The Ghost Of W.D.Gann: Another Crash Is Coming

Authored by Philip Soos & Lindsay David via RenegadeInc.com,

The original wizard of Wall Street, W.D Gann was a finance trader and wealthy speculator that spent decades investigating cyclical trends in equity market patterns and found that prices could be predicted long in advance. He successfully predicted the crashes in the 1929 and Dot-Com stock market bubbles.  And according to his analysis, the US stock market is due for another crash in 2020.

Every movement in the market is the result of a natural law and of a Cause which exists long before the Effect takes place and can be determined years in advance. The future is but a repetition of the past, as the Bible plainly states…

After suffering through the worst economic and financial crisis since the 1930s depression when the real estate and stock markets crashed in 2007, the United States’ bubble economy is back into full swing. Residential and commercial real estate prices are growing strongly, along with equities.

The US stock market, as defined by the S&P500 index, has boomed after collapsing to a trough in 2009. The market ‘recovered’ more quickly than anyone thought it would, and has continued surging from thereon in.

This has led to a lot of commentary and media coverage that the S&P500 is in the thrall of yet another bubble that will burst. Despite the many predictions of collapse, the bubble has powered on unhindered.

Like all asset bubbles, the primary cause is speculators taking on debt to bid up prices to ever-higher levels, generating a stream of greater fools willing to purchase at inflated valuations. In the case of equities, the type of debt used is margin debt.

The trends in the S&P500 index and margin debt are obvious. The name of the game is capital gains; income is increasingly sidelined as yields become compressed to record lows.

The annual change in margin debt (the first derivative) closely tracks that of the S&P500 index. In Australia, this was true of our largest equities bubble on record, which peaked in 2007 and then burst, declining by 55% from peak to trough.

Margin debt all too coincidently rose rapidly during the boom.

In the case of the S&P500 bubbles which peaked in 2000 and 2007, margin debt also peaked a few months beforehand in terms of absolute values, annual growth and acceleration (the second derivative).

It is therefore worth closely tracking the trends in margin debt to understand where equity prices are heading.

Another metric to watch out for is private non-financial business debt because the very low interest rates on business bank loans makes it easy for corporate executives to drive up stock prices by loading up on debt to engage in stock buybacks.

As prices are often linked to executive remuneration, they have every incentive to engage in this unproductive strategy.

The peaks in the annual change of non-financial business debt correspond with those of the equities market. It should be noted that non-financial business debt is also used to speculate on commercial land, which is why land prices cycle in tandem with debt.

The yield curve is one of the best leading indicators of recession and equity market downturns. The yield curve inverted a few months before both peaks in 2000 and 2007. Currently, the yield curve is 108 basis points above zero, and could take a while before it inverts.

While the metrics noted above can accurately indicate the peak of an equities bubbles several months in advance, they cannot tell us anything years ahead of time. For this, we must turn to the research of the original wizard of Wall Street, W.D. Gann. He was a finance trader who developed technical analysis tools and forecasting methods based on geometry, astronomy, astrology and ancient mathematics.

He was a successful and wealthy speculator, spending decades investigating patterns in equities markets. He concluded that equities exhibited a cyclical trend over decades and thus prices could be predicted long in advance.

In 1908, Gann constructed his financial timetable, which tabulated the booms and busts, peaks and troughs of the US equities market. Just like the Geoist land market cycle, there is a repeating 18-year average between every major cycle.

Gann managed to predict the crash of 1929 years in advance. He realised that the timetable would have to be recalibrated on the 25th December 1989.

The updated timetable is amazingly accurate from that date onward, predicting the Dot-Com bubble peak in 2000 and its collapse. The GFC peak was off by one year; 2007 instead of one year earlier in 2006. The trough was in 2009, followed by a minor panic in 2015, when the S&P500 dipped but has since boomed.

According to the timetable, 2020 will be the peak of the equities bubble, followed by a major crash similar to that of the Dot-Com bubble.

To the economists we’ve spoken to, the peak could range between 2019M09 to 2020M03. Given how large the S&P500 bubble has become, it is worth treading very carefully during this period for those exposed to US equities.

Gann is famous for saying: “Every movement in the market is the result of a natural law and of a Cause which exists long before the effect takes place and can be determined years in advance. The future is but a repetition of the past, as the Bible plainly states…”

Due to the ETF revolution, it is a straightforward matter to gain exposure to the S&P500, including leveraged and inverse instruments. It would be even better if the government would enact policies to prevent speculation and subsequent bubbles in the first place. This can be done by banning margin debt and other securities-based loans, and heavily taxing capital gains based on the length of time they were held for (the longer, the less tax).

While the equities market boom has added a great deal of wealth to the balance sheet of US households, it is merely the latest instance in a long line of asset bubbles. No doubt many speculators believe that ‘this time is different’ but the ghost of Gann would argue otherwise.

These PE Firms Are About To Get Crushed By Their Subprime Auto Bets

In the aftermath of the "great recession," private equity firms placed massive bets on subprime auto finance companies with the typical "thesis" going something like this: "well, people have to get to work don"t they?"...genius, if we understand it correctly.

Of course, the "thesis" seemed to be confirmed when auto securitizations performed relatively well throughout the financial crisis, amid a sea of mortgage bonds getting wiped out, and private equity titans were off to the races with wall street titans from Perella Weinberg to Blackstone and KKR scooping stakes in small niche lenders.

Unfortunately, as Bloomberg points out today, the $3 billion bet on subprime auto lenders hasn"t played out precisely to plan as the "well, people have to get to work" thesis has proved to be somewhat less than full proof.

A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.

 

Since the turn of the decade, buyout firms, hedge funds and other private investors have staked at least $3 billion on non-bank auto lenders, according to Colonnade. Among PE firms, everyone from Blackstone and KKR & Co. to Lee Equity Partners, Altamont Capital and CIVC Partners waded in.

 

Many targeted smaller finance companies that often catered to the least creditworthy borrowers with nowhere else to turn. Overall, subprime car loans -- those extended to people with credit scores of 620 or lower -- have increased 72 percent since 2011. Last year, about 20 percent of all new car loans went to subprime borrowers.

 

“The PE guys sailed into this thing with stars in their eyes. Some of the businesses have done fine and some haven’t,” said Chris Gillock, managing director at Colonnade Advisors, a boutique investment bank. But right now, “it’s about as out-of-favor a sector as I can think of.”

Of course, the turnaround strategy was "simple." Given that subrpime auto collateral held up well during the great recession, private equity investors figured they were sitting on rock solid collateral that would holdup under even the most egregious loosening of underwriting standards.  Therefore, given that there was "no downside", lenders wholeheartedly embraced deteriorating underwriting standards, like stretching out terms so borrowers could "afford" cars they couldn"t really afford, as a way to grow their loans books. 

Alas, it didn"t work out as planned as subprime delinquencies are suddenly soaring and used car prices are tanking...making profits somewhat elusive.

Take Exeter. The company, which is licensed in all 50 states and works with roughly 10,000 dealerships, hasn’t been profitable since 2011, when Blackstone took a majority stake, an S&P Global Ratings report in September showed. That’s after the PE firm invested $472 million to help Exeter expand and cycled through three CEOs at the lender.

 

On a pretax basis, Exeter turned a profit in 2016 and 2017, according to Matthew Anderson, a spokesman at Blackstone. He added the New York-based firm hasn’t tried to sell the lender.

 

Blackstone may look to unload Exeter later next year, said a person familiar with the matter, who asked not to be identified because it’s private.

 

Bad loans remain an issue. This year, a rash of delinquencies in two bonds stuffed with loans that Exeter made in 2015 caused the securities to dip into their extra collateral to keep investors whole.

 

Another example is Flagship, which Perella Weinberg bought in 2010. (Innovatus Capital Partners, which manages the lender on behalf of Perella Weinberg, was formed by former Perella Weinberg managers last year after they split from the firm.)

As it turns out, the "well, people have to get to work" thesis only works to the extent that auto manufacturers maintain some level of discipline and refrain from exploiting their captive finance companies to flood the market with new supply...a move which will eventually lead to crashing used car prices and massive subprime securitization losses.

Unfortunately, as we pointed out last month, a review of the latest Fed data on auto loans underwritten by "Banks and Credit Unions" compared to those loans provided by "Auto Finance" companies prove that the nightmare scenario is playing out for subprime lenders...

First, taking a look at auto loans provided by traditional banks and credit unions, one can see some marginal deterioration in subprime auto loans.  That said, the deterioration is certainly nothing substantial with 90-day delinquencies pretty much in line with 2004/2005 levels and no where near the rates experienced in 2008/2009.

 

 

But, a drastically different picture emerges when looking at just the auto loans originated by America"s auto finance captives.  To our great "shock", auto OEMs in the U.S. seem to have been much more "flexible" on underwriting standards over the past couple of years resulting in delinquency rates that nearly rival those last experienced at the height of the great recession.

 

Of course, we"re sure that GM Financial and Ford Motor Credit just got unlucky with their deteriorating credit portfolios...certainly they would never knowingly attempt to game their own short-term financial success by putting millions of Americans into cars they can"t possibly afford, right?

Warning: Real Inflation is Already 3%... and the Fed Wants More!

While the Fed Board of Governors continues with its “we don’t see inflation anywhere” shtick, one of its own in-house measures (the underlying inflation gauge or UIG) is about to hit 3%.

The UIG estimated on the “full data set” increased from a revised 2.91% in October to 2.95% in November.

Source: the NY Fed.

Yes, one of the Fed’s OWN inflation measures (and one that leads the CPI) is about to hit 3%. And by the way, the UIG is from the NY-Fed: the regional Fed bank involved in daily market operations with the best understanding of how the financial system actually works.

Why does this matter?

Because, as I outlined in my bestselling book The Everything Bubble: the Endgame For Central Bank Policy, since the mid-1990s, the Fed has embarked on a policy of intentionally creating asset bubbles to keep the financial system afloat.

In the late ‘90s we had the Tech Bubble or bubble in Technology stocks.

When that bubble burst in 2000, the Fed dealt with it by intentionally creating a bubble in housing: a more senior asset class that was more systemically important.

When that bubble burst in 2008, triggering the Great Financial Crisis, the Fed dealt with it by intentionally creating yet another bubble…

… this time in US sovereign bonds, also called Treasuries.

By the way, these bonds are THE most senior asset class in the US financial system. The yields on these bonds represent the “risk-free” rate against which EVERY asset class in the financial system is priced.

So when these bonds went into a bubble, EVERYTHING followed.

This is THE endgame for Central Bank policy. And the bad news is that inflation is what will lead to this bubble bursting.

You see, bond yields track inflation (as well as economic growth). So as inflation rises (again, the UIG is clocking in at 3% already, bond yields will rise.

When bond yields rise, bond prices fall.

When bond prices fall, the Bond Bubble bursts.

When the Bond Bubble bursts, the EVERYTHING bubble follows.

The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Why We Should Worry About China

Authored by Daniel Lacalle via The Mises Institute,

Many of our readers might remember the late 80s. There were hundreds of movies, songs and books about the inevitable Japanese economic invasion.

The ones of you that did not live that period can see that it did not happen.

Why? Because the Japanese growth miracle was built on a massive debt bubble and, once it burst, the country fell into stagnation for the better part of two decades. It still has not recovered.

China presents many similarities in its economic model. Massive debt, overcapacity and central planned growth targets.

Many economists and investors feel relieved because China is still growing at 6.8%. They should think twice. On one side, that level of growth is clearly overestimated. By any realistic measure of growth, China’s Gross Domestic Product annual increase is significantly lower than the official figures show. Patrick Artus, global chief economist at Natixis Global Asset Management, as well as other economists have noted that there has been a significant decoupling since mid-2014 between the government’s official growth reading and more reliable indicators. On the other hand, even if we agree with the official readings, this growth has been achieved using a worryingly high level of debt.

Chinese growth of 6.5% per annum came with more than 14% annual growth in money supply. Total debt has quadrupled since the financial crisis, and official messages of “measures to curb indebtedness” have shown a different reality. China has added more debt in 2017 than the The European Union, the US, UK, and Japan combined. The IMF estimates debt as a proportion of Gross Domestic Product may rise from 235% to almost 300% by 2022.

This increase in debt would not be a concern if it yielded solid economic returns, but the latest figures show that more than 40%of the Hang Seng Index components are adding debt to repay interests, and China needs now four times more debt to generate the same growth as in 2007. Now bond yields are soaring, which triggered a rise in bond cancellations. Companies postponed or canceled a total of 71 bond issuances worth a combined $13.42 billion in November, according to Reuters. Although bond yields are not at excessive levels, with the Chinese 10-year bond still below 4%, most companies and households cannot absorb a modest rise in yields due to the weak returns and revenues they have. A massive housing bubble has made high-risk debt rise.

Overcapacity has soared, and industries face the impossible task of keeping capacity and jobs as well as deleveraging. And exporting its way out of overcapacity is not easy. In 1992, only two G20 countries had China as one of their top five export destinations, now there are fifteen. However, in 1992 China had a productive capacity deficit, now it has 60% overcapacity, and – as it cannot destroy that excess in a centralized planned economy – it intends to export it. But this is almost impossible to achieve when excess capacity is an endemic problem all over the world.

It is true that Chinese imbalances are mostly local-currency denominated, that household savings rate is healthy and that the high productivity sectors are doing well, but that was the case with Japan in the late 80s as well. And none of these factors offset the large risks created by the housing bubble and excess debt taken by state-owned conglomerates and private businesses. These risks are highly disinflationary and are likely going to impact long-term growth and inflation expectations globally. As China tries to export its way out of the bubble, the impact on prices and trade all over the world should not be underestimated. We should not ignore the financial risks either. Although China’s financial concerns are mostly concentrated in its own system and currency, this does not mean that worldwide spill-over effects can be ruled out.

China is a big risk, and the best outcome for all the world economies is that the government forgets impossible growth targets and focuses on reducing the rising financial imbalances. All of us will prefer a modest Chinese growth-rate rather than an inevitable crisis.

A Question For Every Investor

Authored by 720Global"s Michael Lebowitz via RealInvestmentAdvice.com,

Recently we received the following question from a subscriber:

“If a correction in the stock or bond markets comes, the Central Banks will buy stocks with printed money, like the Japanese Central Bank, etc. Will there ever be a shakeout of the garbage and junk in the system? I am losing all confidence.” –Ron H.

Questions like Ron’s that suggest the decay of capitalism and free markets should raise concerns for anyone’s market thesis, bullish, bearish or agnostic. What stops a central bank from manipulating asset prices? When do they cross a line from marginal manipulation to absolute price control? Unfortunately, there are no concrete answers to these questions, but there are clues.

Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).

The central banks’ goals, in general, are threefold:

• Expand the money supply allowing for the further proliferation of debt, which has sadly become the lifeline of most developed economies.


• Drive financial asset prices higher to create a wealth effect. This myth is premised on the belief that higher financial asset prices result in greater economic growth as wealth is spread to the masses.
  
  • “And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”– Ben Bernanke Editorial Washington Post 11/4/2010.
  
  


• Lastly, generate inflation, to help lessen the burden of debt.

QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome.

The wealth effect is putting riches in the hands of a small minority of the population, with negligible benefits, if any, flowing to the majority of the population. Bernanke’s version of the virtuous circle, as highlighted above, is far from virtuous unless you are in the upper five to ten percent of households by wealth.  To understand how a real economic virtuous circle works, we recommend you read our article The Death of the Virtuous Cycle and watch The Animated Virtuous Cycle.

Inflation has been low since 2008 and deflation continues to be a chief concern of most central bankers. Because QE, in all cases, was focused on financial asset prices and not the prices of everyday goods and services, the inflation they aimlessly seek has not occurred.

To summarize our views, largely ineffective monetary policies are providing few economic benefits. They are increasing the debt burden and furthering socially destabilizing trends. Worse, these policies are packed with consequences that lie dormant and have yet to emerge. One of our concerns, which is being heralded as a positive, is the massive distortions in financial asset prices worldwide. Consider a few of these facts below and whether they are sustainable:

• U.S. yields have been among the lowest ever on record dating back to 1776


• U.S. equity valuations have risen to levels rarely observed and from this perch have always been followed by massive losses


• Over $9 trillion in sovereign bonds yields in many European countries and Japan have negative current yields


• European junk-grade debt now trades at yields lower than U.S. Treasuries


• Veolia, a French BBB rated company, recently issued a 3-year bond at a yield of -.026%.


• Italian 3-year government bonds yield -0.337%, despite the 3^rd highest debt to GDP ratio of all developed nations (132%)


• Argentina, which has defaulted 6 times in the past 100 years, issued a $2.75 billion 100-year bond paying a paltry 8% interest


• The BOJ owns over 75% of all Japanese ETFs


• The Swiss National Bank owns 19.2 million shares of Apple, or 3% of total shares outstanding, and $84 billion in aggregate of U.S. stocks

Yes, Ron, the central bankers have clearly crossed the line between free markets and government controlled markets. To answer your question about the “shakeout,” we must wait until the inevitable day comes and asset prices are in free-fall. When this occurs, we will learn the full extent of their support and how far they have crossed the line. We like to think the central bankers are willing to endure the short-term pain of such a situation and allow the natural cycle of economies and asset prices to run their course. The reality, however, is that the pattern of their actions in the post-financial crisis era argue that they are unlikely to relinquish their grip. To the extent that authority and power is extended to the Fed through the U.S. Congress, it does not seem likely for career politicians to urge action that may be painful in the short-term but highly beneficial in the long-term.

This premonition was supported by recent statements from the October 2017 Federal Reserve minutes and appointed Fed Chairman Jerome Powell respectively. Fed Minutes:

“In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,” further “They worried that a sharp reversal in asset prices could have damaging effects on the economy.” Jerome Powell, in prepared remarks to Congress stated: “(the Fed) will respond with force to threats to the nation’s stability.”

Putting two and two together, one can quickly figure out that falling asset prices and the “damaging effects” they will inflict on the economy will not be tolerated by the Fed. 

Ron, while we cannot answer your question with certainty, we are relatively confident the Fed and other central banks’ influence on markets will only increase in time as they continue to perpetuate the debt and economic problems they helped create. Naturally, the next question for consideration is to what extent markets may be bigger than the Fed? That is an article for another day.

How Fed Rate Hikes Impact US Debt Slaves

Authored by Wolf Richter via WolfStreet.com,

But savers are still getting shafted.

Outstanding “revolving credit” owed by consumers – such as bank-issued and private-label credit cards – jumped 6.1% year-over-year to $977 billion in the third quarter, according to the Fed’s Board of Governors. When the holiday shopping season is over, it will exceed $1 trillion. At the same time, the Fed has set out to make this type of debt a lot more expensive.

The Fed’s four hikes of its target range for the federal funds rate in this cycle cost consumers with credit card balances an additional $6 billion in interest in 2017, according to WalletHub. The Fed’s widely expected quarter-percentage-point hike on December 13 will cost consumers with credit card balances an additional $1.5 billion in 2018. This would bring the incremental costs of five rates hikes so far to $7.5 billion next year.

Short-term yields have shot up since the rate-hike cycle started. For example, the three-month US Treasury yield rose from near 0% in October 2015 to 1.33% today. Credit card rates move with short-term rates.

Mortgage rates move in near-parallel with the 10-year Treasury yield, which, at 2.39%, has declined from about 2.6% a year ago. Hence, 30-year fixed-rate mortgages are still quoted with rates below 4%, and for now, homebuyers have been spared the impact of the rate hikes.

Auto loans, in line with mid-range Treasury yields, have wavered a lot and moved up only a little. The average APR on a 48-month new-car loan rose only 40 basis points over the past two years to 4.4% in August 2017, according to WalletHub, citing the most recent data available. Note that the offers of “0% financing” are usually in lieu of rebates or other incentives and are therefore rarely free.

The chart below shows the increase in the Fed’s target for the federal funds rate, from 0-0.25% to 1-1.25% (not including a hike on December 13), so an increase of 100-basis points. Credit card rates have increased in lockstep by 101 basis points. But bank deposits rates have lagged woefully behind, on the logic that credit-card borrowers and savers, both, are going to get shafted:

So how do these rate hikes translate for households with credit card balances?

Revolving credit outstanding of $1 trillion, spread over 117.72 million households, would amount to $8,300 per household. But many households do not carry interest-bearing credit card debt; they pay their cards off in full every month. Finance charges are concentrated on households that use this form of debt to finance their spending and that cannot pay off their balances every month. Many of these households are already strung out and are among the least able to afford higher interest payments.

Consumer credit bureau TransUnion shed some light on this in its Q3 2017 Industry Insights Report, according to which 195.9 million consumers had a revolving credit balance at the end of Q3, with total account balances of $1.35 trillion. This equals $6,892 per person with revolving credit balances. If there are two people with balances in a household, this would amount to nearly $14,000 of this high-cost debt. If the average interest rate on this debt is 20%, credit-cart interest payments alone add $233 a month to their household expenditures.

What is next for these folks?

For now, the Fed has penciled in, and economists expect, three hikes next year. But recent developments – particularly the expected tax cuts and what the Fed calls “elevated asset prices” – suggest that the Fed might “surprise” the markets with its hawkishness in 2018.

The Fed is currently pegging the “neutral” rate – the rate at which the federal funds rate is neither stimulating nor slowing the economy – at somewhere near 2.5% to 2.75%, so about five or six more rates hikes from today’s target range.

Interest rates on credit cards would follow in lockstep. These rate hikes to “neutral” would extract another $8 billion or so a year, on top of the additional $7.5 billion from the prior rate hikes.

But that’s not all. Credit card balances continue to rise as our brave consumers are trying to prop up US consumer spending and thus the global economy by borrowing more and more. Thus, rising credit card balances combined with rising interest rates on those balances conspire to produce sharply higher interest costs.

Since consumers with high-interest credit-card balances already don’t have enough money to pay off their costly debt, these additional interest payments will further curtail their efforts at making principal payments and thus inflate their credit card balances further.

For many consumers whose credit is already challenged, this scheme eventually ends in default. Credit card delinquencies have started to tick up, from 2.16% in Q1 2016 to 2.53% in Q3. While still soothingly low overall, the damage is always concentrated in the subprime segment – and on lenders that specialize in subprime lending. And there, delinquency rates are jumping. Yet these are still the best of times, with the lowest unemployment rate since the year 2000.

This parallels the delinquencies in auto loans. The 90+ day delinquency rate for loans originated by auto finance companies has hit 9.7% in Q3 2017, the highest since Q1 of 2010, when it was on the way down from the Financial Crisis. Delinquencies first hit that rate on the way up in Q3 2008, during the Lehman moment. But now, there is no Financial Crisis. These are the boom times.

Read…  Auto-Loan Subprime Blows Up Lehman-Moment-Like

Sweden: More Signs The World"s Biggest Housing Bubble Is Cracking

We like to highlight that although Sweden’s property bubble is not the longest running (that accolade goes to Australia at 55 years), it is probably the world’s biggest, even though it gets relatively little coverage in the mainstream financial media.

A month ago, we noted that SEB’s housing price indicator suffered its second biggest ever drop, falling by 39 points, only lagging a steeper fall from ten years earlier. This month the indicator, which shows the balance between households forecasting rising or falling prices, fell into negative territory, dropping to -5 from +11 in November. Households expecting prices to rise has almost halved from 66% In October, to 43% in November and 36% this month. The percentage of households expecting prices to fall has risen from 16% in October, to 32% in November and 41% this month.

After the housing price indicator was published, the Swedish krona fell as much as 0.7% versus the Euro to 10.0118, its lowest level since 5 December 2017.

Not surprisingly, the focal point of Sweden’s property boom has been Stockholm, where the decline in the housing price indicator in December 2017 was precipitous. According to Bloomberg.

SEB says sharp drop in home-price expectations in Stockholm was main culprit behind the decline in its Swedish home-price indicator, with the indicator falling to -42 in the Swedish capital in Dec. from -6 in Nov. That means the Stockholm indicator is now close to the record low of -47 that was reached in Dec. 2008, at the height of the global financial crisis.

(SEB) says 63% of households in Stockholm now expect prices to decline in the coming year while only 21% expect an increase; that’s “a dramatic shift compared with only two months’ ago,”

Given the disproportionate rate of decline in December in Stockholm, SEB was minded to ask whether special factors are at work “rather than general drivers such as fears over rising interest rates or a weak business cycle”. Indeed, aside from south-eastern Sweden, the outlook in all other regions remains positive. With regard to Stockholm, the bank notes that a large increase in new supply of expensive residential property and what it terms “very negative media reporting” have had an impact. Whether that’s a fair assessment, or whether it’s realist reporting of a monumental asset bubble is a moot point. What is indisputable is that the number of Swedish homes for sale has surged in November 2017 compared with the same month last year.

SEB is still undecided on whether Stockholm is a leading indicator for Sweden in general, as Bloomberg notes.

Differences between regions are “unusually high and some of the factors that currently weigh on Stockholm could turn out to be of a more temporary nature, especially given a continued lack of housing, low rates and the strong labor market”

The official HOX/Valueguard house price data for November 2017 will be published on 14 December. Last month, the weakness in SEB’s housing price indicator preceded clear evidence of a decline in Swedish house prices and the likely end to the housing bubble. Average house prices for Sweden fell 3.0% in October versus the previous month, with Stockholm prices down 3.7%. SEB expects “continued small sequential declines and as regards Stockholm also year-on-year” when the data is published on Thursday.

Ahead of the data, some analysts are expecting a “November Noir” with the month-on-month decline comparable with or even worse than what was seen in October 2017. Previewing the announcement, Bloomberg explains.

Anyone with a stake in Sweden’s property market should make space for Thursday in their calendar. That’s when they’ll get fresh clues as to whether they are facing a temporary blip or the start of a full-blown crash…There are indications that the monthly drop will be as big - if not bigger - than October’s, when prices fell 3 percent, the steepest decline since the global financial crisis of 2008.

Nordea Bank AB expects a “November Noir,” with home prices declining 3 percent on a monthly basis and 1 percent on an annual basis. Property-listings website Booli, which is owned by mortgage lender SBAB, said on December 7 that the average selling price for Swedish apartments last month fell 3 percent from the same period a year earlier, led by a 7 percent drop in Stockholm.

While we wouldn’t like to second guess the outcome of Thursday’s data, we would strongly disagree that the fall in prices is already “close to the bottom”. Bloomberg found an analyst with an upbeat view.

All told, there may still be a glimmer of hope. “Looking only at developments over the past two weeks, prices have remained largely stable, both in the country as a whole and in Stockholm,” Nordea’s Andreas Wallstrom said on December 5. “This could be a tentative signal that we are close to the bottom and that our forecast of largely stable prices ahead is on track.”

What we are finding harder to fathom are the schizophrenic views of the normally glum looking Riksbank Governor, Stefan Ingves, who has presided over Sweden’s property boom for more than a decade. Bloomberg reports him arguing that a slowdown is “not a big concern”, which contrasts sharply the grave warning he gave to the Financial Times in October 2016.

But despite a lack of drama so far, Mr Ingves remains worried about a bad ending due to risks over financial stability.

He said: “It remains an issue because we are mismanaging our housing market. Our housing market isn’t under control, in my view.” The ratio of household debt to disposable income in Sweden is one of the highest in the world at more than 180 per cent and the Riksbank estimates it will continue to rise in the coming years.

We have more sympathy with the latter.
 

Doug Noland: There Will Be No Way Out When This Market Bubble Bursts

Authored by Adam Taggart via PeakProsperity.com,

This week Doug Noland joins the podcast to discuss what he refers to as the "granddaddy of all bubbles".

Noland, a 30-year market analyst and specialist in credit cycles, currently works at McAlvany Wealth Management and is well known for his prior 16-year stint helping manage the Prudent Bear Fund.

He certainly shares our views that prices in nearly every financial asset class have become remarkably distorted due to central bank intervention, first with Greenspan"s actions to backstop the markets in the late-1980"s, and more recently (and more egregiously) with the combined central banking cartel"s massive and sustained liquidity injections in the years following the Great Financial Crisis.

All of which has blown the biggest inter-connected set of asset price bubbles the world has ever seen.

Noland foresees tremendous losses as inevitable, as the central banks lose control of the monstrosity they have created:

This is the granddaddy of all bubbles. We are at the end a long cycle where the bubble has reached the heart of money and credit.

 

There will be no way out. We"re not going to get enough private credit growth to reflate things when this bubble bursts. It"s going to have to come from central bank credit; it"s going to have to come from sovereign debt.

 

When this bubble bursts, it will shock people how far the central banks will have to expand their balance sheet just to accommodate the deleveraging in the system. And they won"t really be able to add new liquidity to the market; they"re just going to allow the transfer of leveraged positions from the leveraged players onto the central bank balance sheets.

 

When you get to that point, when the market sees that transfer occurring, I predict there"s going to be fear of long-term financial instruments. We"ll see rising yields. That"s when things will become problematic.

 

There will be losses. Of this global bubble, I think European debt is about the most conspicuous. Sure, European junk debt is nuts, too. It currently trades at 2%. Why? Because the ECB is buying large amounts of corporate debt. The ECB has kept rates either at 0% or negative. The perception is that the ECB will keep those markets liquid.

 

But look at Italy. It"s rapidly approaching 135% in terms of government debt to GDP. That debt will not get paid back. But yet, the market is willing hold that debt at 1.7%. This is debt that has traded at over a 7% yield back in 2012. But here it is today at 1.7%. I mean, Europe is just grossly mispricing its huge debt market. The excesses that have unfolded in European debt across the board are just staggering.

 

So when we get to that point when the central banks begin aggressively expanding their balance sheets (again) but the bond markets are not happy about it, then the central banks will finally have to decide if they want to continue to inflate or if they"re going to focus on trying to keep market yields down. This will be a very, very difficult situation for central bankers when it unfolds.

Click the play button below to listen to Chris" interview with Doug Noland (54m:31s).

No Risk Of Recession?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Review

I have been traveling a lot the last couple of weeks, so a big “Thank You” goes to Michael Lebowitz for “pinch hitting” for me. This week, I just want to review a couple of things as we begin to wrap up 2017.

Earlier this week, I wrote a piece called “This Is Nuts.”   If you haven’t got a chance to read it, I suggest you do. It outlines my view on the current market extension in the short-term and the potential for a mean-reverting correction at some point in the future. To wit:

“More importantly, a decline of such magnitude will threaten to trigger ‘margin calls’ which, as discussed previously, is the ‘time bomb’ waiting to happen.

 

Here is the point. The ‘excuses’ driving the rally are just that. The election of President Trump has had no material effect on the market outside of the liquidity injections which have exceeded $2 Trillion.

 

Importantly, on a weekly basis, the market has pushed into the highest level of overbought conditions on record since 2005. I have marked on the chart below each previous peak above 80 which has correlated to a subsequent decline in the near future.”

As I noted, the problem for investors is not being able to tell whether the next correction will be just a “correction” within an ongoing bull market advance, or something materially worse. Unfortunately, by the time most investors figure it out – it is generally far too late to do anything meaningful about it. 

“As shown below, price deviations from the 50-week moving average has been important markers for the sustainability of an advance historically. Prices can only deviate so far from their underlying moving average before a reversion will eventually occur. (You can’t have an ‘average’ unless price trades above and below the average during a given time frame.)”

“Notice that price deviations became much more augmented heading into 2000 as electronic trading came online and Wall Street turned the markets into a ‘casino’ for Main Street. At each major deviation of price from the 50-week moving average, there has either been a significant correction, or something materially worse.”

However, in the short-term, the market trends are CLEARLY bullish, very overbought, but nonetheless bullish.

As such, our portfolios remain “long” on the equity side of the ledger…for now. 

I am still somewhat suspicious of the markets going into 2018. As I laid out over the last couple of weeks, I believe the risk of “tax-related” selling is a strong possibility at the beginning of the year as portfolios lock in gains without having to pay taxes until 2019. While the risk to the overall market trend remains small, a correction of 3-5% is possible. I am still looking for the right “setup” by the end of the month to add a small “short S&P 500” position to portfolios and increase longer-duration bond exposure to hedge off some of the potential risks. I will keep you apprised.

Importantly, while the short-term backdrop is clearly bullish, and as noted above, the longer-term overbought condition remains worrisome. The monthly chart below shows the current market extension is at levels rarely seen in market history. With the market trading into 3-standard deviations above the 3-year moving average, RSI pushing well above 70, and the MACD line hitting the highest level since 2000, the risk of a market reversion has risen.

While there is plenty of discussion of the support of Central Banks keeping markets afloat indefinitely into the future, it should be remembered that at the peak of every major market throughout history, it was always believed to be “different this time.”

But in the end, it wasn’t, and this time is unlikely to be different as well.

No Risk Of A Recession?

I have discussed, along with Doug Kass, several different “meme’s” running around as of late trying to justify the current market extension. To wit:

“The advance has had two main storylines to support the bullish narrative.

• It’s an earnings recovery story, and;


• It’s all about tax cuts.”

We can add to that list “economic growth” given the strength of the rebound over the last two-quarters which followed two quarters of exceptionally weak growth in Q4 of 2016 and Q1 of 2017. While the growth has certainly gotten everyone excited as of late, it is quite possible we have seen the peak of the “restocking cycle” for now.

Under the guise of these “meme’s” it is currently believed that a “recession” is nowhere to be found and therefore it should be “clear sailing” for investors as we head into 2018 and beyond.

But, is that necessarily the case?

A Funny Thing Happened On The Way To The Recession

The majority of the analysis of economic data is short-term focused with prognostications based on single data points. For example, let’s take a look at the data below of real economic growth rates:

• January 1980:        1.43%


• July 1981:                 4.39%


• July 1990:                1.73%


• March 2001:           2.30%


• December 2007:    1.87%

Each of the dates above shows the growth rate of the economy immediately prior to the onset of a recession.

You will remember that during the entirety of 2007, the majority of the media, analyst, and economic community were proclaiming continued economic growth into the foreseeable future as there was “no sign of recession.”

I myself was rather brutally chastised in December of 2007 when I wrote that:

“We are now either in, or about to be in, the worst recession since the ‘Great Depression.’”

Of course, a full year later, after the annual data revisions had been released by the Bureau of Economic Analysis was the recession officially revealed. Unfortunately, by then it was far too late to matter.

However, it is here the mainstream media should have learned their lesson.

The chart below shows the S&P 500 index with recessions and when the National Bureau of Economic Research dated the start of the recession.

There are three lessons that should be learned from this:

1. The economic “number” reported today will not be the same when it is revised in the future.


2. The trend and deviation of the data are far more important than the number itself.


3. “Record” highs and lows are records for a reason as they denote historical turning points in the data.

For example, the level of jobless claims is one data series currently being touted as a clear example of why there is “no recession” in sight. As shown below, there is little argument that the data currently appears extremely “bullish” for the economy.

However, if we step back to a longer picture we find that such levels of jobless claims have historically noted the peak of economic growth and warned of a pending recession.

This makes complete sense as “jobless claims” fall to low levels when companies “hoard existing labor” to meet current levels of demand. In other words, companies reach a point of efficiency where they are no longer terminating individuals to align production to aggregate demand. Therefore, jobless claims naturally fall. 

But there is more to this story.

Less Than Meets The Eye

The last two-quarters of economic growth have stronger than the last two, but not breaking any records by any measure. However, these two stronger quarters of growth come at a time when oil prices are recovering modestly from their crash boosting activity and earnings. 

Furthermore, this widely touted economic and earnings “recovery,” as witnessed by surging asset prices, should have certainly been met by stronger activity from the majority of Americans, right?

What’s going on here?

Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, cannot be repealed. 

More importantly, while there is currently “no sign of recession,” what is going on with the main driver of economic growth – the consumer?

The chart below shows the real problem. Since the financial crisis, the average American has not seen much of a recovery. Wages have remained stagnant, real employment has been subdued and the actual cost of living (when accounting for insurance, college, and taxes) has risen rather sharply. The net effect has been a struggle to maintain the current standard of living which can be seen by the surge in credit as a percentage of the economy. 

To put this into perspective, we can look back throughout history and see that substantial increases in consumer debt to GDP have occurred coincident with recessionary drags in the economy. No sign of recession? Are you sure about that?

There has been a shift caused by the financial crisis, aging demographics, massive monetary interventions and the structural change in employment which has skewed the seasonal-adjustments in economic data. This makes every report from employment, retail sales, and manufacturing appear more robust than they would be otherwise. This is a problem mainstream analysis continues to overlook but will be used as an excuse when it reverses.

Here is my point. While the call of a “recession” may seem far-fetched based on today’s economic data points, no one was calling for a recession in early 2000 or 2007 either. By the time the data is adjusted, and the eventual recession is revealed, it won’t matter as the damage will have already been done.

As Howard Marks once quipped:

“Being right, but early in the call, is the same as being wrong.” 

While being optimistic about the economy and the markets currently is far more entertaining than doom and gloom, it is the honest assessment of the data and the underlying trends that are useful in protecting one’s wealth longer term.

Is there a recession currently? No.

Will there be a recession in the not so distant future? Absolutely.

Whether it is a mild, or “massive,” recession will make little difference to individuals as the net destruction of personal wealth will be just as damaging. Such is the nature of recessions on the financial markets.

Of course, I am sure to be chastised for penning such thoughts just as I was in 2000 and again in 2007. That is the cost of heresy against the financial establishment, unexperienced investors consumed by complacent optimism and emotionally-driven willful blindness. I am okay with that, it is a price I will gladly pay to keep my clients, and loyal readers, from being burned at the stake, not if, but when the next recession begins.

Peter Schiff Warns Of "Too Big To Pop" Bubble - "Everybody Is Going To Get Wiped Out!"

via Greg Hunter"s USAWatchdog.com,

Money manager Peter Schiff correctly predicted the financial meltdown in 2008.

Now, 10 years later, what does Schiff see today?  Schiff says,

“I predicted a lot more than just the stock market going down back then.  I predicted the financial crisis, but more importantly, I predicted what the government would do as a result of the financial crisis and what the consequences of that would be because that’s where we’re headed. 

 

The real crash I wrote about in my most recent book is still coming...

 

This is the third gigantic bubble that the Fed has inflated, and when this one pops, it’s not going to be ‘the third time is a charm.’  It’s going to be ‘three strikes and you’re out.’ 

 

I think this bubble is too big to pop.  I think it’s the mother of all bubbles, and when it bursts, there is not a bigger one that the Fed is going to be able to inflate to mask these problems, meaning we can’t kick the can down the road anymore.”

This time, the crisis is going to hit everyone in the wallet. Schiff goes on to say,

“I think the problem we are going to be confronted with is going to be much worse than a financial crisis.  It is going to be a dollar crisis, and it is going to be a sovereign debt crisis where the bonds people are worried about are not some sub-prime mortgages...

 

It’s going to be the U.S. government that people are worried about and the solvency of the U.S. government and the Treasury bonds.  If it’s a dollar crisis and people are worried about the dollar, the only thing worse than owning a dollar today is owning the promise of being paid in dollars in the future. 

 

I don’t think we have the courage to default and admit to our creditors that we don’t have the money and we can’t repay.  I think we will create all the money that we need so we can pretend to repay, but what we end up doing is wiping out the debt with inflation.”

So, how long can it go on? Schiff says,

“How high can the debt go?  I don’t know and you don’t know...

 

How many straws can you put on a camel’s back?  You don’t know until you put that final straw that’s one too many and you break his back.  So, can we go to $25 trillion in debt?  Maybe.  At some point, we are going to break the back of the camel with all this debt.  Then we are going to find out how much debt we can pile on, and it’s not going to be pretty. 

 

Everybody is going to lose.  Everybody is going to get wiped out who has been partying in the stock market, the bond market and the real estate market.  The dollar is going to tank, and purchasing power is going to get wiped out.”

Inversely, Schiff says it is the same with the suppressed gold and silver markets. Schiff contends,

“They can’t keep doing it, and it will end.  It’s just like how much debt can we take on.  It’s not an unlimited amount.  We will know when we get there. 

 

How long can they keep the price of gold suppressed?  We will know when we get there.  At some point, the price is going to explode because there is real physical buying, and all that paper selling can’t camouflage that...

 

People don’t trust fiat currencies . . . . More and more people are looking for alternatives, and the real alternative is gold.  When they embrace it, it’s going to overwhelm central banks’ ability to suppress the price.  In the meantime, enjoy the gift that they are giving.”

Join Greg Hunter as he goes One-on-One with money manager and financial expert Peter Schiff, founder of Euro Pacific Capital...

(To Donate to USAWatchdog.com Click Here) 

How "Ghost Collateral" And "Yin-Yang" Property Deals Will Collapse China"s Credit Bubble

One lesson from the 2007-08 crisis was that the vast majority of financial market participants, never mind the general public, were unfamiliar with subprime mortgages until the crisis was underway. Even now, we doubt many have much understanding of repo, the divergence between LIBOR and Fed Funds from 9 August 2007 and Eurodollar liquidity. In a similar way, when China’s bubble bursts, we doubt the majority will be that familiar with “ghost collateral” and “yin-yang” property contracts either.
 
A second lesson from the 2007-08 crisis was that as the value of the collateral underpinning the vast amount of leverage declined, the surge in margin calls led to cascading waves of selling in a downward spiral.

A third lesson was that the practice of re-hypothecating the same subprime mortgage bonds more than once, meant collateral supporting the most vulnerable part of the credit bubble was non-existent. It only became apparent with the falling prices and margin calls. Few people realised the bull market was built on such flimsy foundations, as long as prices kept rising.

A fourth lesson was that in order for the bubble to reach truly epic proportions, key financial institutions, especially banks, needed to conduct themselves in a negligent fashion and totally ignore increasing risks.

Each of these warning signs from the 2007-08 crisis exists in China’s property market now – and other parts of its financial system - bar one…falling prices leading to cascading waves of selling. However, as we’ll explain, we think it’s only a matter of months away now.

We should note that our thesis that China’s bubble would eventually be undermined by a “black hole” of insufficient collateral is one that we have been developing for several years. What we came to realise is that insufficient collateral is nothing more than normal business practice in the Chinese economy. It doesn’t matter whether it’s related to commodity-backed loans, property speculation or managing redemptions in the Wealth Management Products (WMPs) sector.

The first sign of this practice to received worldwide attention came to light in 2014 with the collateral fraud at China’s third largest port, Qingdao, which spreading to another port, Penglai, before it suddenly got covered up stopped. Numerous borrowers were found to have pledged the same copper and steel inventory as collateral to obtain funding from various banks, including state-owned Citic Resources, as well as Citi, Standard Chartered and others.

Not long after the scandal emerged, media attention began to wane, as commentators either assumed it was fixed or were distracted by other issues. However, it wasn’t fixed and we had a shocking reminder last month with the first major publicly announced loss. ED&F Man took an $80m hit after acting as a broker between Australia’s ANZ Bank and two Hong Kong-based trading companies in a sale-and-repurchase financing deal. The trade was backed by storage receipts for about $300 million of nickel stored in Glencore-owned warehouses in Asia. The problem was that the warehouse receipts were forged. As we said.

What is surprising is that it has taken over three years for the first serious hit from China"s "ghost collateral" to emerge. Or perhaps not: in a time of generally rising prices, few if any traders actually bother to check if their pledged collateral ever exists. The problem emerges when prices decline, which courtesy of China"s bubble machine, has so far not been an issue.

In June 2017, we discussed an article, “Ghost collateral’ haunts loans across China’s debt-laden banking system”, by our favourite Reuters reporter and forensic investigator of China’s collateral black hole, Engen Tham. Here are a few soundbites from Tham’s impressive piece.

One lawyer said he discovered that the same pile of steel was used to secure loans from 10 different lenders.

Most of the bankers said that kickbacks were prevalent, with loan officers turning a blind eye to the quality of collateral and knowingly accepting dubious and even fraudulent documents. Two of the bankers said they themselves had taken bribes to smooth the approval of loans.

Overall, 23 of the 30 bankers described the existence of ghost collateral as a serious problem and expected more instances to emerge as the Chinese economy slows. The bankers interviewed come from 13 banks in China, including some of the nation’s biggest lenders.

…fraudulent collateral is “a huge issue,” said Violet Ho, senior managing director and co-head of Greater China Investigations and Disputes Practice at Kroll, which conducts corporate investigations on the mainland. “Often you also see that the paperwork around collateral may be dodgy, and the bank loan officer knows, the intermediary knows, and the goods owner knows – so it’s essentially a Ponzi scheme.”

More than six months later and Egen Tham is back with a “special report” on loan fraud and missing collateral in China’s property market, “Hidden peril awaits China"s banks as property binge fuels mortgage fraud frenzy”. We strongly recommend the article as Tham goes into forensic detail as he examines specific legal disputes which act as a window on the broader Chinese property market.

Here is our summary.

Reuters discovered an epidemic of mortgage fraud in China’s property market from extensive research and interviews with buyers, sellers, real estate agents, loan agents (see below), bankers and lawyers from three major Chinese cities and four smaller ones.

Buyers habitually overvalue the cost of the house or property they are buying so they can borrow more funds which are typically channelled into the property market, e.g. buyers who have insufficient down payment or income. A mortgage banker at Shanghai Pudong Development Bank estimated that 20-30% of his clients borrowed the down payment from a third party.

Small banks and loan companies do not have the resources to monitor if money is borrowed to finance down payments on property deals. Reuters notes that short-term household loans increased by 243% to 1.6 trillion yuan in the first ten months of 2017.

There are up to three contacts for an individual property transaction – the legitimate one, one for the bank providing the loan which overstates the property’s value and one for the tax authorities. These are widely known as “yin-yang” contracts in which real and fake agreements operate side-by-side.

In these re-packaged loan arrangements, all parties, including the bank and the seller, can be complicit in the fraud. Tham provides detailed examples. Since “everybody is doing it”, the crimes go unpunished, even when the guilty admit them in court documents regarding related claims.

Reuters reports that it interviewed twelve estate agents who admitted to helping clients commit mortgage fraud. One salesperson at the E-House China agency said that about 50% of his clients engaged in mortgage fraud. Another real estate agent estimated that about 60% of Shanghai property deals involve “some kind of re-packaging”.

A separate industry of loan agents has evolved which help property buyers to fraudulently secure mortgage loans. Real estate agents, and the banks themselves, introduce borrowers to the loan agents which keeps the criminal activity at “arm’s length”. 

While many western websites are blocked by the Chinese authorities, discussions about securing a fraudulent mortgage, the price of fake documents and adverts from loan agents are prevalent on social media.

The motivation for mortgage fraud is the fear of missing out in the great Chinese property bubble. While official data showed that house prices rose 12.4% in 2016 (fastest since 2011), this understates reality. The state-controlled Chinese Academy of Social Sciences estimates that prices rose by an average of 42% in 33 major cities.

Reuters noted that property market insiders “see little prospects” of an end to mortgage fraud, even though the Chinese regulators have asked banks to stop over-valuations and “yin-yang” contracts. Even when evidence of fraud is specifically shown to a bank, it is likely to be ignored.  

To add some colour to our prose, here are a handful of soundbites from Tham’s article.

Almost all contracts for the sale of existing property in China have some “yin-yang” element, according to Denny Jiang, a former banker and recent home buyer in Beijing.

A Hong Kong property investor surnamed Fu, who declined to give his full name because he was admitting criminal behavior, told Reuters that 20,000 yuan (about $3,000) in a traditional red gift envelope was enough for a valuation company to inflate the price of the apartment he wanted to buy in Shenzhen by 40 percent. That increased the amount the bank was prepared to lend him by 1.26 million yuan.

While property prices in China continue to rise, mortgage fraud remains largely a hidden danger, much as subprime loans in the United States remained mostly out of sight ahead of the 2008 global financial crisis. The fear is that in a property correction, fraudulent mortgages would unravel, accelerating a collapse of housing prices in the world’s second biggest economy. This, in turn, would imperil China’s debt-laden financial system.

“It seems banks don’t consider the issue a serious one.”

We think the last two comments are particularly poignant, harking back to some of the key themes of the 2007-08 crisis. As we noted above, the one thing missing from China’s bubble is falling prices leading to cascading selling which exposes the “ghost collateral” in the financial system. As this chart from Bloomberg shows, the month-on-month growth in Chinese house prices has slowed dramatically from the heady levels of 2016, as Chinese authorities have increasingly tried to cool the bubble.

“Houses are for living in, not for speculation” as Xi Jinping stated at the recent Party Congress. Even though property sales have been slowing, The Standard reported the state’s CCTV said that the property sector’s three regulators, the PBoC, the Ministry of Housing and Urban-Rural Development and the Ministry of Land and Resources, remained committed to stepping up financial regulation and cracking down on speculation after a joint meeting in Wuhan last month.

The regulators said China would prevent funds from being illegally channelled into the property market, and ensure capital allocation between real estate and other industries was balanced. The three central government entities also told provinces to stick to their tightening measures and be consistent in policy, warning against lax regulation that could lead to big fluctuations in the market and a build-up in financial risks.

"(We) must not tolerate any thinking that we can sit back and relax," the regulators said, according to CCTV. China will also improve its management of the land market and prevent cases of high land prices pushing up property prices.

In Deutsche Bank’s latest China macro presentation, “Risks to watch in next six months, part IV”, the bank explained why property prices will cool further and could be declining on a year-on-year basis by the middle of next year (the month-on-month decline would likely be apparent in early 2018). DB’s rationale is as follows. Leverage in the financial sector is slowing rapidly.

Financial deleveraging is a key factor behind rising interest rates…

…which will deflate China’s property bubble during 2018.

DB believes that unless the Chinese authorities rein back their deleveraging policies, H2 2018 could see the market slow rapidly…

…which assumes China’s central planners can fine tune a deflating bubble once it starts. We have our doubts.