India’s shadow Banking system is hanging sword

FT writes “As India’s state-controlled banks were sucked into a crisis of non-performing corporate debt over the past four years, following a glut of lending to ill-fated projects in infrastructure and industry, an opportunity appeared for non-banking financial companies, or NBFCs. Thousands of shadow banks, which face broadly less rigorous regulation than formal banks, rapidly took market share, ramping up loans to customers from scooter buyers to construction companies”

The chart below shows the extent of credit creation by shadow banks at the expense of commercial banking system

By the end of March 2018, the sector’s aggregate balance sheet had reached Rs22tn ($309bn), according to the latest figures available from the RBI.

But as always happens in an upward sloping yield curve, the long term assets of Housing Finance companies were increasingly getting financed by short term commercial paper . This was funded by Mutual funds who  needed an outlet to deploy the unprecedented inflows due to demonetization. So it was the match made in heaven till ILFS collapsed and this funding was suddenly at the risk of rollover from now edgy mutual funds with some of them burnt badly with credit losses and bad press.

This is when spat between govt and RBI came out in open with govt wanting RBI to bail out the shadow banking system . The uneasy truce between central bank and govt (which is keen to have a higher credit/GDP growth in election year) has led to fragile calm in debt markets. But the final word goes to Morgan Stanley which notes Shadow banking loans to property developers, and similar assets, are worth about Rs4.6tn, ( USD 60 billion) with some estimates of inventory in following link https://www.livemint.com/Companies/j7PAiwiugpdE3MGlk0hHpL/Mumbais-new-luxury-flats-face-harsh-realty.html . It is easy and probably patriotic to bail out SME and MSME businesses whose funding from NBFC’s got cutoff in wake of ILFS fiasco.With developers facing a sales slowdown, there are fears that defaults from this sector    ( which can only be bailed out by reducing the value of currency via higher inflation) could create new set of headaches for central bank and hit the credit boom responsible for India’s GDP in last 3 years.

Predicting the next Bear Market in Six charts

The Six Bear Market indicators as per WSJ are

1.High-Yield Bond Spreads

A steady trend higher in high-yield bond spreads accompanied the last two stock market peaks. It signalled that investors were getting wary about riskier companies’ ability to pay back debts.Credit markets are more reliable indicator of rising recession risk

ICE BofAML US High Yield Master II Option-Adjusted Spread

2.Yield Curve Steepness

Inversions often precede recessions and bear markets for stocks. This measure did not invert until after the 1987 bear market, but did precede the bears of 1980, 2000 and 2007. Investors are staunchly divided over whether an inverted yield curve on U.S. Treasurys can still signal a bear market, or whether rates have been distorted by years of unorthodox global monetary policy that keep yields on long-term debt low.

Gap between 10-year and 2-year Treasury yields

3.M&A Deal Activity and Buybacks…… I consider this to be most important indicator because it not only reduces the availability of good stocks in market but also artificially increases the accounting profit of the companies

A big pickup in deal activity has historically come toward the end of bull markets. A jump in mergers can signal that sentiment has turned excessively optimistic—or that companies see it as the only way to grow as the economy decelerates. Mergers and acquisitions spiked in 2000 and 2007 shortly ahead of the stock market peaks in a sign of excessive risk-taking. More recent peaks have been false alarms, though a spike at the end of 2015 was followed by a stock market correction that fell short of a bear market.

4.Weekly Jobless Claims
When unemployment rises, consumers spend less money, which crimps what companies take in. Analysts suggest looking for a consistent rise in jobless claims after a steady period. If this happens at the same time as weakness in the monthly U.S. jobs report, it is an ominous sign for the economy.

5.Investor Sentiment
Look for extreme highs and lows of investor bullishness, says Charles Rotblut at the AAII. When investors get too optimistic, they tend to run down their savings and overspend. There’s typically less cushion to protect the market, allowing selloffs to gain momentum. This measure worked very well just before the dot-com bubble burst, and spiked just before selloffs in 2011 and 2018.

6.What the Market Thinks
A relatively new measure, this chart spiked during the financial crisis and rose sharply during other recent episodes of market stress, including the 2016 China growth scare that sent markets tumbling.

The Smart person Market View

Kyle Bass tweets “There is an easy beginning to negotiations. Chinese theft of US IP is estimated to be $200-$600b annually. They currently own $1.1T of US bonds (book entry).US should begin by cancelling China’s bonds and then look for additional reparation payments”

Bill Blain writes ‘Many of our buy-side clients are telling us their investment committees are telling them to re-focus on top credit ratings and liquidity. Good luck to them as they look for bids on the 50% of the market poised on the edge of sub-investment grade.. (Chortle, Chortle… that’s the sound of stable doors slamming as the horses bolt off down the hill.)’

Kaloyan from Socgen who takes a victory lap with right 2018 market prediction writes  “we Expect another challenging year for global equities, with “downside potential to global equity indices for the next 12 months, with poor performance expected to be concentrated in 2H as investors discount the next US recession” which the French bank expects will hit in mid-2020. The punchline:
Our end-2019 index targets call for an S&P 500 at 2,400pts, the EuroStoxx 50 at 2,800pts and the Nikkei 225 at 21,400pts.

UBS writes “Two days of negative close on the key US markets is forcing a question as to – is this a capitulation. Not so, if you were to listen to our US Derivatives Strategist – Rebecca Cheong. The makeover of a capitulation would need VIX to ( currently 20) go past 30 (need VIX intraday volatility to be extreme vs SPX intraday volatility),need investors to give up buying calls and switching to downside protections. We need a large day of excess selloff. So far, all trading patterns are too orderly for a true market bottom….( thank god I thought why I am the only one not able to make money on long volatility in this fall)

Nepollian (The technical Analyst) writes ……I agree to disagree.CBOE Vix….On the verge of getting bullishly aligned for the first time in weeklies since 2009 which means US markets are finally changing character

Enodo Economics  writes ‘China Quarterly annualised growth was a meagre 0.9% (6.4% according to the official data), the lowest reading since the Enodo series started in 2004. Annual growth slowed to 3.7%, also a new low (6.5% official)’. Enodo further writes China’s middle class has now grasped that they are living in a very different world under Xi Jinping and this is the fundamental reason behind the more pronounced weakening of urban consumption this year.

 

Gold is a non expiring HEDGE

Keith weiner writes “Price is set at the margin. We have covered several times Warren Buffet’s pointed (and disingenuous) comment that gold has no utility. It just sits, and there is a cost for it to sit. And an opportunity cost.
So why do people buy something which has no utility and no return? One, which we discuss a lot, is speculation. They buy whatever is going up, in an attempt to cash in on the rise. So let’s not dwell on this.
A second reason is fear of counterparty default. Third, is gold is a non-expiring hedge for monetary collapse and/or a currency regime change. This is a broader version of simple counterparty default.

Right now, General Electric is in the news. Its investment grade rated bonds are trading like junk bonds. This is like an echo from the past. Bear Sterns retained its investment-grade rating until just before its demise and GE is not alone

Keith raises the issue of price being set at the margin to make a point. In this scenario, the marginal buyer of gold will not be the speculator. It will be the mainstream investor who is desperate to protect himself from a financial system going mad again. When will this happen? Watch for news of GE and other major debtors sinking deeper into trouble.
As to systemic default risk, i.e. monetary collapse, it is early yet. https://acting-man.com/?p=53799

Stock-Market Margin Debt Plunges Most Since Lehman Moment

Wolf Richter writes “The only form of stock market leverage that is reported monthly is “margin debt” – the amount individual and institutional investors borrow from their brokers against their portfolios. Margin debt is subject to well-rehearsed margin calls. And apparently, they have kicked off.https://wolfstreet.com/2018/11/21/stock-market-margin-debt-plunges-most-since-lehman-moment/
In the ugliest stock-market October anyone can remember, margin debt plunged by $40.5 billion, FINRA (Financial Industry Regulatory Authority) reported this morning – the biggest plunge since November 2008, weeks after Lehman Brothers had filed for bankruptcy:he only form of stock market leverage that is reported monthly is “margin debt” – the amount individual and institutional investors borrow from their brokers against their portfolios. Margin debt is subject to well-rehearsed margin calls. And apparently, they have kicked off.
In the ugliest stock-market October anyone can remember, margin debt plunged by $40.5 billion, FINRA (Financial Industry Regulatory Authority) reported this morning – the biggest plunge since November 2008, weeks after Lehman Brothers had filed for bankruptcy”:

Surging margin debt creates stock-market liquidity out of nothing, and this new liquidity is used to buy more stocks. In this manner, rising margin debt is the great accelerator on the way up

Wolf concludes “October’s plunge in margin debt was just the beginning, a little dimple in the overall chart. Unwinding such a huge pile of margin debt and overall stock-market leverage takes time, years, and they’ll be
interrupted with some brief increases that’ll make everyone feel better for a moment”

Jogging for the exits

Scott Minerd, CIO at Guggenheim Partners write…Economic growth has been strong—second quarter 2018 gross domestic product (GDP) growth came in at a robust 4.2 percent and third quarter surprised to the upside at 3.5 percent—but while others trumpet the current moment of peak growth in this business cycle, our investment team is focused on the recession that we foresee beginning in the first half of 2020.
Expansions do not die of old age; they end because important capacity constraints are reached. Every recession since 1970 was preceded by a decline in the unemployment rate to a level below full employment. This kind of overshoot in the labor market typically causes the Fed to tighten policy to quell the potential inflationary reaction, only to tighten too far and push the economy into recession. I find it highly unlikely that the Fed will negotiate a soft landing this time either.
If a recession begins in 2020, investors must understand the history of market performance during the run up to past recessions to appropriately position their portfolios. In credit markets, spreads tend to stay flat in the penultimate year of the expansion before widening in the final year. Rising defaults and increasing credit and liquidity risk premiums drive a sharp pullback in the performance of high-yield bonds before and during recessions.


The key here is to manage this shift in a timely manner. So as our investment management team describes in these pages, we are focused on upgrading credit quality, reducing spread duration, and maintaining a barbelled yield curve position to take advantage of further curve flattening. Call it a jog to the exit rather than a run.
We are seeing typical late-cycle excesses in many corners of the economy, but particularly in corporate credit markets. Loan covenants are lighter and underwriting standards are looser, all while corporate debt loads get heavier. BBBrated bonds now account for about half of the $5 trillion investment-grade universe, the highest in at least 30 years. According to Moody’s, BBB-rated bonds have an 18 percent chance of being downgraded to non-investment grade within five years. A wave of fallen angels this big would overwhelm the high-yield market. The bottom line is that a recession is coming, and it is imperative to prepare now for the period leading up to the downturn. As our portfolio managers explain, we have already reduced our corporate credit exposure to the lowest levels since the financial crisis.
Here are the key takeaways from their latest Fixed-Income Outlook report:
Every recession since 1970 was caused by the Federal Reserve (Fed) tightening monetary policy too far in response to a decline in the unemployment rate to a level below full employment.
The market is just now coming to grips with our base case that the Fed will hike once more this year and four more times in 2019.
We will continue to upgrade quality, position defensively, and remain underweight duration relative to the benchmark, and limit exposure to the short and intermediary parts of the curve in anticipation of higher rates and a flatter yield curve.
We are seeing late-cycle excesses in many corners of the economy, particularly in corporate credit markets. A sizable wave of fallen angels this big would overwhelm the high-yield market.
The rise in rates is already hurting activity in housing and autos, two of the most rate-sensitive sectors, as rising rates dampen consumer sentiment.

Read fourth quarter Fixed income outlook below

https://www.guggenheiminvestments.com/cmspages/getfile.aspx?guid=99aa32a0-30b3-40b3-a0ec-93c9a9ded384

 

The SEX recession

Kate writes for The Atlantic…….”Over the course of many conversations with sex researchers, psychologists, economists, sociologists, therapists, sex educators, and young adults, I heard many other theories about what I have come to think of as the sex recession. I was told it might be a consequence of the hookup culture, of crushing economic pressures, of surging anxiety rates, of psychological frailty, of widespread antidepressant use, of streaming television, of environmental estrogens leaked by plastics, of dropping testosterone levels, of digital porn, of the vibrator’s golden age, of dating apps, of option paralysis, of helicopter parents, of careerism, of smartphones, of the news cycle, of information overload generally, of sleep deprivation, of obesity. Name a modern blight, and someone, somewhere, is ready to blame it for messing with the modern libido.

The retreat from sex is not an exclusively American phenomenon. Most countries don’t track their citizens’ sex lives closely, but those that try (all of them wealthy) are reporting their own sex delays and declines. One of the most respected sex studies in the world, Britain’s National Survey of Sexual Attitudes and Lifestyles, reported in 2001 that people ages 16 to 44 were having sex more than six times a month on average. By 2012, the rate had dropped to fewer than five times. Over roughly the same period, Australians in relationships went from having sex about 1.8 times a week to 1.4 times. Finland’s “Finsex” study found declines in intercourse frequency, along with rising rates of masturbation.”

The Gaurdian adds “What might people be doing instead of having sex? I mean, I can think of one thing … Yes, people do a lot of that. Since the 90s, in the US, the proportion of men who masturbated in a given week has doubled to 54% and women to 26%.
I blame vibrator technology and online porn. Perhaps. There is little evidence that it is addictive, but, as one researcher put it, it might be “taking the edge off” people’s libido.”

Do say: “Perhaps we need a central bank to stimulate the sexual economy.”
Don’t say: “Lowering the price of alcohol ought to do it.”

Read full article below

https://www.theatlantic.com/magazine/archive/2018/12/the-sex-recession/573949/

Deutsche Bank, Again

Deutsche Bank, which has been labeled by the IMF as the biggest contributor to global systemic risk, hit a new all-time low in Frankfurt this morning, closing at around €8.17, down over 91 percent from its pre-GFC high and almost 50 percent year-to-date. The latest hit comes from its involvement with Danske Bank, who is wrapped up in a money laundering scandal in Estonia.
Whenever a GSIB stock is making a new low, it’s time to sit up, stand up and listen.

https://macromon.wordpress.com/

Mumbai’s new luxury flats face harsh realty

Out of the total supply of 7,292 luxury apartments in Worli and Prabhadevi, 4,107 remain unsold, according to data compiled by Liases Foras Real Estate Rating and Research Pvt. Ltd. The average cost of an apartment in these areas is ₹10 crore. At the current pace, it may take more than 17 years to dispose of the current stock,shows the data.

https://www.livemint.com/Companies/j7PAiwiugpdE3MGlk0hHpL/Mumbais-new-luxury-flats-face-harsh-realty.html