Scary Stuff

China is a scary place Insanely, investment in real estate in China is running at over 18% of GDP. Much of it is financed by banks, which are behemoths, but running on tiny sliver of equity. The slightest pause in the price of real estate would make 2008 look like a tea party. Supposedly, China has 30 years of inventory waiting to be occupied.

I’ve listened to several presentations by Gavekal talking about how cheap China assets are, and how it is the future. With the place now run by a mad autocrat, and an economy based on a tottering tower of debt and empty real estate, I think it’s eye-wateringly expensive. With rich Chinese bailing out and converting as much wealth as possible into a form where Xi Jin-Ping cannot get his hands on it, the prospects for China seem very bad indeed.

Of course, the CCP provides hidden subsidy, in the form of cheap loans and free infrastructure and tax breaks to manufacturers who export, so it will be hard to break our addiction in the West to cheap Chinese products, but if Xi continues to kill the Uigers, repress the population of HK, and invade Taiwan, I think we might have to.

The market as I see it

Wrap

Central banks are going to take that bloody punchbowl away again. The Fed is expected to hike 75bp, and the BoE the same. Headline inflation is high, but falling surely. The RBA (tomrrow) is expected to hike just 25bp, so maybe this is the start of the end.

Fixed income yields were up across the curve, but with a slightly flattening tilt. At settlement, 2s +8.1bps at 4.503%, 3s +7.4bps at 4.463%, 5s +7.4bps at 4.262%, 7s +7.2bps at 4.177%, 10s +7.5bps at 4.085%, 20s +5.5bps at 4.444%, 30s +6.7bps at 4.196%. (data from Newsquawk).

Oil was down $1.37 a barrel on the expectation of further Chinese weakness and a stronger dollar.

Equities were down in the US, but up in Europe, presumably again influenced by the dollar. DXY went as high as 111.67 before sagging a bit.

FX was mainly about the dollar, but the Yen was particularly weak.