KeNo's Housing and Economic Portal: Thursday October 22 Housing and Economic stories

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If You Thought China's Equity Bubble Was Scary, Check Out Bonds - (www.bloomberg.com) As a rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another. So says Commerzbank AG, which puts the chance of a crash by year-end at 20 percent, up from almost zero in June. Industrial Securities Co. and Huachuang Securities Co. are warning of an unsustainable rally after bond prices climbed to six-year highs andissuance jumped to a record. The boom contrasts with caution elsewhere. A selloff in global corporate notes has pushed yields to a 21-month high, and credit-derivatives traders are demanding near the most in two years to insure against losses on Chinese government securities. While an imminent collapse isn’t yet the base-case scenario for most forecasters, China’s 42.2 trillion yuan ($6.7 trillion) bond market is flashing the same danger signs that triggered a tumble in stocks four months ago: stretched valuations, a surge in investor leverage and shrinking corporate profits.

Bank of America: Here's the Precise Moment When We Should Have Known QE Went Wrong - (www.bloomberg.com) "There's no such thing as a free lunch" is an oft-quoted maxim in economics, and it seems like a maxim that could easily be applied to the Federal Reserve's bond-buying program known as quantitative easing. In a new note titled "The real cost of QE," Bank of America's FX strategist Athanasios Vamvakidis takes a critical look at the U.S. central bank's particular brand of unconventional monetary policy, and its changing relationship with financial markets. He contends that "excessive reliance on unconventional monetary policy" is not without side effects, many of which are only now being felt in markets. At some point during Fed QE, the markets started reacting positively to bad news. In our view, this is when things started going wrong. Bad news became good news for asset prices, as markets expected more QE by the Fed.

China Faces Default Chain Reaction as Credit Guarantees Backfire - (www.bloomberg.com) China’s credit guarantees, lauded by Premier Li Keqiang for helping fund smaller firms, are backfiring as a slowing economy risks causing a chain of defaults. Failures of guaranteed loans surged 86 percent last year to about 400 billion yuan ($63 billion), according to UBS Group AG. At the nation’s Big Five lenders, such borrowings made up 18 percent of the total and 29 percent of non-performing financing, the Swiss bank said in a note. Standard & Poor’s said specialist guarantee firms are suffering, while the industry’s second-largest company halted operations amid accusations that it took on too much financial risk. Credit guarantees, which began as a way to help smaller firms obtain funding by merging the risks of various borrowers, have now expanded to cover debt such as bonds issued by cash-strapped local-government financing vehicles and online peer-to-peer loans. The business works on the assumption that borrowers are unlikely to default at the same time, a premise that collapsed in the U.S. during the global financial crisis when slumping home prices sparked a chain reaction of defaults.

Concern Grows That the I.M.F. May Be Overstretched - (www.nytimes.com) As financial leaders gather here this week to assess the health of the world economy, one of the central topics for discussion will be how ready markets are for a crisis in a large developing economy such as China, Turkey or Brazil. At the center of this debate will be the question of whether the International Monetary Fund still has the ability to act effectively if — as some experts fear — emerging markets begin to crumble under the weight of heavy debt. For the better part of five years, the I.M.F., which is sponsoring the weeklong meetings of financiers, government officials and central bankers from around the world, has been bogged down where it does not usually engage in rescue work — developed Europe, in particular Greece.

Spike in Repos Shows A Liquidity Crisis Hit The Banking System In September - (www.investmentresearchdynamics.com) …the spike-up in reverse repos occurred at the same time -- September 16 -- that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period. You'll note that this is around the same time that a crash in Glencore stock and bonds began. It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the "Lehman moment" that triggered the 2008 collapse. The blame on the general stock market plunge was cast on the Fed's inability to raise interest rates. However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out sight in the general liquidity functions of the global banking system.

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