This page has been archived and commenting is disabled.
SocGen Models A Chinese Hard-Landing; Sees The S&P Crashing 60%
Now that even permabulls are openly discussing a recession as a possibility for the US economy, a comparable and far more dire scenario is making the mainstream rounds: a China hard-landing.
Earlier today, SocGen decided to model out what what would happen to equities in just such a scenario. In fact, it took it one step further and combined this with what an "EM lost decade", one which increasingly looks more realistic, would look like.
This is what it found:
Our model indicates the US equity market could potentially drop by 30% in the event of an ‘EM lost decade’ and by 60% in the event of a China hard landing (i.e. S&P 500 back to its lows).
The silver lining will depend on just how aggressive the response to such a collapse will be:
The amplitude of the correction would be a function of the policy response. In both scenarios, we think global equities would rebound strongly after
having overshot (i.e. equities to price in a more optimistic scenario).
SocGen then provides the following seven investment recommendations for what would be more or less an apocalypse for risk assets:
While the above are largely self-exlanatory, SocGen adds the following explainer:
The 2015 summer sell-off highlighted how nervous the markets are regarding any risk coming from China: the S&P 500 index lost 11% in one week, the Eurostoxx 50 fell 16% and the Nikkei was down 13%. Whatever the scenario (hard landing or EM lost decade), if China’s GDP growth were to drop by c. 2% between 2015 and 2016, volatility would jump and the equity market would price in a lack of future growth (i.e. via a spike in the risk premium).
And some more details:
‘EM lost decade’ scenario: a square root-shaped equity market
Stressing our equity risk premium model indicates that the S&P 500 could potentially drop by 30% to 1400pts due to a strong move in the risk premium during 2016. In such a scenario, the market could quickly rebound (by year-end 2016) in line with commodity prices. We would expect support from central banks and the resilience of the US and European economies to support developed equity markets, which should gradually recover, albeit to a lower level. We thus imagine a square root-shaped scenario in which European equities would underperform US equities, but would then rebound stronger (on the back of a lower oil price, weaker currency, a more aggressive ECB and more attractive valuations).
‘Chinese hard-landing’ scenario: a V-shaped equity market trend
In our hard-landing scenario, a theoretical drop in China’s GDP growth from 6.9% in 2015 to 3.0% in 2016 and its consequences would have a major impact on global corporate earnings. We would expect a sharp sell-off of global equities in such a scenario. Our risk premium model indicates that the S&P 500 could in theory return to its lows (around 800pts). But then again the deflationist shock could prompt the central banks to turn more aggressive and support the equity markets to prevent the S&P 500 from sliding into such a bear market. We think that after such a shock the global equity market would rebound strongly on a return to growth in China and central banks actions.
* * *
So while hardly coming as a surprise to anyone, the resultant devastation across global equity markets will mean that more than even a US recession, this explains why the Fed's 4th mandate is precisely one that focuses on both Chinese markets and the economy, because suddenly the Fed has realized that the biggest risk to the S&P 500 is not domestic, but one stemming from China whose jugging of a real estate, credit, investment, banking and equity bubble will surely take up all the Fed's resources in the coming years.
»
- 32249 reads
- Printer-friendly version
- Send to friend
- advertisements -
FUCK YOU, S&P 500!!!!! BASTARDS!!!!!!!!!!!!!!!!!!!!!
Exactly as predicted a month ago
http://www.goldsqueeze.com/analysis/tobins-q-technical-analysis-agree-se...
So are we to assume these two scenarios are mutually exclusive? What about scenario 3-- China lost decade and Developed
Markets hard landing and Emerging Markets spelunking expedition?
They always add what it will take to get back to "normal" in these analysis.
I do not think things will go back to "normal" if the S&P tanks 60+%. Think of the mindsets out there after people have lost >60% of pensions and retirement savings. At that point funding Social Security will be a pipedream.
With all the debt in the world there will be a massive fight for the morsels left.
… funny how cheerful the markets get when China closes up for a week’s holiday!
"a more aggressive ECB " I'm wondering what exactly they have in mind...
Or 5 years ago http://hedgeaccordingly.com/2010/01/theoretical-spy-chart-foreshadowing-...
why does it post twice.. do not get it.
… That’s the copy the NSA keeps.
The US will never recover if the S&P 500 crashes 60%. The Fed will never permit such a big drop if it can help it.
US debt and unfunded liabilities are well over $1,720,000 per taxpayer. The dollar must never be allowed to weaken or confidence in the US stock market allowed to falter.
The US economy is sustained by the wealth effect of the US stock market.
The US economy is an illusion and will persist as long as enough people believe.
… would those be The Believers who voted for you-know-who?
dumbass.
the US can continue to pretend this is sustainable for a while longer as long as the SPX trades north of like 1800.
in the end, though, the piper will have to be paid.
the US can not survive longterm unless we let risk be priced correctly and allow the malinvestment to be burned away.
we are selling future YEARS for ever day of this falsehood that the fed is buying.
sign of the last horsemn of the apocalypse: when ZH becomes crowded with fed apologists. the end must be close...
The four horsemen cometh:
https://www.youtube.com/watch?v=BjAmLS14yDs
The only way the S&P will be allowed to drop 60% is if suddenly torrents of retail muppet, mom&pop, dumb money pours in,
and the Fed. cronies can take the other side of the trade; then you can bet your ass you'll hear "PULL IT!!!" echo through the
Eccles building and through out Manhattan.
If the exit doors are welded shut, all the chips stay in the casino. The gamblers might starve, but the casino doesn't lose anything.
+1 Such are the stakes nowadays
Way too much, 60% not this year in my view. Maybe 16/17. I do expect/want a Lower Low to finish the pattern created by man and machine, wave 5 down.
http://tripstrading.com/2015/10/06/sp500-1987-vs-2011-vs-2015-pattern-of...
Wave 5 of a 1 only. Beware what you wish for unless you 100% committed.
Print motherfuckers!
I want my helicopter money like Ben promised!
Fear not...They will!
YUM down 18%, Adobe down 7%, Nuskin down 17%n after hour trading after reported earnings.
funny earlier today the CNBC pumping analyst was saying this is the quarter YUM will turn around and put a 4 star buy rating on this stock with a target price of $100. Good call clowns! lol what planet are these experts from? seriously!
Huh, so do I although I think 60% will be best case in terms of purchasing power...
Does anyone really think the Fed and Treasury are just going give up and let that happen? After 7 years of this stupidity, with their credibility on the line, I am in the camp of doubt. I'd love to see it. But it is way too easy to print money and buy stocks. And then you have that idiot in the Whitehouse, who doesn't want to look bad no matter how much of civilization he has to destroy. There are no adults at the controls--Just idealogues and criminals. They thinking losing everything for some paper that they can print themselves is winning. They are not going to stop. Hitler rode it out until almost the very end in a bunker. These people need a boot on their throat before they will stop.
bring them down to china town !
Sounds just like Climate Modeling. You can get any outcome you want, but the likelihood of it being accurate is next to nothing.
the biggest risk to the S&P 500 is not domestic, but one stemming from China whose jugging of a real estate, credit, investment, banking and equity bubble will surely take up all the Fed's resources in the coming years.
So, China has become too big too fail?
that sounds like a prediction of their perma bear; you know the SG economist, a guy who ZH loves along with Bob Janjuah.
Perma bears of the world unite against the scions of the Status quo of "print to infinity and we can't lose" brigade.
What a mad fight at ZH fight club of dumbbelled enlightenment.
Two extremes, two rotten planks, and no middle !
the middle you just have to find for yourself, can't be spoonfed if you want the middle.
Crash calls are as numerous as children in poor communities. And about as useful, too.
Still they keep on popping out.
troll
Let's see....hmmm...Bernanke will get a heads up from his old pals @ the FEd of a massive QE4 stawks and index futures buying program...he'll whisper the tip to his traders @ Citadel during cocktail hour...and they'll proceed to front run the shit out of it and make bazillions in fiat paper profits
50/50 odds that happens..
'' suddenly the Fed has realized that the biggest risk to the S&P 500 is not domestic, but one stemming from China, whose jugging of a real estate, credit, investment, banking and equity bubble will surely take up all the Fed's resources in the coming years.''
Probably not the Fed's resources but moms and pops resources when Negative rates are coming to town.
They are using the Kerviel model for that forecast rofl
Kranzler nails it...
"A Liquidity Crisis Hit The Banking System In September"
TND Guest Contributor: Dave Kranzler |
Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market.
Full story: http://thenewsdoctors.com/?p=517186
The thing that makes almost all of these predictions a complete joke is that most of them use highly corrupted government metrics in their calculations. If the data going in is bad the conclusions coming out are virtually worthless.
Bullshit, I checked.
I don't know ...sounds (so general)...
It is becoming clear China is in a situation similar to what America faced in 1929 following a period of rapid growth and credit expansion. To say the economy of China is shaky understates the situation. The kind of growth we have witnessed in China during the last several decades has been extraordinary and was driven by several "one time factors" that have be played out.
To those who doubt just how massive the problems are they only need look to the newly constructed city of Ordos in Inner Mongolia. Most of the new town buildings are empty or unfinished. This was noted a few years ago, but the situation has grown more dire. Below is the latest in a series of articles concerning China's deteriorating economic situation.
http://brucewilds.blogspot.com/2015/09/china-economic-update.html