10 Nov 2021

Let us not shed any tears for Tesla’s 11% drop yesterday. Its a big whack for Johnny come lately’s but even Tesla needs some fuel, I mean energy, to continue its relentless climb to space.

Its not often that you hear the CEO of one of the big 4 banks saying, “We cannot see another 20 per cent house price growth over the next 12 months. We cannot afford to have that happen in the Australian marketplace.’’ Mr McEwan is suggesting that the bank regulators need to step in and increase the loan buffer requirements. However he acknowledges this will probably not be enough.

I don’t think we can rely on any elected bureaucrats to do the hard work, we will need to stay very vigilant on the bond market. It is this market that effectively calls the shots in the trillion dollar real estate industry. As you can see in the chart below, the yields sold off hard over the last couple of weeks forcing the RBA to abandon its yield curve control. So far during November the bond market has undone some of its recent correction and we now wait and see what the inflation numbers around the world and locally have to say to take further direction of the near term trend.

What is important to note is that any market that grows too quickly has the combinatory effect of creating instability. This may sound paradoxical but as Hyman Minsky the great economist said in my words, too much stability leads to instability. The other great thinker on this subject is Nassim Taleb who speaks of antifragility and its unintended consequences.

Mark Mobius was in the press yesterday talking up India as his top pick for his emerging markets fund. He see’s India as he saw China 10yrs ago. The chart of the Nifty is at an all time high like much of the global markets. This will be a good one to keep an eye on over the coming months and years.

To very little fan fare Bitcoin also made a new all time high yesterday. It was a little painful for me personally as I was short some calls that expired yesterday in the money. I am planning to unpack that trade a little over the weekend. Its a little too raw to talk about right now 🙁

I am reading more and more mainstream reports on how the Chinese economy is slowing down. I pulled up a chart of the Hong Kong stock index as it has more history than the Shanghai Index and I believe many of the major Chinese companies trade on the Hong Kong exchange. The market has sold off 20% from its most recent highs but it is a market out of step with all the other major stock indices around the world that are making new all time highs. A break below the white trend line will be really bearish.

To provide a bit of a narrative to this story there are many comparisons to the Japanese market that saw an incredible growth in the corporate sector that was largely fuelled by debt. All looked fine as the debt was largely backed by real estate that was growing as well.

Here you can see how the lending this century as a % of GDP is very similar to Japan in the 80’s.

Another contributory factor to the decline in China other than the excessive debt is the decline in population growth.

Finally the one important thing that was keeping the glue together was the strength in the real estate market. Things have gone a little quiet on the Evergrande side of things. If you look at this chart there is big trouble still brewing. I don’t think we have heard the last of the bankruptcy murmurings here.

Hat tip to the Market Ear, the Baltic Dry Index could be signalling a cool off to the economy and lets see if it doesnt lead to a splash in the equities. I love my puns.

Wouldn’t this be something if after all the noise about inflation the last few weeks it turns out that it tops at the end of the year and starts to drift down. If that happens I have no idea how the markets will react. Dow or Bitcoin the first to hit a million ????

I have to say with all the crazy real estate prices and the stock market at new all time highs and the historically low interest rates I was expecting to see US households personal debt explode. When I first looked at this chart I thought wow people have been responsible with their borrowings this cycle. However if you look at the chart closely it is measuring net household liabilities as a % of disposable income. This is the catch and most people have fallen for it. Simply put. Despite the massive increase in borrowings in nominal dollar terms, the household is in effect better off than during the subprime housing crisis because the cost of servicing the debt is so low that households have much more disposable income than during that crisis period. Do not be fooled. If interest rates shoot up to normal levels this falling green line will spike hard.

Finally to make everything I just said above feel even more confusing, the UK 30yr Government Bond yield is back at 1%. Go figure, there is clearly less inflation concern in the UK than there was a month ago.

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