Global Investors Hiding Out in the U.S.

An interesting look at year to date ETF flows from Bloomberg.  Nearly $56B inflows to the U.S. this year vs $17B outflows from Japan and Europe.  The PE on the S&P 500 has expanded from 17x to 19x this year, it appears a lot of investors are hiding out in the U.S.

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In Millions of U.S.

Country Netflow Netflow Flow%
United States ł +55,914 +3.1
Canada +3,519 +6.8
China +2,198 +2.3
United kingdom +1,660 +5.6
Brazil +723 +13.6
Australia +710 +5.9
Colombia +247 +26.6
Asia Pacific* +219 +2.9
Latam Region* +164 +10.6
Europe ex UK* +140 +3.3
Russia -358 -6.1
Taiwan -369 -4.6
India -400 -2.8
Mexico -521 -11.8
Italy -700 -11.5
Spain -880 -23.5
Japan -1,208 -0.6
European Region* -3,683 -3.4
Germany -3,722 -8.5
Eurozone* -8,905 -5.0


Lehman 2.0, China Moves to “Securitize” Toxic Debts

This morning, Reuters and Bloomberg are reporting securitization of distressed assets once again is emerging as a creative venue, this time for Chinese banks to offload their toxic bad debts.

Pick up out 21 Lehman Systemic Indicators Here

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Central Banks and Investor’s Reach for Yield

 Act #1: 2004-8

$3 Trillion:  US Mortgage Backed Securities, CDOs, RMBS, MBS, NINJA loans (No Income, No Job, No Assets)

 Act #2: 2010-16

$5 Trillion: Commodity Debt, Emerging Market government debt, EU Bank CoCo debt, MLP debt, China SEO Debt, Puerto Rico debt


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In a repeat of 2007-8, Central Banks have kept interest rates far too low for to long.  This forces yield hungry investors to reach for yield, oh how we’ve seen this show before. The bottom line, trillions (U.S. dollars) of capital is in places it just shouldn’t be.

The fundamental problem, 99% of central bankers have never taken professional risk, they’ve never hit a 90mph fast ball.  The have written and theorized at great length on the subject, but they’ve never actually been in the game.

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In 2007, they couldn’t see the 2008 financial crisis coming at U.S. financial markets, as many recall Fed Chair Ben Bernanke lectured us “subprime risks are contained.”  The Iceberg was right there, they couldn’t see it. 

Today, they sit back as the disgusting debt load floats, floats and floats higher.

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The recent success of bad-debt securities sales by Bank of China and China Merchants Bank may prompt more securitization by China banks. The six largest listed banks are all taking part in a 50 billion yuan ($7.6 billion) pilot program, Reuters reported. Broker Guotai Junan estimated bad-loan securitization will reach 1.5 trillion yuan in 2016. The sales may limit credit costs and help banks’ profits.


Companies Impacted: Bank of China and China Merchants Bank sold distressed asset-backed securities totaling 534 million yuan in May. AgBank and China Construction may soon follow with similar plans, according to the Shanghai Securities Journal. ICBC and Bocom are also participating in the pilot program.

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The Global Wrecking Ball that is the U.S. Dollar

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday June 1st, at 2pm.

Pick up our latest Bear Traps Report menu here.

MAY ISM MANUFACTURING: 51.3 vs 50.3 exp.
PRICES PAID: 63.5 vs 58.5 exp.
Sub Indices:
– New Orders Index: 55.7 vs 55.8 prior
– Production index: 52.6 vs 54.2 prior
– Employment Index: 49.2 vs 49.2 prior
– Inventories 45.0 vs 45.5 prior
(So higher prices drove the beat in ISM, most other components weak/unched)
ISM ManufacturingOver the last year, the global wrecking ball that is the U.S. dollar index has ripped apart the global economy.  The pull back from February – April in the greenback was a breath of fresh air for markets.  Last year, U.S. ISM Manufacturing was hammered by the dollar’s surge, today it surprised to the upside.
The price of a Fed “liftoff” (strong dollar) is a lot higher than economists tell you, they don’t look at risk.
We have our top 5 trading ideas looking ahead at the Fed’s next move, pick up our latest Bear Traps Report menu here.


Air Ball: China Manufactured PMI

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday June 1st, at 2pm.

Pick up our latest Bear Traps Report here.

Breaking News: They call it China Manufacturing PMI, but it’s just manufactured.

Manufacturing PMI at 50.1 vs expected 50.0 vs prior 50.1. ( the range was 49.7-50.2; 27 economists, or lost persons searching in the dark).
Non-manufacturing 53.1 vs prior 53.5.
One would have hoped a $1T stimulus program, coming on the back of a massively re-leveraged banking system,  a less pathetic result would have come forth.  They’re running out of gas.


China PMI

China’s capital outflows will ONLY accelerate as yuan depreciates in response to a stronger dollar (sharpest surge since 2014) in response to the Fed’s beloved rate hike plans.

State Owned Enterprises represent 50% of ALL the loans of the Chinese banking system, and these SOE loans are the most troubled loans. The total claim of Chinese banks on the non financial Chinese corporations reached 175% of GDP by end Q1.

If 25% of SOEs become NPL (non-performing), they wipe away the ENTIRE capital base of the Chinese banking system.  For our full report, click below.

Pick up our latest Bear Traps Report here.




Best Dollar Run Since 2014, Winners and Losers

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday June 1st, at 2pm.

Pick up our latest Bear Traps Report here.

The Fed governors have successfully talked the dollar higher.  So far Mr. Market hasn’t slapped them across the wrist, but we know that’s coming.

The U.S. Dollar posted its best monthly gain in almost two years on speculation the Federal Reserve is getting closer to raising interest rates as soon as June. Bloomberg’s Dollar Spot Index, which tracks the greenback against 10 major peers, added 3.7 percent in May, its best performance since September 2014.

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At the Bear Traps Report, we made a bullish call on the U.S. Dollar on May 2nd.  For a look across the meadow of the next six months, winners and losers.  Pick up our latest Bear Traps Report here.



Global Economy is still Driving the U.S. Interest Rate Bus

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday June 1st, at 2pm.

Pick up our latest Bear Traps Report here.

Wall St. has been lecturing us for two years to stay away from bonds.  They foolishly have been far too focused on the U.S. economic outlook, as well as the Fed’s lofty (bogus) assessment as to the path ahead.

As we’ve stressed since 2013, the global economy is driving the U.S. interest rate bus, not the Fed.

Global GDP

Outside the USA: $61T

Inside the USA: $18T

The bottom line U.S. economist keep getting wrong comes down to simple global math.  If $18T is growing at 1.8% to 2% a year, and $60T was growing at 5%, now 2.5%, the growth slowdown globally far over-powers the U.S.  Obviously, demographics are playing a large roll as well as developed markets are aging, more savers than ever.

Pick up our latest Bear Traps Report here.

Today’s $9T of negative yielding bonds are creating a panic buy into U.S. Treasuries.  As you can see below, large speculators are more bullish U.S. government bonds than ever, to us this is a near term sell signal.


In a world of negative interest rates, U.S. debt looks like a high-yielder. Hedge funds and other large speculators boosted their net long positions in Treasury Bond Futures as of May 24 to the highest level since 2005, a report from the Commodity Futures Trading Commission showed. Treasuries with maturities of 10 years and longer have returned 8.5 percent this year as inflation gauges remain below the Federal Reserve’s 2 percent target. – Bloomberg

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China’s Currency War with the Fed and the World

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday June 1st, at 2pm.

Pick up our latest Bear Traps Report here.

Breaking News: China Weakens Yuan Fixing to Lowest Level Since March 2011

PBOC weakens yuan fixing by 0.34% to 6.5693/USD.

Offshore yuan -0.04% to 6.5689 in Hong Kong.

Once again, just as the Fed makes a move at a rate hike, the U.S. dollar surge creates side effects that explode in China.  We believe the PBOC (China’s Central Bank) wants to ease some of the depreciation pressure before the Fed interest rate decision in June.

As you can see below, over the last year as the yuan weakens, U.S. equity (stock market) volatility has surged.


Pick up our latest Bear Traps Report here.

As we stated last year in our Bear Traps Reports, we believe a bailout in the trillions of dollars is needed to the arrest toxic bad-debt levels dragging down China’s economy.

The 13 Most Dangerous Men on Earth

The most dangerous men on earth might just be those 13 men in a room in Beijing. We are witnessing a planned economy gone rogue, asset prices surging in some places, plunging in others. With all the Communist Party’s talk of giving markets a hand in prices, China’s financial system is still ruled by their highly LEVERAGED state-owned lenders. They swooped in to support the economy several times since 2008. Party leaders can order banks to make new loans or lock in generous forbearance agreements (extend and pretend) on others. The PBOC has also been expanding support for “policy banks” that support government objectives, re-inflating asset bubbles.

Beware of SEOs

From 2006-8, I led a team that made over $100m betting against the subprime mortgage market.  Today, we’re seeing the same colossal failure of common sense all over again in China.  It’s shadow banking on steroids.  Beware, 25% of the (SEOs) state owned enterprises’ outstanding loans are equal to the entire capital base of China’s commercial banks plus loan loss reserves.  It’s leverage on leverage, on leverage.

The Coming 20% Devaluation

We believe China’s currency is 20% over-valued.  As the Fed moves toward extended liftoff, the U.S. dollar’s surge creates a lot of pain for China, it unearths ugly flaws in their planned economy.

China must weaken its currency in an effort to stop the hemorrhaging of cash leaving the country.

As most know, China lost $800B last year in capital outflows (see the chart below).  As the dollar weakened in March, capital outflows in China took a well-needed breather. The Chinese yuan is pegged to the U.S. dollar; thus, a strong U.S. currency makes China’s goods sold around the world much more expensive. After the dollar’s pull back (March – April), China posted their two best export months in the last year.  But now the U.S. dollar is on the rise again (see below).

If you are a billionaire in China and you know your currency is dramatically over-valued, you are going to do everything you can to get cash out of the country and into dollars. This explains the record amount of U.S. acquisitions by companies in China, it’s the great cash run out of the country.

Two Ways Out

There are only two ways out for China, a substantial currency or credit devaluation. We think they will choose the former. With NPLs (non-performing loans) at 17% of outstanding credit vs what the PBOC tells us (less than 2%), it’s a mess. Bad loans are 8x to 10x than the bogus official numbers lead us to believe. Ultimately, we believe there is likely $700B to $1T of losses.

$50B Bullets at a $5T Problem

Over the last year, China has been busy throwing $50B bullets at a $5T problem. In recent months, the PBOC’s effectiveness has been seen in the money multiplier, which was at 5.2 in March. The nest result, for every yuan the central bank pumps into the economy generates 4.2 more through the process of loans generating new deposits that then create further loans. Next, the cycle keeps repeating, the bubble keeps inflating.

China Forex

Bogus Trade Data

There are rising doubts in the market that China has not had a trade surplus since at least February 2013.   A reported (bogus) trade surplus of roughly $74B for Q1 2016,  we believe in reality was a deficit in the $90-$110B neighborhood.

A look at China’s current balance against net foreign receipts by domestic banks gets you an entirely different picture.

Over a 10 year period, the difference is near $500B.  The trade gap is even larger.  In 2015, China reported a trade surplus of $330B, while banks reported a trade account deficit of $121B.

If you view the data this way, China’s foreign exchange reserves are in the ugly reality of $2.8T to $3T.

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