en Why Governments Will Not Ban Bitcoin <p><a href=""><em>Authored by Charles Hugh Smith via OfTwoMinds blog,</em></a></p> <p><em>Those who see governments banning ownership of bitcoin are ignoring the political power and influence of those who are snapping up most of the bitcoin.</em></p> <p><strong>To really understand an asset, we have to examine not just the asset itself but <em>who owns it, and who can afford to own it</em>.</strong> These attributes will illuminate the <em>political and financial power wielded by the owners of the asset class</em>.</p> <p>And once we know what sort of political/financial power is in the hands of those owning the asset class, we can predict the limits of political restrictions that can be imposed on that ownership.</p> <p><strong>As an example, consider <em>home ownership</em></strong>, i.e. ownership of a principal residence. Home ownership topped out in 2004, when over 69% of all households &quot;owned&quot; a residence. (Owned is in quotes because many of these households had no actual equity in the house once the housing bubble popped.)</p> <p>The rate of home ownership has declined to 63%, which is still roughly two-thirds of all households. Clearly, homeowners constitute a powerful political force. Any politico seeking to impose restrictions or additional taxes on homeowners has to be careful not to rouse this super-majority into political action.</p> <p><strong>But raw numbers of owners of an asset class are only one measure of political power.</strong> Since ours is a <em>pay-to-play form of representational democracy</em> in which wealth buys political influence via campaign contributions, philanthro-capitalism, revolving doors between political office and lucrative corporate positions, etc., <strong><em>wealth casts the votes that count.</em></strong></p> <p>I am always amused when essayists claim &quot;the government&quot; will do whatever benefits the government most. While this is broadly true, this ignores the reality that <em>wealthy individuals and corporations own the processes of governance</em>.</p> <p>More accurately, we can say that <strong>government will do whatever benefits those who control the levers of power most</strong>, which is quite different than claiming that the government acts solely to further its own interests. More specifically, it furthers what those at the top of the wealth-power pyramid have set as the government&#39;s interests.</p> <p><strong>Which brings us to the interesting question, will governments ban bitcoin as a threat to their power?</strong> A great many observers claim that yes, governments will ban bitcoin because it represents a threat to their control of the fiat currencies they issue.</p> <p><strong>But since <em>government will do whatever most benefits those who control the levers of power</em>, the question becomes, does bitcoin benefit those holding the levers of power?</strong> If the answer is yes, then we can predict government will not ban bitcoin (and other cryptocurrencies) because those with the final say will nix any proposal to ban bitcoin.</p> <p>We can also predict that any restrictions that are imposed will likely be aimed at collecting capital gains taxes on gains made in cryptocurrencies rather than banning ownership.</p> <p>Since the wealthy already pay the lion&#39;s share of federal income taxes (payroll taxes are of course paid by employees and employers), their over-riding interests are <em>wealth preservation and capital appreciation</em>, with lowering their tax burdens playing third fiddle in the grand scheme of maintaining their wealth and power.</p> <p>Indeed, paying taxes inoculates them to some degree from social disorder and political revolt.</p> <p><strong>I was struck by this quote from the recent <em>Zero Hedge</em> article</strong> <a href="" target="resource">A Look Inside The Secret Swiss Bunker Where The Ultra Rich Hide Their Bitcoins</a>:</p> <p><em>Xapo was founded by Argentinian entrepreneur and current CEO Wences Casares, whom Quartz describes as &quot;patient zero&quot; of bitcoin among Silicon Valley&rsquo;s elite. <strong>Cesares reportedly gave Bill Gates and Reed Hoffman their first bitcoins.</strong></em></p> <p><em>Their first bitcoins.</em> That suggests the billionaires have added to their initial gifts of BTC.</p> <p><strong>The appeal to the wealthy is obvious:</strong> any investment denominated in fiat currencies can be devalued overnight by devaluations of the currency via diktat or currency crisis. Bitcoin has the advantage of being decentralized and independent of centrally-issued currencies.</p> <p><strong>I submit that not only are the wealthy the likeliest buyers of bitcoin for this reason, they are the <em>only group that can afford to buy a bunch of bitcoin as a hedge or speculative investment.</em></strong> Lance Roberts of <a href="" target="resource">Real Investment Advice</a> recently produced some charts based on the Federal Reserve&#39;s 2016 Survey of Consumer Finances (SCF) report-- <a href="" target="resource">Fed Admits The Failure Of Prosperity For The Bottom 90%</a>.</p> <p><strong>Put another way: how many families can afford to buy a bunch of bitcoin?</strong></p> <p>Here is a chart of median value of family financial assets: note that this is far below the 2000 peak and the housing bubble of 2006-07:</p> <p><img align="middle" border="0" class="wide" src="" /></p> <p>Here is mean family financial assets broken out by income category: note that virtually all the gains have accrued to the top 10%, whose net worth soared from $1.5 million in 2009 to over $2.2 million in 2016, a gain of $700,000.</p> <p><img align="middle" border="0" class="wide" src="" /></p> <p><strong>The Fed&#39;s 2016 Survey of Consumer Finances is a treasure trove of insights into wealth and income inequality in the U.S.</strong> Here are the highlights: <a href="" target="resource"> Changes in U.S. Family Finances from 2013 to 2016</a>.</p> <p>As you&#39;d expect, the report starts off on a rosy note: GDP rose by 2.2% a year, unemployment declined to 5%, and the median family income rose 10% between 2013 and 2016.</p> <p><strong>Blah blah blah.</strong> Meanwhile, on page 10, it&#39;s revealed that the top 1% receives 24% of all income, and the families between 90% and 99% receive 26.5%, for a total of 50.5% of all income flowing to the top 10%.</p> <p>The top 1% owns 38.6% of all wealth, and the families between 90% and 99% own 38.5%, so the top 10% owns 77% of total wealth.</p> <p>On page 13, we find that the total median net worth of all families between 40% and 60% went from $57,000 to $88,000, a gain of $21,000, while the median net worth of families in the 60% to 80% bracket rose from $166,000 to $170,000, a grand total of $4,000.</p> <p>Meanwhile, back in La-La Land, the median net worth of the top 10% soared by $468,000, from $1.16 million to $1.62 million.</p> <p><strong>Which family has the wherewithal to buy a bunch of bitcoin at $5,900 each as a hedge or investment,</strong> the one that gained $4,000 in net worth, the one that gained $21,000 in net worth or the one that gained $468,000?</p> <p><strong>You see the point: the likely buyers of enough bitcoin to count are the politically powerful financial elite.</strong> If any politico was foolish enough to propose banning bitcoin, a few friendly phone calls from major financial backers would be made to impress upon the politico the importance of blockchain technology and cryptocurrencies to the U.S. economy.</p> <p>Heck, the financial backer might just suggest that all future campaign contributions to the politico will be made in bitcoin to drive the point home.</p> <p><strong>My vision of cryptocurrency, laid out in my book <a href=";camp=1789&amp;creative=9325&amp;creativeASIN=B0178MQI1M&amp;linkCode=as2&amp;tag=charleshughsm-20&amp;linkId=CGXPIKGVST4OBTXU" rel="nofollow" target="resource"> A Radically Beneficial World: Automation, Technology &amp; Creating Jobs for All</a>, is of a truly decentralized currency that directly funds work that addresses scarcities in localized community economies.</strong> The reality of existing cryptocurrencies is that they are probably being snapped up for buy-and-hold storage by the wealthy.</p> <p>Those who see governments banning ownership of bitcoin are ignoring the political power and influence of those who are buying enough bitcoin to matter.</p> <p>*&nbsp; *&nbsp; *</p> <p><em>If you found value in this content, please join me in seeking solutions by <a href="" target="resource">becoming a $1/month patron of my work via</a>. Check out both of my new books, <a href=";camp=1789&amp;creative=9325&amp;creativeASIN=B01MSP2SXM&amp;linkCode=as2&amp;tag=charleshughsm-20&amp;linkId=e45dbb20ba66e69c33a3a26772391278" target="resource">Inequality and the Collapse of Privilege</a> ($3.95 Kindle, $8.95 print) and <a href=";camp=1789&amp;creative=9325&amp;creativeASIN=B01ELXQZGE&amp;linkCode=as2&amp;tag=charleshughsm-20&amp;linkId=33DAOPEVGBNGBS37" target="resource">Why Our Status Quo Failed and Is Beyond Reform</a> ($3.95 Kindle, $8.95 print, $5.95 <a href=";camp=1789&amp;creative=9325&amp;creativeASIN=B01M7YCLI2&amp;linkCode=as2&amp;tag=charleshughsm-20&amp;linkId=60a5ab448cf91113c0df9df97732358e" target="_blank"> audiobook</a>) For more, please visit the <a href="" target="resource">OTM essentials website</a>. </em></p> <p>&nbsp;</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="610" height="313" alt="" src="" /> </div> </div> </div> Alternative currencies Bill Gates Bitcoin Bitcoin Blockchains Cryptocurrencies Currency Decentralization Digital currency Economics of bitcoin ETC Federal Reserve Finance Housing Bubble Legality of bitcoin by country or territory Money Reality Unemployment US Federal Reserve Xapo Mon, 23 Oct 2017 20:25:00 +0000 Tyler Durden 605812 at The US Stock Market Just Did Something It Has Never Done Before <p><strong>It has now been 242 days since the US equity market dipped by 3% or more... <a href="">That has never, ever, happened before</a>...</strong></p> <p><a href=""><img alt="" src="" style="width: 600px; height: 303px;" /></a></p> <p>Rick Astley said it best...<em><strong>&quot;never gonna let you down... or desert you&quot;</strong></em></p> <p><iframe allowfullscreen="" frameborder="0" height="315" src="" width="560"></iframe></p> <p><strong>Ironic then that stocks had their worst day in 6 weeks.</strong></p> <p>GE schizophrenia shows the utter farce that this so-called &#39;market&#39; has become...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 303px;" /></a></p> <p>&nbsp;</p> <p>Nasdaq gave up all Friday&#39;s Budget-Resolution, tax-reform-hope gains...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 280px;" /></a></p> <p>&nbsp;</p> <p>NOTE they tried to ramp stocks in the last 20 mins but that failed - this is not something we have seen recently...NOT OFF THE LOWS...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 417px;" /></a></p> <p>&nbsp;</p> <p>S&amp;P VIX jumped by the most since Sept 5th - back above its 50- and 100-DMA...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 350px;" /></a></p> <p>&nbsp;</p> <p>Risk and price remain decoupled...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 318px;" /></a></p> <p>&nbsp;</p> <p>It ain&#39;t over yet...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 315px;" /></a></p> <p>&nbsp;</p> <p>FANG Stocks dropped near 3-week lows...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 310px;" /></a></p> <p>&nbsp;</p> <p>Financials are starting to catch down to the yield curve&#39;s reality...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 318px;" /></a></p> <p>&nbsp;</p> <p>Treasury yields dipped today...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 316px;" /></a></p> <p>&nbsp;</p> <p>But 10Y tested up towards 2.40% before fading back...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 312px;" /></a></p> <p>&nbsp;</p> <p>The Dollar Index extended Friday&#39;s gains, closing at its highest since July 14th (even though it faded into the close)...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 317px;" /></a></p> <p>&nbsp;</p> <p>Cable was strongest after May&#39;s speech but Yen surged in the last hour...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 316px;" /></a></p> <p>&nbsp;</p> <p>Bitcoin tumbled from new record highs early on following Saudi Prince comments but was bid into the close of the US equity market...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 324px;" /></a></p> <p>&nbsp;</p> <p>Despite dollar strength, commodities were higher, led by copper...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 318px;" /></a></p> <p>&nbsp;</p> <p>Gold futures spiked around 12ET on the back of a $2.4 billion notional volume surge... back above its 100DMA...</p> <p><a href=""><img height="343" src="" width="600" /></a></p> <p>&nbsp;</p> <p><u><strong>WTF Bonus Chart:</strong></u> South Korean stocks are at record highs (why not!!) but South Korean sovereign credit risk is at its worst in 20 months...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 304px;" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="855" height="99" alt="" src="" /> </div> </div> </div> Bitcoin Business Copper Mathematical finance NASDAQ Reality Technical analysis VIX Yen Yield Curve Mon, 23 Oct 2017 20:02:14 +0000 Tyler Durden 605847 at The 4 Possible Channels For A Chinese Financial Crisis <p>That China is a widely accepted global outlier in the context of credit, debt and leverage, look no further than the latest Financial Stability Report from the IMF, which in no uncertain terms lays out where China can be "found" relative to its G-20 peers in the following chart:</p> <p><a href=""><img src="" width="498" height="399" /></a></p> <p>Yet according to the IMF, China's bleak picture is based on a relatively rosy estimate of the country's <a href="">non-financial debt to GDP at approximately "only" 242</a>%. </p> <p>The reality, however, is that China's true leverage picture is far worse, and while there are far more aggressive and pessimistic estimates in the public domain, we have chosen the latest number calculated by Victor Shih from the Mercator Institute for China Studies, who in a just released report calculates that total non-financial credit in China stood around 254 trillion RMB as of May 2017, <strong>equivalent to 328% of 2016 nominal GDP</strong>, or nearly 100% higher than the official IMF estimate. This is also 34% increase as a share of GDP compared with the end of 2015.</p> <p><a href=""><img src="" width="500" height="444" /></a></p> <p>And while some categories of shadow finance, including bill finance and non-loan trust credit, have actually declined in recent months (<a href="">duly noted here</a>), most other categories rose by double digits in percentage terms in the year and half between the end of 2015 and May 2017. Of note, credit held by funds, rose by 116%.</p> <p>So with credit soaring, Shih - like Goldman clients - asks <strong>"how much longer can this go on?</strong>" and answers that "the amount of interest that debtors in China must pay creditors provides clues on the costs of such a high debt level. If interest servicing exceeds incremental increase in nominal GDP, the debtor would need to pursue one of two courses of action to avoid a crisis. This ultimately goes to the question whether China has hit its "Minsky Moment" or is still in the Ponzi Finance stage, a <a href="">discussion popularized by Morgan Stanley first in 2014</a>.&nbsp; </p> <p>Here are Shih's observations:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>First, <strong>creditors can extend even more credit to the debtors </strong>so that interest payments are serviced with new credit. <strong>This mechanism renders China more of a Ponzi unit, which requires new credit to service interest payments. </strong>Alternatively<strong>, a rising share of income for households, firms, or government will go toward servicing interest</strong>. While the first dynamic would cause the acceleration of debt accumulation, the second dynamic is tantamount to a massive tax which will slow growth for an extended period.</p> </blockquote> <p>The problem with both approaches is that <strong>China as a whole is a Ponzi unit</strong>. And, as Shih calculates and as shown in the chart below, total interest payments from June of 2016 to June of 2017 exceeded incremental increase in nominal GDP by roughly 8 trillion RMB (Figure 1). </p> <p><a href=""><img src="" width="500" height="369" /></a></p> <p>And since we have not see large-scale defaults in China, <strong>the new additional interest burden must have been financed in some way</strong>. Most likely, the Merics analysis notes, <strong>roughly this amount or more was capitalized as new loans, contributing to the rapid rise in total debt. </strong>As the chart above shows, this was not always the case. Prior to 2011, incremental nominal GDP roughly matched or even exceeded interest payments. The advent of high-yielding shadow banking led to the explosive growth in interest payments, and thus the need to capitalize interest payments, starting in 2012. <strong>This is a dynamic which will drive debt growth in China for years to come, or until the debt bubble ends.</strong></p> <p>So what ends the bubble? According to the Merics analysis, there are 4 possible channels for a financial crisis in China. First, it should be noted that despite the enormous debt load, a domestically triggered crisis is not likely in the next five years. Trouble is more likely to come from some combination of capital flight and sudden withdrawal of external credit. </p> <p><em>With that in mind, the crisis scenarios are as follows: </em></p> <ul> <li><strong>Sharp household deleveraging: </strong>Because Chinese household debt is still a relatively small share of banking sector assets, a rise in distressed household debt by itself will not impact the financial system by much. Beijing has guarded against this by requiring high down payments from home buyers.</li> <li><strong>Panic in shadow-banking sector: </strong>Off-balance-sheet non-standardized credit to the corporate and government sectors has reached 50 trillion RMB by May of 2017, or 64% of GDP. Despite the enormity of shadow credit, as long as the flow of liquidity continues from the banking sector, shadow finance is unlikely to implode in the near future. However, given the enormity of shadow finance and the PBOC’s periodic tightening, miscalculation by the PBOC can cause a temporary panic.</li> <li><strong>Capital flight: </strong>China’s foreign exchange reserve now totals only 10% of money supply and 30% of household savings, leaving China vulnerable to capital flight that depletes liquid foreign exchange reserves. If large outflows resume despite capital control measures, ”maxi-devaluation” and external defaults may be the only means of preserving China’s reserves.</li> <li><strong>Withdrawal of credit by international lenders: </strong>Including net Hong Kong-domiciled debt, Chinese external debt exceeded 1.9 trillion USD, 1.2 trillion of which in short-term debt to Chinese financial institutions. Additional external borrowing muted the impact of capital flight to the tune of 140 billion dollars in the past two years. Sudden withdrawal of foreign credit would immediately lead to severe reserve depletion, which can only be stopped by “maxi-devaluation” and defaulting on external debt.</li> </ul> <p><em>Below we present the full details on each scenario, courtesy of Shih's analysis:</em></p> <p><span style="text-decoration: underline;"><strong>HOUSEHOLD SECTOR CRASH</strong></span></p> <p>The financial malaise that the United States experienced in recent years stemmed from household sector indebtedness, which led to distrust between financial institutions over distressed household debt they held on their balance sheets. Is this a possible scenario for China? <strong>Because Chinese household debt is still a relatively small share of GDP and of banking sector assets, the sudden appearance of a large amount of distressed household debt by itself will not impact the financial system significantly. </strong>However, because the appearance of distressed household debt likely will correlate with a serious economic downturn, this will feed into debt deflation triggered by the highly-indebted corporate sector.</p> <p>We calculate household debt by adding the PBOC official statistics of other depository institutions’ claims on the household sector to loans made by housing providence funds (HPF), which are non-bank entities, to households. To be sure, a pattern of rapid leveraging is apparent. <strong>While household savings growth has fallen to under 10%, recent months have seen household borrowing exploding at 30% growth rates. Household debt has reached 41 trillion RMB as of the end of June 2017, which included 36.7 trillion in bank loans and over 4 trillion in housing providence loans. </strong>Because of the high speed of growth, Chinese household debt has reached nearly 60% of GDP by June 2017 (Figure 2). It is poised to reach over 90% of GDP by 2020, essentially pre-crisis level in the United States.</p> <p><a href=""><img src="" width="500" height="368" /></a></p> <p>Yet, Figure 2 also reveals that even if we assumed that household debt will grow by 25% in the years leading up to 2020, it will remain a modest 20% of overall bank assets because overall banking sector assets also will rise quickly. Thus, even 25% NPL ratio for household debt would only require a write-down of roughly 5% of bank assets. If this were to occur in isolation (a big if), a combination of government bailout and bank write-down likely will resolve the problem with little difficulty. It is likely that households also borrowed additional amounts to pay down payments in recent years. From 2013 to the end of 2016, buyers in China paid approximately 13 trillion RMB in down payments. If a quarter of that was borrowed, household debt would increase by another 3.25 trillion, again a relatively modest amount in China’s banking system.</p> <p>But even with a relatively low aggregate level of household debt, <strong>households may be borrowing heavily on the margin to buy increasingly expensive real estate, which would be a warning sign for a sharp deleveraging by the household sector in the near future. </strong>As in the United States, the highly leveraged marginal buyers of real estate may be the first to default or to sell in a panic, causing a spiral of default-driven asset price deflation. </p> <p>The Chinese government has increased down payment requirements for mortgages to limit leveraging and to control prices in China’s top cities. In Beijing, for example, financial regulations mandate 35% down payment for the first home and a whopping 50% down payment for second homes. To ascertain whether these regulations are effective, we calculate a rough loan-to-value (LTV) ratio for new real estate purchases.5 If the marginal buyers are more leveraged, we should see an upward trend in this line toward 1. Yet, as Figure 3 reveals, although household LTV ratios went up during property peaks, there is no clear sign that households were borrowing more relative to purchasing prices in order to buy real estate in the current cycle.</p> <p><a href=""><img src="" width="500" height="298" /></a></p> <p>Although household debt on its own is unlikely to trigger a financial crisis, <strong>the household balance sheet is increasingly squeezed on both the asset and the liability columns by China’s credit bubble</strong>. On the liability side, households are forced to buy increasingly expensive properties with more leveraging. In the short term, this allows growth to continue. In the medium term, however, household discretionary spending will fall as households are saving for down payments or paying burdensome interest on mortgages. <strong>Thus, the main impact of rising household leveraging will be on the consumption front rather than as a trigger of a financial panic</strong>.</p> <p>* * * </p> <p><span style="text-decoration: underline;"><strong>SHADOW BANKING PANIC</strong></span></p> <p>Off-balance sheet credit has grown tremendously in recent years. The growth of shadow financing in China is closely linked to banks’ desire to transfer primarily corporate loans off of their balance sheets in order to circumvent various regulatory requirements and in order to roll over distressed loans. <strong>It is a symptom of a highly leveraged corporate sector and pervasive moral hazard in the financial system. </strong>If a panic were to ensue for the holders of these assets, both the corporate and household balance sheets would suffer substantially. </p> <p>Yet, despite explosive growth, shadow banking assets remain a modest share of total banking assets, and both the central banks and commercial banks continue to support shadow banking with interbank loans. As long as the flow of loans continued, shadow finance should not be the source of a financial panic. Conflicting objectives at the PBOC and CBRC remain the biggest threat to stability in the shadow-banking world, as recent volatility in the&nbsp; interbank market has shown.</p> <p>In the classic set up of shadow financing, a bank transfers an on-balance sheet loan to an off-balance sheet vehicle such as a wealth management product (WMP), trust product, or an asset management plan (AMP). The funding for that “purchase” comes from the private banking division of the bank, which channels clients’ deposits into a shadow banking product.</p> <p>Shadow credit has seen explosive growth in recent years, growing from nearly zero to a 50 trillion RMB phenomenon.6 Even at 50 trillion RMB, however, shadow credit still pales in comparison to assets held by the formal banking system, which had 240 trillion RMB in assets at the end of June 2017. The biggest new category of non-financial credit is that held by investment funds, which include stand-alone funds, as well as asset management subsidiaries of major banks, insurance companies, and brokers. Figure 4 shows that fund assets grew from around 8 trillion RMB at the beginning of 2013 to over 50 trillion by June 2017, a six-fold increase in a little over 4 years to 65% of China’s GDP. Meanwhile, funds’ holding of off-balance sheet credit rose from 1.6 trillion RMB in mid-2015 to a whopping 17 trillion by June 2017 (Figure 4).</p> <p><a href=""><img src="" width="500" height="346" /></a></p> <p>Despite the modest size of shadow financing relative to the banking sector, at 50 trillion RMB, <strong>a panicky unwinding of assets in the shadow banking world can spell serious problems for China. </strong>In fact, China already experienced a panic among non-bank financial institutions in the fall of 2016. Non-bank financial institutions (NBFIs) borrowed from banks (i.e. repos) to finance around 50% of their bond holding as of early 2016. To lower this level of leveraging, the PBOC increased repo rates in the fall of 2016, which caused NBFIs’ leverage ratio to drop by 20%, a 2 trillion RMB reduction in borrowing in one month.</p> <p>In any other market, this would have caused a panic in the interbank bond market and distress in a number of NBFIs. <strong>In China, however, NBFIs hardly sold any bond holdings. The reason for calmness is that many shadow banking participants, including funds, insurance companies, and brokers, had access to the interbank market and thus access to a nearly limitless amount of money provided, ultimately, by the central bank.</strong></p> <p>&nbsp;</p> <p><a href=""><img src="" width="500" height="446" /></a></p> <p>Even when short-term repos shrank rapidly, NBFIs still received longer-term facilities from the PBOC and the banks. PBOC lending to banks nearly doubled in 2016 alone, from 5 trillion RMB outstanding to nearly 10 trillion RMB. Meanwhile, banks took PBOC money, which increased the money supply through the multiplier effect, and lent an additional 10 trillion RMB to NBFIs in the same period. </p> <p>Although PBOC liquidity can avert crises, too much liquidity conflicts with other policy objectives. In recent months, the PBOC has increased interbank rates intentionally in order to deter too much leveraging by smaller banks and NBFIs, as well as to discourage capital flight. Given the high indebtedness of the corporate and government sectors, higher rates made debt rollover much more difficult and costly. <strong>Higher rates also have slowed down bond issuance. Monthly bond issuance (net) was around half the level in spring of 2017 compared to levels in the spring of 2016.</strong></p> <p>As long as the central bank is not compelled to stop the flow of liquidity and as long as regulators do not place any hard limit on the amount that NBFIs can borrow, rising shadow credit in itself likely will not be the trigger of a systemic financial crisis. <strong>However, if the PBOC neglected to provide sufficient liquidity for long periods of time due to another policy priority, as it did in 2013 and 2014, interbank rates will spike up, indicating a panic in the entire financial market (Figure 5).</strong> </p> <p><img src="" width="500" height="304" /></p> <p>Recent regulatory actions, although having a muted impact compared to 2013, already caused greater fluctuation in interbank rates starting in late 2016, reflecting nervousness among banks. Also, central bank provision of credit will necessarily lead to a relatively fast increase in money supply</p> <p>* * * </p> <p><span style="text-decoration: underline;"><strong>CAPITAL FLIGHT</strong></span></p> <p>As debt accumulates in a country, expectation of future growth may decline, and wealthy households may be afraid of a massive tax in the future to help bail out the financial system.9 These considerations may prompt wealthy households to move money out of a country, depleting a country’s foreign exchange reserve and forcing a dramatic maxi-devaluation of the currency. These events could in turn trigger severe inflation, high interest rates, and substantial asset depreciation. Prior to 2013, severe capital flight was considered only remotely possible in China. However, between the middle of 2014 and the beginning of 2017, China’s foreign exchange reserves lost nearly 1 trillion USD. The question is no longer whether massive capital flight is possible; it clearly is possible. The main question now is whether the Chinese government can prevent capital flight of the same scale in the near future. <strong>Given the enormous trade flows that go through China and China’s large monetary base, China remains highly vulnerable to another bout of capital flight.</strong></p> <p>To begin, I assess how ample China’s foreign exchange reserves are against capital flight. Figure 6 shows that the foreign exchange reserves, as calculated in the RMB-denominated PBOC foreign exchange assets numbers, used to be over 20% of money supply and 55% of household savings deposits as of mid 2014. In the subsequent two years, however, the depletion of the reserves and continual increase in the money supply have lowered these ratios to just above 10% for money supply and 30% for household savings. In other words, if households and firms were to move just 10% of money supply overseas, China’s FX reserves would basically be depleted. The need for China to increase its money supply directly links its domestic credit bubble to a potential crisis triggered by capital flight.</p> <p><img src="" width="500" height="404" /></p> <p>The legal channel for moving money out of China by and large is composed of two steps. First, banks have to convert RMB into US dollars for customers. Second, customers have to get their banks to wire the converted US dollars to Hong Kong or other offshore locations. Figure 7 shows the ebbs and flows of banks’ net conversion (negative denotes conversion into dollar) and banks’ net remittance (negative denotes moving funds out of China) on behalf of customers, as well as monthly changes in the FX reserves, including reserves net of the valuation effect.10 As one can see, these numbers largely correlate with each other. That is, when bank customers convert RMB savings into dollars, banks have to buy more dollars from SAFE to satisfy dollar demand, thus depleting the FX reserves. We saw two major waves of outflows in recent years, one in the fall of 2015 and the other in early 2016. In both waves, monthly reserves depletion reached 100 billion USD while close to that amount was converted into dollars or even moved offshore.</p> <p><img src="" width="500" height="320" /></p> <p>Onshore entities have converted much less RMB into dollars since 2Q 2016, compared with late 2015. This obviously was the result of escalating capital control measures. These measures have included limitations on corporations to swap RMB into US dollars without underlying trade invoices, checks on the veracity of trade invoices, higher hurdles for individuals to convert RMB into dollars, crackdowns on underground banks and popular offshore locations to convert money, including Hong Kong and Macau. Faced with increasingly draconian capital controls, exporters who earned USD increasingly opted to receive payment abroad (i.e. in Hong Kong). Meanwhile, importers exaggerated imports in order to remit more money overseas. One can estimate the extent of this phenomenon by subtracting gross export receipts by onshore banks from the monthly gross exports numbers and subtracting monthly imports from import invoices that onshore firms have paid to offshore counterparties (Figure 8). As one can see, such trade exaggerated invoicing led to monthly outflows of 80 billion USD in September 2015. Exchange regulations have lowered the level of such outflows, but they by no means have disappeared. <strong>Through most of 2017, China still lost 20 to 30 billion USD per month to trade misinvoicing or offshore payments of export.</strong></p> <p><img src="" width="500" height="411" /></p> <p>Figure 9 shows the major categories of gross outflows from China. As one can see, repayment of FX debt and outward FDI were two major channels through which money flowed out of China in the fall of 2015 and early 2016. After March 2016, new FX regulations, which put a monthly and regional ceiling on outward FDI and FX debt repayments, managed to control outflows in these two categories to less than 10 billion USD per month. This was a great success for Chinese capital control. However, even with the advent of tighter regulations, China continued to struggle with payments for services to counterparties overseas.<strong> Chinese banks sold 30 to 50 billion dollars per month to customers who traveled, shopped, received medical care, and studied overseas (Figure 9).</strong></p> <p><img src="" width="500" height="348" /></p> <p>The open current account and Chinese citizens’ trips overseas continued to provide ample opportunities to move money out of China or to spend money outside of China. <strong>As long as the authorities do not close down China’s border to outward travel or to devalue the currency severely, monthly net outflows of over 100 billion USD remain possible.</strong> If this were to happen for a few months, it may lead to a crisis of confidence in the RMB, which further accelerates outflows. As seen in the case of Russia from 2012 to 2013, the result may not be catastrophic, but maxi-devaluation would lead to several years of negative growth, some external default, and asset deflation. As will be discussed in the next section, if this were to happen in lockstep with an international panic about the entire emerging market or China, the squeeze on China may be worse.</p> <p>* * * </p> <p><span style="text-decoration: underline;"><strong>SUDDEN STOP OF INTERNATIONAL CREDIT</strong></span></p> <p>The common perception is that China drastically pulled back on its international borrowing in the aftermath of the devaluation episode on August 11, 2015. Thus, the possibility of a sudden stop, i.e. sudden withdrawal of credit to China, is much smaller today than prior to August 2015. In any event, as a share of GDP, official Chinese external debt remains modest.</p> <p>Yet, two concerns remain. <strong>If one included Hong Kong external debt in the calculation, which is reasonable because Hong Kong is a part of China and because Chinese firms and banks borrow aggressively through Hong Kong subsidiaries, Chinese external debt is much less modest at over 1.9 trillion dollars, over a trillion of which is short-term interbank borrowing. </strong>Second, on the margin, China has met outflows with aggressive external borrowing. As such, a sudden stop in foreign credit to Chinese banks and companies may once again lead to large-scale net outflows from China, which may lead to a combination of sizable devaluation and defaults on external debt. While the PBOC printing press can mitigate a domestic crisis, the PBOC cannot print foreign currencies and cannot stop an externally originated panic.</p> <p>On the face of it, official figures on external debt suggest a whopping 400 billion US dollar repayment, followed by some modest increase in external debt in recent months. But was this really the case? I turn to Bank for International Settlement (BIS) statistics, which provide a much more comprehensive look at cross-border borrowing by financial and non-financial entities. The BIS reported “locational” statistics, which calculates debt by the locations of the registered addresses of the borrowers. Obviously, we assume that most of the borrowing by entities domiciled in China was done by Chinese entities. In addition, however, Chinese entities could be borrowing through subsidiaries overseas, which would be difficult to track using locational statistics. For example, a Chinese-owned company registered in Luxemburg would be reported as a Luxemburg-based borrower. Fortunately, the vast majority of “overseas” borrowing by Chinese companies and banks still takes place in Hong Kong. Assuming that much of the marginal cross-border borrowing conducted in Hong Kong was done by mainland entities, we add the BIS numbers for mainland located borrowers to the BIS statistics on Hong Kong borrowers, but also net out Hong Kong banks’ lending to mainland entities to avoid double-counting.</p> <p>BIS figures displayed in Figure 10 show that although there was a slight hiccup after August 2015, borrowing resumed soon thereafter. Still, just looking at mainland-domiciled companies and banks, external debt dropped by nearly 200 billion USD after August 2015. Once we included external borrowing in Hong Kong, however, Greater China’s external deleveraging was only 80 billion US dollars. In the year since August 2015, Hong Kong’s cross border debt jumped by almost 100 billion USD. Thus, including Hong Kong-domiciled Chinese borrowers, Chinese external debt reached 1.9 trillion USD by Q1, 2017. That figure likely will be over 2 trillion USD by the end of 2017.</p> <p><img src="" width="500" height="333" /></p> <p>What gave rise to the jump? <strong>One hypothesis is that Chinese firms, especially the SOEs, were able to take advantage of Hong Kong’s dollar-pegged currency to continue borrowing in the international market. If they couldn’t borrow directly themselves, they would get their Chinese banks to borrow through the global interbank market and on-lend to them. Another hypothesis is that Hong Kong banks borrowed heavily in the international market because of the surge in demand for </strong><strong>mortgages in Hong Kong as the housing market heated up in 2015 to 2016.</strong></p> <p>BIS statistics on Hong Kong banks suggest that much of the money did not stay in Hong Kong. In essence, Hong Kong banks borrowed heavily from the international market in the year after August 2015. If they borrowed the money for the Hong Kong housing market, Hong Kong banks’ cross-border claims on banks and companies should not have gone up because the purpose of the money would be to finance activities in Hong Kong. BIS numbers, however, show a marked increase in cross-border claims.</p> <p>Thus, the surprisingly smooth increase in Chinese external borrowing after August 2015 was due mainly to aggressive international borrowing by Hong Kong-domiciled Chinese banks and companies, which on-lent the funds to parents and affiliates in mainland China and elsewhere. The scale of this operation was roughly 140 billion US dollars since August 2015. In essence, anticipating foreign banks restricting or even pulling credit lines from mainland-based companies, <strong>the PBOC might have coordinated Hong Kong-based Chinese banks to borrow aggressively in the international market so as to on-lend the funds to Chinese banks and companies facing credit calls from their foreign lenders.</strong></p> <p>Because Hong Kong-domiciled mainland Chinese banks and companies were able to borrow directly from international banks, they did not draw from China’s rapidly dwindling FX reserves for debt repayment or overseas investment. In fact, Chinese entities may be borrowing dollars from foreign or Chinese banks in order to replenish the FX reserves. Basically, if an SOE borrowed 10 billion USD from international creditors to invest in or swap back to China, the 10 billion would be added to the FX reserves. Figure 11 shows that prior to the third quarter of 2014, both Chinese foreign exchange reserves and Chinese external borrowing increased on a quarterly basis. Into 2015, however, China’s foreign exchange reserves dropped in every quarter, but China’s external borrowing, including Hong Kong, rose in the majority of quarters, especially in 3Q, 2015. Without the ability to borrow massively through Hong Kong, China’s foreign exchange reserves would have diminished by an additional 140 billion USD, all else being equal.</p> <p><img src="" width="500" height="423" /></p> <p>Through Chinese policies to smooth China’s external leveraging by increasing borrowing through Hong Kong, the world’s exposure to the Chinese financial system also grew substantially. If one added cross-border liabilities of Chinese financial institutions, including international bonds issued by financial institutions, to the cross-border liabilities of Hong Kong-domiciled financial institutions, the world has lent Chinese and Hong Kong-based financial institutions a whopping 1.2 trillion USD as of 1Q 2017, most of it presumably in short-term interbank loans (Figure 12). </p> <p><img src="" width="500" height="275" /></p> <p><strong>What can go wrong? </strong>When a bank in London lends to a Hong Kong-based bank, the presumptions are that the ultimate risks are with relatively liquid assets denominated in a freely tradable currency and that credit risks are managed strictly. None of these assumptions hold up. If the London bank lent to a subsidiary of the Big Four state banks, such as BOCHK, the funds may be lent to an SOE, which immediately converts the funds into RMB to invest in China. Like other illiquid investment in China, borrowers may not generate sufficient cash flows with which to repay interest on the loans. Perhaps, like Huishan, the value of collaterals provided by the borrower is inflated. Finally, when repaying their dollar-denominated debt, a Chinese company would need to convert RMB into USD, but SAFE may not allow a Chinese company to do so in order to meet internal targets on net conversion for the month. All of these events can create risks for the Chinese banks and indirectly for their foreign creditors.</p> <p><strong>In the past, no one would have questioned China’s ability to use its reserves to repay foreign creditors, but with the rapid dwindling of its FX reserves in recent months and, as it turns out, the rapid increase of its foreign debt, China may no longer have sufficient liquid reserves to meet these liabilities, especially the 1.2 trillion USD in interbank liabilities which tend to be short term. </strong>If foreign creditors one day discovered the precarious nature of their loans to Hong Kong or China- domiciled companies, or if an interest rate spike in the United States caused a reversal of the flow of funds to emerging markets, Chinese and Hong Kong banks may suddenly find themselves unable to roll over the massive amount of liability to foreign banks.</p> <p><strong>To be sure, these Chinese banks may be able to draw from China’s foreign exchange reserve to meet these calls. Even if Chinese banks only needed a couple hundred billion from the FX reserves to repay foreign counterparties, however, China may not want to expend a sizable portion of its dwindling liquid reserves to repay debt</strong>. For a Chinese government obsessed with control, defaulting on global obligations is much preferred over the uncertainty of running out of reserves. </p> <p><strong>If defaults were to occur, the global financial market would lapse into turmoil</strong>.<strong> For China, however, its foreign funding also will be cut off, and every connected tycoon and princeling will desperately try to obtain some part of the remaining foreign exchange reserve. </strong>After the reserves dwindle some more throughout this process,<strong> the government will realize that the only way to stop the loss of reserves is a maxi-devaluation, which destroys the wealth of these billionaires. </strong></p> <p><strong>Unlike in the case of a domestically generated crisis, the PBOC will be powerless to stop many of the deleterious consequences. </strong>To be sure, the PBOC can use draconian capital control to stop outflows, but events in the past two years have shown that the PBOC used a mixture of capital control and additional external borrowing to meet outflows demand. <strong>Without additional external funding, it would be very hard for the PBOC alone to stop politically connected insiders from moving sizable amounts of funds out of China. </strong>As Russia discovered in 2013, maxi-devaluation, followed by an aggressive interest rate hike, may be the only effective way of preserving the foreign exchange reserve, presumably still the highest priority for China’s FX policy.</p> <p>* * * </p> <p><em>Shih's conclusion:</em></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>As credit in China continues its rapid build-up, an increasing number of scholars, policy makers, and investors wonder how long China can sustain such a high pace of leveraging before a financial crisis. Yet, analysts of past&nbsp; bubbles also underestimate the extent to which the ruling Chinese Communist Party controls nearly every aspect of the financial system through party committees in every financial institution in China. This control decreases the chance of panic selling, often the trigger of a crisis. In the analysis I calculate outstanding debt and interest payments, followed by analysis of four plausible scenarios of financial crisis in China: <strong>household defaults, shadow banking panic, capital flight, and a sudden stop of international lending. </strong></p> <p>&nbsp;</p> <p><strong>I conclude that China’s greatest vulnerability resides in its dwindling foreign exchange reserve and escalating external debt, which one day can trigger a confluence of maxi-devaluation, external defaults, and sharp asset price depreciation.</strong></p> </blockquote> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="617" height="381" alt="" src="" /> </div> </div> </div> BIS Bond Business Central Banks China Chinese Communist Party Chinese government Counterparties Creditors Debt default Economy Economy of the United States Finance Financial crisis of 2007–2008 Financial ratios G-20 Great Recession Hong Kong Household debt Housing Market Insurance Companies International Monetary Fund Mercator Institute Monetary Base Money Money Supply Moral Hazard Morgan Stanley National debt of the United States Nominal GDP None People's Bank of China Real estate Reality Shadow Banking Shadow banking system Systemic risk Volatility Mon, 23 Oct 2017 19:56:55 +0000 Tyler Durden 605846 at Why The Next Stock Market Crash Will Be Faster And Bigger Than Ever Before <p><a href=""><em>Authored by Simon Black via,</em></a></p> <p>US stock markets hit another all-time high on Friday.</p> <p>The S&amp;P 500 is nearing 2,600 and the Dow is over 23,300.</p> <p><strong><em>In fact, US stocks have only been more expensive two times since 1881. </em></strong></p> <p>According to Yale economist Robert Shiller&rsquo;s Cyclically Adjusted Price to Earnings (CAPE) ratio &ndash; which is the market price divided by ten years&rsquo; average earnings &ndash; the S&amp;P 500 is above 31. The last two times the market reached such a high valuation were just before the Great Depression in 1929 and the tech bubble in 1999-2000.</p> <p>Some of the blame for high valuation goes to the so-called &ldquo;FANG&rdquo; stocks (Facebook, Amazon, Netflix and Google), whose average P/E is now around 130.</p> <p><em><strong>But there&rsquo;s something different about today&rsquo;s bull market...</strong></em></p> <p><em><strong>Simply put, everything is going up at once.</strong></em></p> <p><a href=""><em><strong><img alt="" src="" style="width: 600px; height: 313px;" /></strong></em></a></p> <p>Leading up to the tech bubble bursting, investors would dump defensive stocks (thereby pushing down their valuations) to buy high-flying tech stocks like Intel and Cisco &ndash; the result was a valuation dispersion.</p> <p>The S&amp;P cap-weighted index (which was influenced by the high valuations of the S&amp;P&rsquo;s most expensive tech stocks) traded at 30.6 times earnings. The equal-weighted S&amp;P index (which, as the name implies, weights each constituent stock equally, regardless of size) traded at 20.7 times.</p> <p>Today, despite sky-high FANG valuations, the S&amp;P market-cap weighted and equal-weighted indexes both trade at around 22 times earnings.</p> <p>Thanks to the trillions of dollars printed by the Federal Reserve (and the popularity of passive investing, which we&rsquo;ll discuss in a moment), investors are buying everything.</p> <p>In a recent report, investment bank Morgan Stanley wrote:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>We say this not as hyperbole, but based on a quantitative perspective&hellip; Dispersions in valuations and growth rates are among the lowest in the last 40 years; stocks are at their most idiosyncratic since 2001.</strong></p> </blockquote> <p>So, ask yourself&hellip; With stocks trading at some of the highest levels in history, is now the time to be adding more equity risk?</p> <p>Or, as billionaire hedge fund manager Seth Klarman notes&hellip;<em><strong> &ldquo;When securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.&rdquo;</strong></em></p> <p>Volatility &ndash; as measured by the Volatility Index (VIX) &ndash; remains below 10 (close to its lowest levels in history). For comparison, the VIX hit 89.53 in October 2008, as the market plunged.</p> <p><strong>We haven&rsquo;t seen a 3% down day since the election. And if that holds through the end of the year, <em>it will be the longest streak in history.</em></strong></p> <p>And this false sense of security comes just as the main driver of this bull market &ndash; the trillions of dollars global central banks printed after the GFC &ndash; is coming to an end.</p> <p>Markets saw around $500 billion of accommodation in 2016. And &ldquo;quantitative tightening&rdquo; should suck about $1 trillion out of the markets in 2018&hellip; That&rsquo;s a $1.5 trillion swing in two years. And it&rsquo;s a major headwind for today&rsquo;s already overvalued markets.</p> <p><strong>But that&rsquo;s just one issue. Remember, we also have&hellip;</strong></p> <p><u><em><strong>Slowing global growth, record-high debt, potential nuclear war with North Korea, a rising world power in China, and cyber terrorism (just to name a few of the potential pitfalls) &hellip;</strong></em></u></p> <p>Still, investors continue to put money to work without a care in the world.</p> <p>And more and more of that money is being invested with ZERO consideration of market valuation &ndash; thanks to the rise of passive investing.</p> <p>Through July 2017, exchange-traded funds (ETFs) took in a record $391 billion &ndash; surpassing 2016&rsquo;s record inflow of $390 billion.</p> <p>According to Bank of America, 37% of the S&amp;P 500 stocks are now managed passively.</p> <p>Investors in these passive index funds and ETFs pay super-low fees in return for an automated investment process. For example, any money invested in a passively-managed S&amp;P 500 ETF is equally distributed (based on market cap weighting) across the 500 S&amp;P companies&hellip; So, companies like Apple, Google, Facebook and Amazon get the biggest share of that money.</p> <p><strong>The result&hellip; as this dumb money rushes in, the biggest stocks get even bigger &ndash; despite their already ludicrous valuations.</strong></p> <p>And the biggest players in this field are amassing <em>a tremendous amount of power</em>.</p> <p>Vanguard, which introduced the world&rsquo;s first passive index fund for individuals in 1976, has $4.7 trillion in assets (around $3 trillion of that is passive).</p> <p>BlackRock, the world&rsquo;s largest asset manager and owner of the iShares ETF franchise, <strong>is approaching $6 trillion in assets</strong>. And only 28% of BlackRock&rsquo;s assets are actively managed.</p> <p><strong>Passive funds owned by these two firms are taking in $3.5 billion a day.</strong></p> <p>Bank of America estimates Vanguard owns 6.8% of the S&amp;P 500 (and stakes of more than 10% in over 80 S&amp;P 500 stocks).</p> <p>And as long as the money keeps flowing into passive funds, the bubble keeps expanding.</p> <p><strong>At a time of exceptional market risk, more and more money is being managed without any notion of risk.</strong></p> <p><em><u><strong>But what happens when these uninformed and value-agnostic investors have to sell?</strong></u></em></p> <p>Humans are emotional creatures. And when we do finally see that 3% (or even larger) down day, investors will rush for the exits.</p> <p>And the computers will pile on the selling (every model based on historically low volatility will completely break when volatility spikes).</p> <p>But when the wave of selling comes, who will be there to buy?</p> <p><strong>As these passive funds dump the largest stocks in the world, we&rsquo;ll see an air pocket&hellip; nobody will be there to hit the bid.</strong></p> <p><strong>And when the drop comes, it will come faster than anyone expects.</strong></p> <p>So, while most investors are ignoring risk, I&rsquo;d advise you to use this record-high stock market to your advantage&hellip;</p> <p><em><strong>Sell some expensive stocks to raise cash. Own some gold. And allocate capital to sectors of the market that haven&rsquo;t been blown out of proportion thanks to the popularity of passive investing. That means <a href=";utm_medium=email&amp;utm_campaign=201710_4p&amp;utm_content=notes_stocks_high" rel="noopener" target="_blank">looking at smaller stocks and stocks outside the US</a>.</strong></em></p> <p>Even if stocks go up for another year, which they may, it&rsquo;s simply not worth the risk to chase them higher&hellip; Because<strong> the downturn will be devastating.</strong></p> <p><a href=""><em>And to continue learning how to safely grow your wealth, I encourage you to <span class="link tve_evt_manager_listen tve_et_click">download our free Perfect Plan B Guide</span>.</em></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="600" height="313" alt="" src="" /> </div> </div> </div> Apple B+ Bank of America Bank of America Blackrock Business Central Banks China Dow 30 Dumb Money Economy Exchange-traded fund Federal Reserve Finance Funds Google Great Depression Hedge fund Index fund Investment Market Crash Mathematical finance Money Morgan Stanley Next Stock Market Crash North Korea Robert Shiller S&P S&P 500 S&P 500 Index Seth Klarman Stock market US Federal Reserve VIX Volatility Yale Mon, 23 Oct 2017 19:35:00 +0000 Tyler Durden 605843 at CLOs – "Safe" CDOs – Are Booming Again <p>Last week we explained<a href=""> how<strong> junk bond managers were buying increasing amounts of equities</strong></a><strong> to &ldquo;juice&rdquo; their portfolios </strong>and propel their funds higher in the performance rankings.</p> <p><a href=""><img src="" style="width: 600px; height: 318px;" /></a></p> <p>While this struck us as a relatively recent development,<strong> the tried-and-trusted method of trading more risk for more yield is going gangbusters in the CLO (Collateralized Loan Obligations) market in 2017</strong>...</p> <p><a href=""><img height="337" src="" width="600" /></a></p> <p>In <a href="">&ldquo;Hunt for Yield Fuels Another Boom in Another Complex, Risky Security&rdquo;, the WSJ notes:</a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;<strong>The CLO boom is the latest sign of the ferocious hunt for yield permeating markets. </strong>Stellar performance over the past year has made CLOs increasingly hard to ignore for investors like insurance companies and pension funds. CLOs carve up a portfolio of bank loans to highly indebted companies into slices of securities with different levels of risk.</p> <p>&nbsp;</p> <p><strong>The securities at the bottom of the CLO stack offer the highest potential source of returns, but they are also the first to absorb losses if there are defaults in the underlying loan portfolio.</strong> The more senior slices offer lower returns but are more insulated from losses. CLOs are often lumped together with other alphabet-soup acronyms of the financial crisis, such as more toxic CDOs, or collateralized debt obligations. But CLOs actually weathered the financial crisis well: Investors who bought at the top of the market in 2007 suffered paper losses, but there were no defaults at all for the highest-rated securities.&rdquo;</p> </blockquote> <p>The &ldquo;boom&rdquo; terminology applied by the WSJ for 2017 is apt:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;...<strong>investors seeking yield are overcoming their skepticism and buying into securities that rely on financial engineering to juice returns. Volumes of CLOs, or collateralized loan obligations, hit a record $247 billion in the first nine months of the year,</strong> according to data from <a href="">J.P. Morgan Chase</a> Co. Fueled by a wave of refinancings and nearly $100 billion in new deals, that far outpaces their recent full-year high of $151 billion in 2014 and the pre-crisis peak of $136 billion in 2006.&rdquo;</p> </blockquote> <p>During 1994-2013, Standard and Poor&rsquo;s estimated that losses on B-rated securities were only 1.1%. That doesn&rsquo;t prevent some conservative investors from conflating the CLOs with the now-infamous CDOs, many of which were linked to subprime mortgages and spread and amplified losses in the U.S. housing market. One breed of CDOs are on a comeback path of their own, with more investors returning to them during an aging bull market.</p> <p><strong>Many people were &ldquo;burnt by these acronyms from the crisis,&rdquo; </strong>said Zak Summerscale, head of credit fund management for Europe and Asia Pacific at Intermediate Capital Group .</p> <p>CLOs are essentially a subset of the CDO market. They are generally backed by senior secured loans on sub-investment grade companies &ndash; not sub-prime mortgages, as was the case with many of the worst-performing CDOs during the crisis. Despite the superior performance of CLOs, the general concept that CLOs are &ldquo;bulletproof&rdquo; while CDOs are &ldquo;worthless&rdquo; is incorrect. As former portfolio consultant, Eknath Belbase, noted <a href=""></a> &ldquo;<strong>What really matters is the collateral pool and the inter-asset correlation</strong>. You can create a very diversified (CDO) pool, NOT by collecting BBB rated tranches from the same type of badly underwritten mortgage bonds, but from securitized debt of, for example, corporate bonds and emerging market debt from a wide set of regions and industries. This could, in theory, be more diversified than a concentrated CLO that focuses on bank loans to just 2 US sectors, for example energy and mining companies. Overall, when compared within all fixed-income securities, CLOs and CDOs are much more similar than they are different (lions and tigers).&rdquo;</p> <p>Rick Rider, Blackrock&rsquo;s CIO for global fixed income told the WSJ <strong>that &ldquo;The demand for things like CLOs&hellip;.is extraordinary,&rdquo;</strong> - not surprising when the performance of BB-rated CLOs has matched the NASDAQ since JPM began recommending CLOs more than a year ago, the WSJ shows.</p> <p><em><strong>Market returns since JPM recommended buying CLOs last July</strong></em></p> <p><a href=""><img alt="" src="" style="width: 599px; height: 339px;" /></a></p> <p>The recommendation was made by strategist, Rishad Ahluwalia, although the Journal reported that he is more cautious on the outlook. <strong>&ldquo;CLOs have been an absolute home run,&rsquo; said Mr. Ahluwalia, though he added such chunky returns aren&rsquo;t repeatable.&rdquo;</strong></p> <p>Other commentators are divided in their views, although one comment did lead to raised eyebrows.</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;Renaud Champion, head of credit strategies at Paris-based hedge fund La Française Investment Solutions, likes AAA-rated CLO tranches but with a twist: leverage. Mr. Champion says he buys senior European CLO tranches and borrows money against them to increase the size of his position between five and 10 times. That can amplify gains&mdash;and losses&mdash;significantly.<strong> &lsquo;The difference between now and a year ago is the availability of leverage,&rsquo; </strong>he said. Bankers say only a small proportion of CLO buyers use leverage and emphasize that trades are subject to daily margin calls. That means investors have to post cash to cover mark-to-market losses on a position, which in turn limits how much they are willing to borrow. &lsquo;The leverage in the system today is a fraction compared to pre-crisis,&rsquo; said J.P. Morgan&rsquo;s Mr. Ahluwalia.&rdquo;</p> </blockquote> <p>Following the crisis, funds that manage a CLO are forced by regulators to retain 5% of a security issuance. <strong><em>That is undoubtedly a positive but, as ever, we struggle to think of an industry which is prone to more pro-cyclical risk-taking.</em></strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="711" height="399" alt="" src="" /> </div> </div> </div> Asia Pacific Blackrock Bond Business CDO Collateralized debt obligation Collateralized Debt Obligations Collateralized loan obligation Collateralized Loan Obligations Finance Financial crisis of 2007–2008 fixed Funds High-yield debt Housing Market Insurance Companies Loans Money Mortgage-backed security NASDAQ Structured finance Subprime mortgage crisis Subprime Mortgages United States housing bubble Mon, 23 Oct 2017 19:20:00 +0000 Tyler Durden 605821 at Good Companies Don't Always Make Good Stocks <p><em><a href="">Authored by Vitaliy Katsenelson via,</a></em></p> <p>I was recently going through a new client&rsquo;s portfolio and found it full of the likes of Coca-Cola, Kimberly-Clark and Campbell Soup - what I call (pseudo) bond substitutes. Each one is a stable and mature company. Your mother-in-law would be proud if you worked for any one of them. They have had a fabulous past; they&rsquo;ve grown revenues and earnings for decades. They were in their glory days when most baby boomers were coming of age. <strong>But the days of growth are in the rearview mirror for these companies - their markets are mature, and the market share of competitors is high. </strong>They can innovate all day long, but consumers will not be drinking more fizzy liquids, wearing more diapers or eating more canned soup.</p> <p><strong>If you were to look at these companies&rsquo; financial statements, you&rsquo;d be seriously under-impressed. </strong>They paint a stereotypical picture of corporate old age. Their revenues haven&rsquo;t grown in years and in many cases have declined. Some of them were able to squeeze slightly higher earnings from stagnating revenue through cost-cutting, but that strategy has its limits &mdash; you can only squeeze so much water out of rocks (unless someone like 3G Capital takes the company, sells its fleet of corporate jets and starts mercilessly slashing expenses like the private equity firm did at Budweiser and Heinz). These businesses will be around ten years from now, but their profitability probably won&rsquo;t be very different from its current level (not much higher, but probably not much lower either).</p> <p><strong>However, if you study the stock charts of these companies, you won&rsquo;t see any signs of arthritis; not at all - you&rsquo;ll have the impression that you&rsquo;re looking at veritable spring chickens, as these stocks have gone vertical over the past few years. </strong>So this is what investors see - old roosters pretending to be spring chickens.</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 300px;" /></a></p> <p><strong>Let&rsquo;s zoom in on Coke. Unlike the U.S. government, Coca-Cola doesn&rsquo;t have a license to print money (nor does it have nuclear weapons). </strong>But it is a strong global brand, so investors are unconcerned about Coke&rsquo;s financial viability and thus lend money to the company as though it were the U.S. government. (Coke pays a very small premium to Treasury bonds.) Investors ignore what they pay for Coke; they only focus on a singular, shiny object: its dividend yield, which at 3 percent looks like Gulliver in Lilliput (fixed-income) land.</p> <p>And as investors do so, they are ignoring an inconvenient truth:<strong><em> They are paying a very pretty penny for this dividend. Coke is trading at 23 times earnings. This is not the first (nor will it be the last) time this has happened to Coke stock. </em></strong>Investors who bought Coke in 1998 were down 50 percent on their purchase ten years later and have not broken even for more than 15 years.</p> <p>And this brings us to the problem with shiny objects:<strong> They don&rsquo;t shine forever.</strong> Investors are paying 23 times earnings for a very mature business. Consumption of Coca-Cola&rsquo;s iconic carbonated beverage is on the decline in health-conscious developed markets, and you can clearly see this in its income statement &mdash; sales and earnings have languished over the past decade.</p> <p>Let&rsquo;s say Coke does what it has not done over the previous decade and grows earnings 3 percent a year, despite the shift in consumer preferences away from sugar-powered and chemically engineered (diet) drinks. If at the end of this journey its price&ndash;earnings ratio settles to its more or less rightful place of 13 to 15 times, then jubilant Coke investors will have lost a few percentage points a year on Coke&rsquo;s price decline. Thus the bulk of the dividend will have been wiped out by Coke&rsquo;s P/E erosion.</p> <p><strong>Coca-Cola to some degree epitomizes the U.S. stock market.</strong> <em>If over the next ten years, despite all the headwinds it faces, Coke is able to grow earnings at a faster pace than 3 percent and interest rates remain at current levels (so that the company&rsquo;s P/E stays at the present &ldquo;I want this 3 percent dividend at any cost&rdquo; level), then its stock will provide a decent return.</em><strong> However, there is a lot of wishful thinking in this paragraph.</strong></p> <p><em>If interest rates rise and/or consumers&rsquo; tastes continue to shift from high-margin sugary drinks to low-margin (commodity) water, then Coke will be hit from both sides - its earnings will stall, and investors will take their eyes off its shiny dividend. Suddenly, they will see Coke for what it is: a 124-year-old arthritic American icon whose growth days are sadly behind it.</em></p> <p><strong>I am using Coke just to demonstrate the importance of differentiating between a good company (which Coke is) and a good stock (which it is not),</strong> and the danger of having an exclusive focus on a shiny object &mdash; dividends &mdash; when you are analyzing stocks.</p> <p>&nbsp;</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="694" height="347" alt="" src="" /> </div> </div> </div> Bond Business Coca-Cola Coke Corporate Jets Diet Coke Dividend Dividend yield Economy Financial ratios Food and drink Investment Market Share New Coke Price–earnings ratio Private Equity The Coca-Cola Company US government Mon, 23 Oct 2017 19:04:40 +0000 Tyler Durden 605840 at New York AG Launches Civil Rights Probe Into Weinstein Company <p>Thomas Barrick&rsquo;s Colony Capital might want to hold off on its planned purchase of &ldquo;some or all&rdquo; of the Weinstein Company&rsquo;s major assets, <strong>because the company might need those to settle a civil probe that&rsquo;s been opened by New York Attorney General Eric Schneiderman.</strong></p> <p>According to the <a href="">New York Times</a> and the <a href="">New York Post,</a> Schneiderman&rsquo;s Civil Rights Bureau on Monday sent a subpoena to the Weinstein Company &ndash; which recently accepted an emergency loan from Colony - <strong>seeking a laundry list of documents &mdash; personnel files, criteria for hiring, promoting and firing, formal and informal complaints of sexual harassment or age or gender discrimination, and records of how those complaints were handled, said a source familiar with the investigation.</strong></p> <p>Schneiderman also wants paperwork and communications related to eight settlements that Weinstein reached with accusers that were first reported by the New York Times. The investigation will also examine whether the company should be held financially responsible for any of Weinstein&rsquo;s misconduct.</p> <p><a href=""><img alt="" src="" style="width: 500px; height: 319px;" /></a></p> <p><em>Eric Schneiderman</em></p> <p>The question of who at the company knew what about Weinstein&rsquo;s aggressive behavior has been widely explored since the scandal broke earlier this month. Reporting by the New Yorker suggests that most of the firm&rsquo;s employees knew both Harvey and Bob Weinstein to be difficult, aggressive and abusive in their professional lives &ndash; and some were aware of Harvey&rsquo;s sexual transgressions.</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>&ldquo;No New Yorker should be forced to walk into a workplace ruled by sexual intimidation, harassment or fear,&rdquo;</strong> Schneiderman said in a statement.</p> <p>&nbsp;</p> <p><strong>&ldquo;If sexual harassment or discrimination is pervasive at a company, we want to know.&rdquo; </strong></p> </blockquote> <p>The inquiry will seek to determine whether the company should be held financially liable for Weinstein&rsquo;s behavior, according to the <a href="">NYT</a>.</p> <p>David Boies, a lawyer who has represented Weinstein and the company, said the company and its board were aware of as many as four payouts to women related to Harvey&rsquo;s behavior. Lance Maerov, a board member, said he was told of only one settlement with a woman who complained of misconduct. The company did not return requests for comment on Monday.</p> <p><a href=""><img alt="" src="" style="width: 500px; height: 255px;" /></a></p> <p><em>Harvey Weinstein </em></p> <p>Weinstein was fired by the company&rsquo;s board shortly after the scandal broke. He recently completed a one-week stay at a $2,000-a-night rehab center. While he was there, the LAPD announced it had opened a sex crimes investigation into him &ndash; bringing the number of criminal investigations into Weinstein&rsquo;s behavior to four. They include: The DOJ, LAPD, NYPD and Scotland Yard.</p> <p>As the <a href="">Times </a>points out, civil investigations like this can be very costly. <strong>Those found in violation can face fines and other penalties. In 2015, ConEd was required to pay nearly $4 million to a group of hundreds of female employees </strong>after an investigation by the AG and the Equal Employment Opportunity Commission found multiple instances of sexual discrimination.<br />&nbsp;</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="552" height="352" alt="" src="" /> </div> </div> </div> Colony Capital DOJ Equal Employment Opportunity Commission Eric Schneiderman Feminism Harassment Harvey Weinstein Harvey Weinstein sexual misconduct allegations Human behavior Human sexuality LAPD Law Misconduct New York Post New York Times NYPD Schneiderman’s Civil Rights Bureau Scotland Yard Sexual harassment The Weinstein Company Weinstein Mon, 23 Oct 2017 18:50:00 +0000 Tyler Durden 605841 at Gold Spikes On Massive Volume After Trump's Fed Chair Comments <p>The Dollar index dropped and gold jumped as President Trump told reporters during a meeting with the prime minister of Singapore that he was <strong>&quot;very very close&quot; to a decision on who would be the next chair(person) of The Fed</strong>...</p> <p>Jerome Powell continues to be the front-runner...</p> <p><a href=""><img height="506" src="" width="600" /></a></p> <p><strong>In a span of five minutes, 18,792 gold contracts,</strong> each representing 100 ounces of the metal, traded on the Comex at around 11:55 a.m. in&nbsp;New York - <em><strong>this represents around $2.4 billion notional of sudden buying-panic...</strong></em></p> <p><a href=""><img alt="" src="" style="width: 600px; height: 343px;" /></a></p> <p>&nbsp;</p> <p>Pushing the precious metal above its 100DMA...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 343px;" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="1982" height="1132" alt="" src="" /> </div> </div> </div> American people of German descent Business Cabinet of Singapore Climate change skepticism and denial Comex Donald Trump Politics Politics of the United States Precious metal Precious metals The Apprentice United States US Federal Reserve WWE Hall of Fame Mon, 23 Oct 2017 18:39:44 +0000 Tyler Durden 605831 at "A Utopia Of Hermaphrodites?" <p><a href=""><em>Authored by James Howard Kunstler via,</em></a></p> <h3><u><strong>Down With Sex!</strong></u></h3> <p><a href=""><u><strong><img alt="" src="" style="width: 600px; height: 342px;" /></strong></u></a></p> <p>It&rsquo;s interesting to see how, in a culture so pornified that any nine-year-old can watch sex acts on-screen all the live-long day, <strong>we discover that decorum is absent in American life. </strong>This, at the same time that the more Gnostic political <strong>Leftists want to transform human nature by erasing sexual categories in their quest to create a utopia of hermaphrodites.</strong></p> <p>Sex is bothersome, you know. It comes between people literally and rather awkwardly, and it is fraught with tensions so primitive that it can frighten and shame us. Is it any wonder that these tensions will manifest in a workplace where men and women spend their waking hours? Are you really surprised that sexual attraction is a currency for advancement? That it tends toward the naked exchange of favors?</p> <p><strong>I&rsquo;d submit that the wreck of Harvey Weinstein is a dramatic representation of collapse of the movie industry as we&rsquo;ve known for nearly a century. </strong>The two-hour motion picture exhibited in a large room with a lot of seats is in its death throes. It joins the long-playing album of recorded music and the book-length literary exercise called the novel in the elephants&rsquo; graveyard of art-forms. The fall of HW is just the period at the end of the sentence.</p> <p><strong>The past month has been a bloodbath for the theatrical release of movies. </strong>Supposed blockbusters are being pulled from the empty cineplexes like guest speakers from the college lecture halls. The struggling middle-class doesn&rsquo;t need movie theaters anymore, and the flat-screens at home enable them to get lost in whole fictional worlds that grind on in weekly episodes year after year like so much bratwurst. Who knows how long that phase of show biz will last. In evolution, remember, the climactic form of an organism is often supersized. Think: <em>Baluchitherium</em>, titan of the Oligocene land mammals. (And imagine sex between two creatures the size of tractor-trailer trucks!) The fate of television &ldquo;content&rdquo; like <em>Game of Thrones</em> probably depends on the fitness of an electric grid that is looking pretty sclerotic these days. Personally, I think the show-biz of the future will tend toward puppet shows.</p> <p>Fortunately (or maybe not, depending on your political ideology) sex will still be with us, and its eternal tensions with it. <strong>What is more subject to change is the division of labor. </strong>Most adults I know accept it as axiomatic that social changes they&rsquo;ve seen in their lifetime have become permanent installations in the human condition. That was Tom Friedman&rsquo;s &ldquo;narrative&rdquo; about globalism, which is now fracturing and withering. The same is true of the Gnostic Leftists, who believe they are on a trajectory to exterminate the detested <em>cissexist heteropatriarchy</em>. <strong><em>How do you suppose things will work out in a nation of eunuchs and trannies?</em></strong></p> <p>You&rsquo;ll be surprised, perhaps, at how <em>not</em> permanent these trends may be. <strong>The decadent USA, lacking discipline and decorum, lost in raptures of grandiose techno-narcissism, broadcasting its twerked-up gangsta fantasies while it sucks finished goods from other lands in exchange for janky bonded debt, is becoming the international pariah.</strong> It&rsquo;s a good bet that the tensions arising out of that dynamic will, one way or another, provoke the blow-up of the trade and financial systems that nourished the phase of history now passing &mdash; with plenty of collateral damage in all the other realms of daily life.</p> <p>In the meantime, America sinks into a swamp of sexual excess, sexual preoccupation, sexual confusion, sexual recrimination, and sexual remorse. <strong>The one thing that none of the combatants can agree on is what might pass for sexual normality. The very notion would be taken for a war-cry.</strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="735" height="419" alt="" src="" /> </div> </div> </div> Behavior Fertility Fracturing Human sexual activity Human sexuality Interpersonal relationships None Personal life Pornified Self Sexual acts Sexual intercourse Sexual reproduction Mon, 23 Oct 2017 18:35:54 +0000 Tyler Durden 605839 at The One Economic Indicator That Is Making Goldman Turn Bearish <p>Is there such a thing as too much good news?&nbsp; According to Goldman Sachs, the answer is yes. </p> <p>Over the weekend, <a href="">we reported that per </a>the latest Weekly Kickstart report from Goldman's chief equity strategist, David Kostin, there was only one question on Goldman clients' minds: <strong>when will the current rally, which is about to become the longest in history without a 3% correction, and 333 days without a 5% "drawdown", finally end?</strong></p> <p>&nbsp;</p> <p><a href=""><img src="" width="500" height="359" /></a></p> <p>As usual, Goldman provided a variety of arguments why the rally could continue (passage of tax reform the key upside catalyst), and why it could end, mostly because stocks have never been more overvalued...</p> <p><img src="" width="500" height="367" /></p> <p>... although Kostin warned that usually attempts to time a market correction end in tears:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Catalysts for equity market corrections are notoriously difficult to identify ex-ante. In fact, catalysts can even be difficult to identify in retrospect; historians still debate the cause of the Black Monday plunge although portfolio insurance is viewed as the reason the collapse was so dramatic. We do not expect an imminent drawdown, but the risks identified most frequently by clients may limit medium-term S&amp;P 500 upside.</p> </blockquote> <p>Still, there is one economic indicator that, according to Kostin, has emerged as a red flag of caution. According to Goldman, the most actionable economic indicator currently <strong>is the manufacturing ISM</strong>, which has so far provided the green light for stocks to maintain their ascent (even as "hard" economic data has been anything but stellar in recent weeks):</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Economic growth is the most important driver of corporate earnings and equity performance. Since the Tech Bubble<strong>, S&amp;P 500 returns have generally tracked the pace of US economic activity as captured by the ISM Manufacturing Index</strong>. After dipping in 2Q, the index has surged in recent months <strong>and in September hit 60.8, the strongest reading in 13 years </strong>(since May 2004). The US acceleration matched a surge in global growth; our global Current Activity Indicator shows a 4.9% pace of real economic growth, nearly the fastest in five years.</p> </blockquote> <p>&nbsp;</p> <p> <a href=""><img src="" width="500" height="366" /></a></p> <p>So far so good. The concern, however, is what happens next, and it is here that "too much good news may be bad news." According to Kostin, "<strong>although economic data are extremely strong now, an ISM reading above 60 typically marks the peak of growth and presages economic and equity deceleration</strong>. Since 1980, the ISM has exceeded 60 in eight separate episodes; <strong>four of those lasted only one month</strong>."</p> <p>&nbsp;</p> <p><a href=""><img src="" width="500" height="345" /></a></p> <p>And the punchline: "<strong>Investors buying the S&amp;P 500 at ISM readings of 60 or higher have gone on to suffer negative three- and six-month returns on average as economic activity slowed</strong>." </p> <p>&nbsp;</p> <p><a href=""><img src="" width="500" height="349" /></a></p> <p>In other words, <strong>"an environment of synchronized global growth acceleration today raises the risk of coordinated global slowdown tomorrow." </strong>And that's not even including "coordinated global" tapering by central banks, which sooner or later will be priced in by the market.&nbsp; &nbsp; <strong><br /></strong></p> <p>Furthermore, since much of the "global, coordinated economic growth" was largely a byproduct of China's tremendous credit impulse in the months headed into the 19th Party Congress, which is ending shortly, and as a result China's credit injection is about to slow significantly if not shut outright, the likelihood of a sharp drop in US and global manufacturing surveys is rising rapidly. </p> <p>Finally, keep in mind that despite its caveat of a 2nd year-end S&amp;P price target of 2,650 <span style="text-decoration: underline;"><em><strong>if </strong></em></span>tax reform passes, Goldman's official target for the US market remains 2,400, or nearly 200 points lower. So will market repricing be driven by a slowdown in manufacturing, especially once the full knock-on effects from the recent hurricanes is fully priced in? And will a bearish Goldman prediction finally come true? The answer will be revealed over the next few weeks when the next round of Flash PMIs and ISMs are revealed. </p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="547" height="334" alt="" src="" /> </div> </div> </div> 2015–16 Chinese stock market turbulence Business Central Banks Congress Economic growth Economy Finance Financial crisis of 2007–2008 flash goldman sachs Goldman Sachs Goldman Sachs Great Recession ISM Manufacturing Macroeconomics Rockefeller Center S&P 500 Stock market Stock market crashes Subprime mortgage crisis Weekly Kickstart Mon, 23 Oct 2017 18:19:02 +0000 Tyler Durden 605842 at