China, where FX warfare has taken a back seat to evaluating the full damage from the Tianjin explosion which as we reported on Saturday has prompted the evacuation of a 3 km radius around the blast zone, and instead it was Japan that featured prominently in Sunday's headlines after its Q2 GDP tumbled by 1.6% (a number which would have been far worse had Japan used a correct deflator), and is now halfway to its fifth recession in the past 6 year, underscoring Abenomics complete success in desrtoying Japan's economy just to get a few rich people richer. Of course, economic disintegration is great news for stocks, and courtesy of the latest Yen collapse driven by the bad GDP data which has raised the likelihood of even more Japanese QE, the Nikkei closed 100 points, or 0.5% higher. 

One of the most disturbing and recurring themes highlighted on this site over the past year has been the ever greater disconnect between the worlds of equity and fixed income, whether in terms of implied volatility, or actual underlying risk.  It turns out there is be an even more acute, and far more concering divergence, which was conveniently pointed out overnight by Bank of America and which suggests that a Bear Stearns type event may be just a few days ahead.

• China central bank tries to soothe global markets, says no reason for yuan to fall further (Reuters)
• Huge blasts at Chinese port kill 44, with hundreds injured (Reuters)
• China efforts to slow yuan fall hoist Europe shares, bond yields (Reuters)
• Greek Economy Unexpectedly Surged Before Capital Controls (BBG)
• Joe Biden Is Sounding Out Allies About a 2016 Bid (WSJ)
• U.K. Tries to Kick-Start Shale Gas With Planning Speedup (BBG)