Tuesday 24 April 2018

Treasury real yields

Inflation breakevens are above the Fed's 2% target, yet it looks like Treasury real yields might also be about to break out above the 1% cap QE seems to have placed on them. Can the US 10 year try for 3.25%

Sunday 15 April 2018

Wages bouncing following tax cuts

Wages bouncing again following a turgid H2 last year Seems the tax cut is being passed through but so far companies very cautious about paying up and shrinking margins

Part time/ maginally attached workers seeing some initial catch up as well

Friday 13 April 2018

Venezuela prepares to hard default after May's elections?

Could Vene hard default after the Presidential elections on 20th May? 

Oil production is around 1.5mmbpd and forecast to go to 1.1mmbpd later this year and lower in 2019 

But they use 425k bpd domestically and pay JV partners including China and Russia 550k bpd. 

So at 1.1mmbpd production there is basically nothing to pay for imports, bonds or increased maintenance capex 

Something has to give and with the potential for more sanctions, blaming a hard default on sancitons is a way to keep going 

Having moved the military into manage oil production could also be a sign they are preparing to hard default; they want to keep control, maximise graft and manage the hard default scrario vs creditors 



Thursday 12 April 2018

Hong Kong real estate pops on rising USD Libor?

I have written a few blogs on monetary inflation post-08 and how as its power wanes the crashes get closer to the source the sources being the Fed and PBoC.

Well, there are signs that global prime residential is rolling over; London, Manhattan, Toronto are all off 'bigly' with much further to go in my view, Dubai is grinding lower partly on high supply, partly the lower oil prices. Some other markets seem to still be powering higher, notably San Fran and Hong Kong.

Always hard to time the top but the rise in Libor in USD is hurting the pegged currencies. Dubai seems to mainly be a local cash second home market, but Hong Kong is clearly leveraged up the wazoo.

Now the HKMA is starting to intervene to maintain the peg. The only problem is there is almost an unlimited amount of forwards than FX traders can sell and all the HKMA can do is shrink the private sector money supply to maintain the peg. Genuine capital outflows face the same problem, they cause a shrinking domestic money supply as HK$'s in the money supply get given to the HKMA in exchange for USD$ reserves held by the HKMA. That has to cause a credit crunch in the same way that inflow caused credit expansion on the way up.

I'm not sure what mechanisms the HKMA could use to try and sterilize these effects but either way the market seems to be witnessing a ridiculous blow off top phase. If the HKMA just expands private credit at the rate of interventions, then presumably it could face a Black Monday type event were outflows beget outflows.


China is also curtailing credit expansion and may see to limit capital flight more going forwards.

An article on residential property and some relevant charts below:


I don't have time to dig into the components behind the numbers but at a headline level since end-2008:
  • National income is up about 30%
  • GDP is up about 47%
  • M3 money supply is up ~130% 
  • M3 is now circa HK$14Tn vs GDP of 2.7Tn, so 520% of GDP
  • Bank balance sheets are up a similar % amount as M3
  • Loans to the private sector are up from HK$3.3Tn in Jan 08 to HK$9.5Tn, almost tripling with many priced in foreign currencies.
  • Construction as a percent of GDP is about 4.4% and has doubled since the crisis vs an economy that is up a lot less than that
  • House prices are up 140% from 2009 to Dec 17

What could possibly go wrong?




Monday 9 April 2018

Chinese FX deval coming up?

China runs a CA deficit with the world ex-EU and US. If as part of Trade Wars it wants to export more to these countries, or do more bilateral trade as part of OBOR, then it probably needs a cheaper REER, as CNY/CNH is highly valued on a REER basis vs these countries.

So far this year the USD has been weak and CNH roughly flat vs EUR and JPY.

Using very rough numbers China is running a $375bn surplus with the US and a $422bn number overall. Its running a EUR180bn surplus with the EU and a $175bn or so sized deficit with the rest of the world.  If it loses say $150bn of sales to the US, or over 1% of GDP, it needs to find customers elsewhere for that.

The EU and Japan are the only large economic blocks which can absorb that much in sales in the short run, and implementing OBOR and related
exports will take time.

We also still have not seen what Trump plans for the EU/ Germany which it ran a $151bn and $64bn deficit with respectively in 2017.

If they dont devalue then they need to absorb the sales internally, which involves getting the savings rate down, reinflating the credit bubble, or risking deflationary forces push prices down. One pressure release valve domestically could be to cut interest rates. PBOC rates are above inflation which is about 1.5%-2% depending on which indicator you use vs an inflation target of 3%.

Thursday 5 April 2018

Russel Napier on the Fed balance sheet unwind


My views:

Bank credit growth stalled in Feb as banks liquidated Treasuries and other securities but it has continued its slow growth path in March.  Maybe the rise is Libor vs OIS is part explained by foreign banks and some of their overleveraged customers being hit with duration or other losses. The next shoe to drop in my view is probably people long USD duration; so principally leveraged prime real estate, and leveraged USD borrowers. 
We are already seeing prime residential in places like New York, London, Toronto more or less in freefall.


Next up, downwards rent reviews for offices.

But for the domestic US economy rates are still low and the Fed has not reduced that much of its balance sheet.

As such I think we are still in the transition phase of the last cycle having more or less ended and the new cycle not having started and avoiding a recession in between via low interest rates.