Juggling Dynamite

This report gives a good overview of the global interconnections in our highly levered financial markets and economies. Deflation in the global property sector is needed.  It will be painful but also helpful longer-term in redirecting capital from realty speculation to more productive investment.

Real Vision’s Roger Hirst uses Refinitiv’s best-in-class data to look at issues surrounding China Evergrande, a leveraged conglomerate that includes property development and banking amongst its operations. Expectations of a default have been running high, but its issues……… and the policy response…… go deep into the transition that China is undertaking. This looks more like a controlled explosion, rather than a contagion event, but the repercussions for global investors will be widespread.  Here is a direct video report.

Also See:  Evergrande debt crisis is financial stress test no one wanted.

While some wait breathlessly for self-enriching US Fed members to hold forth on their next policy tricks, this chart shows the relative size of US financial assets at 5.5x US gross domestic product today compared with 3.5x at the tech bubble top in 2000, and less than 3x from 1950 through the mid-1990s.

Looks about as healthy and sustainable as Canadian home transfer costs, now making up a whopping 10% of Canadian GDP (as shown earlier this week.)

As stocks rebound from some of this week’s losses this morning, under the hood weakness has been broad, with just 31% of S&P 500 members trading above their 50-day moving average as of yesterday’s close (shown lower left).

Meanwhile, the US dollar index (DXY) is so far holding above $93, and long government bonds remain bid in a slowing global economy that is long on debt and increasingly short on cash.

With the consensus expecting a reduction in central bank largesse over the next 6 months, the question is where new inflows will come from to keep asset prices moving higher?  Stagnation is not an option here.  With the retail crowd now fully in and then some (on margin), which weak hands are left to buy?

There are parallels here for other economies like Canada, which have enabled an unhealthy reliance on debt and realty bubbles.

“If you want to teach a lesson you have to cause pain.”

China Beige Book CEO Leland Miller joins Yahoo Finance Live to discuss why China property fears are concerning investors.  Here is a direct video link.

Meanwhile, the stress in Chinese stocks is not contained in China, see Bank stocks sell-off on China Evergrande Concerns as investors worry who has exposure to its $300 billion in debt.  The below table shows some of the largest mutual funds with direct Evergrande Group exposure.