Shadow Banking

Weekend Reading: Valuationally Challenged

As another week comes to a close, we continue to wrestle with a market that remains detached from underlying economic data and clings to recent levels of over overbought, overextended and low reward/risk outcomes. Of course, in the final stages of a bull market, this is what has historically been the case.

Futures Rise, Global Stocks Flat After Ugly Chinese Economic Data

One day after all three US indexes hit record highs for the first time since December 31, 1999, US equity index futures, European stocks and Asian equities are little changed after the Nikkei jumped on the back of a Yen weakness, while China reported disappointing economic data and the PBOC suggested that the flood of new debt is slowing which pushed Chinese stocks higher by 1.6% on hopes of more stimulus.

Back To Square One: Why The Financial System Needs To Reset

"Zero interest rates and negative interest rates and Europe and Asia are a huge signal that we are almost at the point where central banks have lost their tools to perpetuate a sense of confidence, that things are cyclical.... If you were to apply the Bretton Woods model for valuing money today, gold would be up to $15,000 an ounce..."

Chinese Stocks Sink Over Fears Regulators Will Curb Wealth Management Schemes

Overnight China's Banking Regulatory Commission drafted new rules curbing the nation’s multi-trillion market for wealth management products, which was not taken well by the local stock market, leading to a plunge in stocks in early Chinese trading, before rebounding at the close of trading. China's ChiNext index of smaller companies sank as much as 5.5%.

Why The ECB Thinks Brexit Is Not A "Lehman Moment"

"I think indeed the comparison does not apply because the reaction to Lehman as you may recall was that several markets froze... That was not the case this time." Actually... that's not exactly true is it!!

"Brexit Is A Bear Stearns Moment, Not A Lehman Moment"

Brexit is a Bear Stearns moment, not a Lehman moment. That’s not to diminish what’s happening (markets felt like death in March, 2008), but this isn’t the event to make you run for the hills. Why not? Because it doesn’t directly crater the global currency system. It’s not too big of a shock for the central banks to control. It’s not a Humpty Dumpty event, where all the Fed’s horses and all the Fed’s men can’t glue the eggshell back together. But it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead.

Something Unexpected Emerges In China's Latest Money And Credit Data

China's corporate bond market, one of the fastest growing sources of cheap credit, did something in May it hasn't done in in six years: it shrank.  And then there was the record contraction in banker's acceptance bills, a pseudo currency used by companies for payments that have been the subject of several instances of massive fraud. Hopes for a big credit push are again being dashed.

All Eyes On Yellen As Global Stocks Rebound Despite Brexit Fears, Record Low Yields

US equity index futures and global stocks rebounded for the first time in 6 days, ahead of Federal Reserve Chair Janet Yellen’s remarks, while Chinese manipulation prevented a selloff in Chinese stocks when MSCI refused to add the country to its EM index due to fears about... manipulation. Sterling has rebounded despite ongoing Brexit doom and gloom. Oil is the only key commodity that has failed to stage a modest rebound, while gold is down alongside the dollar, just because.

What Could Possibly Go Wrong?

So we have a booming market in opaque, complicated financial instruments involving layers of risk, leverage and maturity mismatches.  We have unsophisticated investors and issuers, both seeking to avoid government regulations and expecting to be bailed out in the worst case. We have cross-holdings and backdoor exposures to regular credit channels.  We have all of this taking place in an environment of booming credit expansion, a deteriorating economy and financial repression. We hate to repeat ourselves, but really... WHAT COULD POSSIBLY GO WRONG?

China's Real Unemployment Rate Is Three Times Higher Than The Offical Number

Based on a new report by Fathom Consulting, it appears that China is also dramatically misreporting what may be the one most critical for social stability metric, its unemployment rate, which when stripped away of the political propaganda, is more than three times greater than the officially reported rate. According to Fathom, China's underemployment Indicator has tripled to 12.9% since 2012 even while the official jobless rate has hovered near 4% for five years.

Goldman Finds That China's Debt Is Far Greater Than Anyone Thought

"The trend of China’s leverage has probably deteriorated faster than we previously thought... Compared to our previous estimates, the experience in 2015 suggests that the economy’s dependence on credit has deepened significantly and that it likely needs sizeable flow of credit on a persistent basis to maintain a stable level of growth...Such a scale of deterioration certainly increases our concerns about China’s underlying credit problems and sustainability risk. The possibility that there is such a large amount of shadow lending going on in the system... underscores the lack of visibility on where potential financial stress points may lie and how a possible contagion may play out."

That Didn't Take Long: Fed's Brainard Goes Full Dove One Week After Yellen's Hawkstravaganza

Last Friday, stocks soared as Yellen dropped hawkish hints that The Fed would raise rates "because it was appropriate" implying everything is awesome. One week later - following a terrible Fed-narrative-imploding jobs print - Hillary Clinton-donor and Fed member Lael Brainard goes back to full dove-tard: BRAINARD: U.S. JOBS IN MAY REPORT SUGGESTS LABOR MKT HAS SLOWED, SEES BENEFITS TO FED WAITING FOR ADDITIONAL DATA. Nothing would surprise us less to see stock go green today on this dovish news - just as they did last Friday on hawkish sentiment. If (Fed speaks) THEN (Buy).