The Economist on the Chinese Economy: I Wish I Was Taller


I've been told the whole world grinds to a halt to watch the new season of Game of Thrones, but I've never given one thin dime to HBO so I've never watched it.   I still think one of the best shows of all time is Seinfeld. One of my favorite episodes was "The Cartoon." Elaine gets a cartoon published in the New Yorker. Elaine says the pig says, “I wish I was taller.”  She comes to realize that she subliminally plagiarized the caption from Ziggy.

I’m sure it was the same phenomenon when The Economist published this article on the credit boom in China. The author discusses the BIS research on the history of credit booms, the speed of credit growth, and the gap between credit growth and trend growth, with a wider “gap” tending to expose an economy to greater risk of a crisis. Where have I read that before? Ah, on MacroMan!!

Look, I’m sure I’m not the only one that nerds out to “Liberty Street Economics” and the BIS. What I love about The Economist version is, well, how awesome it is. They don’t caption their articles, but this guy is an absolute professional. Check this out:

On a rollercoaster, riders climb upwards slowly, their suspense building, then plunge downwards quickly, their stomachs lagging a little behind. In its deleveraging efforts, China’s government hopes to do the opposite. It has allowed the country’s liabilities to mount quickly. Now it wants them to plateau or drop gently (relative to the size of China’s economy), leaving stomachs unchurned.”

Dang. I wish I could write like that. The article goes on to say that growth and inflation have closed a material portion of this gap in 2017, which is a valid point. But it is still well above levels that the BIS would suggest imply economic stability.

Top shelf financial writing aside, this did force me to look back on my analysis from six weeks ago. As so often happens, the analysis stands the test of time, but the trades are a little shopworn. I did pitch them as hedges for a larger risk-seeking portfolio, but you are even farther away from low-delta strikes in currencies like SGD, CAD and AUD---and while 5y5y AUD receiver swoptions are probably still skulking around the same area, CAD rates are higher.

My outright ideas to short CLP and COP are looking relatively good--CLP only recently made a material move stronger on stronger copper prices, but COP has weakened back above 3000 on continued weak oil prices and the stagnating domestic economy.  

It brings up a dilemma in macro trading, tail hedging, or practically anything I guess--if you have a long time horizon, even in a couple of months you can move far enough away from strike prices to take out the gamma you are supposedly paying up for. I continue to like the hedges I brought up the first time around--heck, they may be even cheaper now. The price action of the past couple of months shows that timing is key...but if you are running a large portfolio you are likely not being paid to make decisions about market timing.

That is why it is of great importance to find tail hedges at a reasonable cost in the context of a broader portfolio that is seeking long-term excess returns for a unit of risk. Otherwise, The Great Volatility Ambien Pill of 2017 will put you to sleep and you’ll wake up with in a bad neighborhood with your wallet missing.

The article closes by saying, “Credit, on the other hand, should be a vehicle of economic progress, not a circular thrill ride.” True...but since the breakdown of Bretton Woods, global credit has undoubtedly been a thrill ride of historical proportions. As China continues to ratchet up towards the next peak, we can only speculate when we will reach the top and how steep the inevitable drop will be.

That’s the best I got, Economist writer. Your move.  
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July 24, 2017 at 8:58 AM ×

" The Economist on the Chinese Economy: I"m Glad I'm Out Of The Prospect Business"

And staying out!

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johno
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July 25, 2017 at 1:03 AM ×

China ... not yet. Property sector outside cities where authorities implemented restrictions is still strong. A big slowdown, if it's coming, seems a 2018 event. Shawn -- do you have any view on PEN, either way?

Went long Taiwanese Dollar NDFs. Data is starting to line up with the strong H2 tech cycle narrative. Currency no longer looks extended within the "dynamic stability band" the central bank references. Last week bought some September expiry call spreads on gold as a bet on a debt ceiling showdown.

Missed the move in EURUSD since 1.12-ish. How to think about this now? 1) Issuer constraints are going to force a tapering of sovereign QE, regardless of inflation, though the taper could extend well into 2019. How is EURUSD a function of short rate, long rate, and QE (stock and/or flow) differentials? I don't have a great answer though long rates/QE expectations seem in the driver's seat now. 2) I'm guessing Italy needs a low euro more than Germany needs higher rates (arguably the eurozone needs low rates in Germany too, so it over-heats and its relative price level inflates, which helps sort out imbalances), so the "mistake" of going to negative rates isn't going to be undone until "well after" QE ends. 3) Draghi is President through October 2019 so don't expect a hawkish policy surprise before then (and 580 pips of negative carry until then). 4) Though there's a 200bps short rate gap, EURUSD doesn't necessarily rally if it closes in, for example, a global recession scenario. That's because of the dollar funding short and historical precedents, e.g. 2000. 5) The surge of flows into European equities seems to have tailed off and the markets aren't trading well. I can go on and on, but so far nothing has coalesced into an actionable whole. Anyone want to share their clarity?

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Leftback
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July 25, 2017 at 11:03 AM ×

Anyone else out there afraid of an unexpectedly hawkish FOMC statement with hints of a slightly increased pace of balance sheet reduction? Anyone else worried about slightly less weak US economic data? Anyone else worried about a rebound in USD? Anyone concerned about the lack of US equity shorts and the large synthetic short vol positions?

Not many, I would guess, looking at realized and implied vol, and COT data. There are some decent arguments outlined above for a weaker EURUSD. That might be our next FX regime change for the second half of the summer - and perhaps even longer. We are not far from strong technical support levels in the dollar, so there are multiple reasons to be concerned about a turn in the markets at the moment.

We are taking our US fixed income bets down today and increasing our cash allocation here. I am reminded a little bit of the summer of the Taper Tantrum, where everyone was more than half asleep as Bernanke testified to Congress on 5/22/13 and it turned into a fixed income and REIT bloodbath over the course of the next three months.

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Leftback
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July 25, 2017 at 11:09 AM ×

Bond volatility is even lower than it was last month when this was written:

https://www.bloomberg.com/news/articles/2017-06-14/bond-market-volatility-drops-to-taper-tantrum-lows-as-fed-meets

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Jim
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July 25, 2017 at 12:19 PM ×

VOL SELLERS BRANCH OUT

“He still keeps in contact with his old shop, and he told me what the brokers are experiencing. Across the board, clients are engaging in volatility selling strategies. And although they are shorting some stock index volatility, they are not limiting themselves to equities.

He described an endemic pattern of these sophisticated clients shorting gold vol, euro vol, bond vol – any listed options, these guys are shorting them. Take gold for example. They pick a three month option, and with gold trading here at 1245, they sell the 1145 put while simultaneously selling the 1345 call. Lever up the position, collect the premium, and let the quiet markets pad your bankroll. And clients are doing this strategy in size.”

http://themacrotourist.com//macro/vol-selling-branches

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Jim
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July 25, 2017 at 12:29 PM ×

No question -- on weekly Real Range® chart Eurocurrency entering generational breakout

https://twitter.com/PeterLBrandt/status/888134478803202049

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Jim
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July 25, 2017 at 1:51 PM ×

About 1 million options contracts changed hands on a bet that the CBOE volatility gauge, called VIX, will rise to 25 by October.

https://www.wsj.com/articles/investor-makes-mammoth-vix-bet-that-could-pay-out-265-million-1500917145

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July 25, 2017 at 3:55 PM ×

Back at it, at the desk, LB....any way LB, I hate this market more than you could ever imagine, but what can you do. Over and out.

https://www.youtube.com/watch?v=mlQazNBH5fY

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Shawn
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July 25, 2017 at 8:29 PM ×

@johno...I like long PEN...it has always been a low beta choice but there are a few things going for it--the slow burn in China/metals (such as it is), pent up FDI after PPK's victory, inflation is falling, growth is ok-ish, c/a dynamics are stable, and you can chalk up some decent carry (~4%). Sure, the BCRP is on the bid, but when/if the scene gets ugly they're on the offer, too, which limits the "gap" risk, and gives you time to get away from it or take the other side. PEN isn't going to make anyone's year but it is a decent (small) risk/reward.

@leftback...I tend to agree with your points...but not sure if FOMC is going to be the catalyst. Stronger data? Maybe, seems like the bearish USD trade has gotten ahead of itself but I thought that a week or two ago, too.

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Polemic
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July 25, 2017 at 10:36 PM ×

Thanks Shawn nicely put.
THe roller coaster analogy is sweet as it conjures up in the readers mind the expectation of precipitous fall, because that is what rollercoasters do. But China doesn't, or hasn't or may do one day. BUT as I've coined before -
"Chna blow up can remain a meme longer than you can remain short"

If we look at the evolution of Eur strength from the dark pits of Euro narrative 5 years ago we can see that things have worked out much better than expected through continued blood transfusions to the patient through QE and the starter motor to growth has fired the engine.

China is just as capable of finding solutions through complexity despite what can be labled as obvious disaster ahead. This solution could even evoke military conflict, unlikely and unpleasant, but still possible. China has a control over its population unlike anything in Europe or US- where we would march in the streets against austerity and collapse in a pile of self-pity expecting someone to rescue us, the Chinese would work hard at the end of a State whip to dig themselves out of it. It is different because their behaviour is different. And as Economics is about behaviour we could even say that ergo, their economics is different.

But anyway, i'm sure that is opening a bag of behavioural economics worms.

Metals have gone ballistic (with copper screaming higher threatening recent highs) and with such a sharp move up in the boring bases I do wonder if this is going to be a Trump like rally after the Trump rally has been kicked into the grass. Woops that wasn t meant to happen an d certainly not eant to happen in the Chona slow down narrative

OIl too. Brent is basically back at 50 which s mid range and suits yours truly who is still sitting on a 3 year possie in Oil rubbish stocks. I know LB is an uber bear but sorry mate, I'm happy to sit tight. ( interesting BBG piece on Shale guys turning off the Capex at last)

Anyway . Agree LB on most of your thoughts. Yes, Usd has done its crap out on my eyes.
Europe is suddenly the darling ( WTF??) Abd so EURUSD has had a blinder to the point of sucking in the extrapolationists ( get ruler and pencil draw line to 1.30 + yaawn) SO Im selling EUR .. but have gone short EURGBP and added Short EURAUD to that trade today. As I want to be long AUD but think USD is done falling.

Agree LB that equities are due a wobble and my mythical 18th July turn date has just gone by ( Ok .. no move... yet). BUt I m ready for a shake. VIX? I really cant get excited about technicals on a derivative (VIX)of a derivative (Vol) of a derivative (stock index). Especially ETFs on the VIX which are a derivative too far and just bleed carry costs. If I buy Vol I now do it the old fashioned way and Buy option structures. Watching twitter chatter from guys talking about VIX ETFs reminds me of children having been handed rocket launchers.

As for FOMC watching. Yeeeaaawn. And anyway. You wont beat the algos o sit back and wear it, what ever it is.

I am long LATAM credit, Peru and Mex eq ETFs, oily shitty stuff, Commodity Co's, long USDTRY, short EURGBP and EURAUD and long a fewother EM funds, particularly African .. There you go .. full disclosure laugh at me tomorrowif you wish.

Oh and finally - I dont give a monkeys about Trump/Russia, Chlorinated Chicken, Large trades on exchanges going through ( every buyer has a seller) nor generational breakouts in Euro. Generational? How old are these guys? (ref back to kids with rocket lauchers)
Sorry for the long one
Cheers Pol







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johno
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July 26, 2017 at 1:21 AM ×

Shawn, thank you for the feedback on PEN.

Jim, I'm aware of the breakout. I'm not a chart guy, but I will grant you there's some information content in a weekly breakout on a multi-year pattern as we've seen in EUR. By no means am I shorting EUR (in options, do have shorts against SEK and NOK, but longs against CHF and JPY, and in cash long EURCHF). My best attempt at modeling EUR as short rate differentials, expected cumulative QE 2 years forward, and expected QE flow 1 year forward (yeah, I made up those data series) has EURUSD not too far from fair here. Another way of looking at it, is to look at the 10Y forward rate. On that basis, since '04, it's been between 1.2 and 1.6 (but more like 1.25 and 1.55) and currently is 1.39, basically in the middle of its range. So, within its historical range, it's maybe fair.

Speaking of rates, the short RX long TY doesn't seem bad to me. Curious how people think about where bund goes in absence of QE. Maybe way over-simplistic (or just wrong), but I broke it into the 5Y and the 5Y5Y pieces. I assume the bobl-OIS spread goes back to normal and the OIS curve is correct to 5Y. For the 5Y5Y, I assume it goes to it's historic average differential. At yesterday's prices, that gave me 1.1% for the bund. Paired with TY, it even carries positively. Guess one risk here is we have a Philips Curve awakening in the US .. not so ridiculous a thought with UE at 4.3%. But we probably have a ways to go yet before we see inflation accelerating in worrying fashion.

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johno
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July 26, 2017 at 1:26 AM ×

that's "historic average differential" to US treasury rates, above. Wasn't clear.

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Shawn
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July 26, 2017 at 4:40 AM ×

@johno, maybe I'm too far in the "anecdotal" data camp but I just don't see an upside surprise and/or phillips curve awakening in the US. I could see the curve flattening, or remaining flat, I guess. Re: bobl spreads, I'm not a big fan of long swap spreads here, they've come back a long way from earlier in the year and while there are legit concerns about the capital key, sovereign issuance/ecb buying, etc., I think HFs are so hungry they are chasing this one a bit too far. I can't claim to be a great mind on bobl spreads, just my two cents, thinking about the data, chart, positioning, etc. I like your approach on RX vs. TY, I would tend to agree--but tough to get the beta right on that one.

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Jim
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July 26, 2017 at 2:14 PM ×

Is LB's $USD rebound upon us?

https://www.kimblechartingsolutions.com/2017/07/u-s-dollar-triple-support-test-rare-30-week-decline/

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johno
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July 27, 2017 at 7:34 PM ×

LOVING this EURCHF action. And look at the move in vols! Options in longer expiries still look interesting to me.

The whole narrative around euro existential doom is crumbling. The "euro is going to 0.85" crowd looking like DUMMIES. As they go from sounding plausible or prophetic to sounding like DUMMIES, EURCHF could travel, far. (whether they're right or not, in the end, who knows)

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abee crombie
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July 27, 2017 at 8:41 PM ×

China credit is the only number you really need to watch and it has been rolling over for a while. Problem is that it went ballistic last year so world economy is still feeling its effect.

SHPROP is a good proxy for when Chinese markets start to feel the pinch. so far inventories are tight and price appreciation expectations are high so even though sales are down in Tier1 and 2 cities, ppl are still postive on real estate. But the turn is comming. But like Johno says, perhaps not until next year. I think Q4. PMi's good to watch as well.

Big fan of Seinfeld and Game of Thrones. Check out the defiant ones as well if you have HBO

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IPA
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July 27, 2017 at 9:38 PM ×

You know you are at a professional gathering when there is a 142-point intraday plunge in NASDAQ and people just reach for another drink. I am on vacation and contributing to the cause.

Interesting things are happening though. I'll list some of them here and let's see if crickets turn into bees.

IYT about to have a bearish outside month thanks to a 3% puke today. Don't get me started on the "new millennium" nonsense where we will have a red button next to a toilet to have a new roll ordered on Amazon just as we sit down, and have it delivered to us by Whole Foods delivery man by the time we get done with our business. Maybe another drink and I will unleash a better bathroom joke.

For all the talk of tech ripping higher and "amazing" gains by none other than on-demand toilet paper enabler of the 21st century (looking a little less stellar afterhours as I type), what stock is up 70% since May 12th? Don't even look at tech and waste your time. It's DDS (Dillard's). Yes, the brick-and-mortar retailer that's going to disappear into the ether. KIM and KRG up 6% today. This will be the first weekly close above the middle BB on both since Sep of 2016.

Short Vol mania is about to end badly. What in the world of nuts and bolts is going on with SVXY? There was a 3 for 1 split in mid-July that introduced more little guys into the feeding frenzy and invited a speculation not seen since the US housing debacle. I am going to lay out my not-so-complicated strategy here. Long 80/55 and 75/50 Jan '18 put spreads. Yes, I really think it'll be cut in half.

ULTA is below $250. A selfish plug, but just shows you that if you are going to listen to the anal-ysts you will end up with a pain in the as*. There, I knew I had a better one.
Jokes aside, really not a funny matter if you have a teen daughter. Please proceed to the nearest toilet and flush down your tainted cosmetics. There is never just one cockroach.

https://www.asbestos.com/news/2017/07/19/asbestos-found-in-childrens-makeup/

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dfdsfiol
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July 28, 2017 at 5:02 AM ×

and they talk about job booms in Toronto that is supposedly behind the housing bubble:

https://www.reddit.com/r/toronto/comments/6pvehe/tech_salaries_in_toronto_vs_north_america/

lowest paying salaries for engineers.

The housing market here has turned in a big way. Houses are sitting 40+ days now and most sellers have just started to delist as there are no buyers. Prices for detached homes are nearly down 20% since the peaks and falling hard.

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Leftback
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July 28, 2017 at 10:07 AM ×

@IPA

LB has a similar type of bet on in SVXY options. This really does just seems like the proverbial pile of stupid money sitting in the corner of the room, and one day a few lucky/smart people will just walk over there and pick it up. We would suggest that tiny punters contemplating more vol selling for income simply put their punting money in an envelope and send it to the blog, or you could save time and just take out a cigarette lighter and burn it all if you really want to….

Note that Gundlach couldn't resist a little punt on vol when VIX dipped below 9… he is now bearish bonds and equities. We agree and are only interested in holding cash and some small synthetic long vol positions here. Imagine if they had those vol vehicles in 1987?… :-)

Too many people expecting The Big One, only not now, later…. this is a recipe for a little one, and then a Medium Sized One when no-one is ready - perhaps very soon. In any case, these days it will not take a Big One to cause a significant dislocation. In the land of zero vol, a 3% down day would be relatively cataclysmic…

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July 29, 2017 at 11:35 AM ×

LB, I am burning the USA/UK trading book down. The South East Asia trading desk wins hands down. Who wants to be a billionaire hedge fund manager on Wall Street and Bachelor of the year when you have to bend over to the rich bastard elites.....oh yeah, I'm all the way over here from Australia to deliver you alpha. I'm good.You can't find winners surrounded and chain down to that circle and having to always be thinking who's going to wheel me into the next Charity foundation event. You can wheel me down Walking Street but.

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July 29, 2017 at 11:40 AM ×

LB, trade where your going to find winners. Otherwise, it's a quick route to the shithouse.

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kongponleu88
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July 30, 2017 at 1:41 AM ×

nice this blog.
You put really very helpful information. Keep it up. Keep blogging. I’m looking to reading your next post.

โกเด้นสล็อต

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July 30, 2017 at 5:17 AM ×

LB, I tell you what. Let's make a trading contract. I'll give you $50 million and you take whatever trading opportunity case you want and we'll split the difference.

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July 30, 2017 at 5:19 AM ×

List of stock cases:
on and on and on and on.........................................................................................................................................................................................................................................................................................................................................................................................

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July 30, 2017 at 5:21 AM ×

Here you go, LB....knock yourself out.

https://www.stockmarketclock.com/articles/trillion-dollar-club

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July 30, 2017 at 5:29 AM ×

Not enough, LB......you want more? how about handing off your money problems to someone else then. I don't see any faces that you know ....but hey, I don't everything do I.....lol

https://www.tipranks.com/hedge-funds/top

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July 30, 2017 at 5:39 AM ×

Not to your liking LB. No worries.....here at MacroManlist stock substitutes are our forte.Here you go , LB.... here is another list of investments for you to jump into bed with ..(again)

https://www.msn.com/en-us/money/savingandinvesting/the-worlds-richest-hedge-fund-billionaires-2017/ar-BByqTwU#image=BByrpiy|18

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July 30, 2017 at 7:10 AM ×

And a hat tip for LB and others.....shove those blue chip stocks up your ass. Out of date and and out of ideas. Just a lot of bullshit. Wrong.

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July 30, 2017 at 11:50 AM ×

LB, this one is especially for you.

https://www.msn.com/en-us/money/savingandinvesting/the-worlds-richest-hedge-fund-billionaires-2017/ar-BByqTwU#image=BByrpiy|13

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