Welcome we will be reviewing macro events from this past week from The Post I made at the beginning of this week on 7/11/22.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
Substack has launched an iOS app for those of you using apple devices. I am an android peasant and can’t tell you if its good or not, but check it out if you have an iPhone or some other such trappings of royalty.
Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
Of note, this review post is coming out a day late. The Forecast post for the coming week will come out Monday morning (US Central time (UTC-6 clock)). The Mechanical Liquidation section of the Crypto Macro is being excluded and will be in the Forecast post for 7/18.
Table of Contents
Chinese Corporate Junk Bonds
US Inflation
New Zealand Interest Rates
Canadian Interest Rates
Bank of England Speech
Crypto Macro
Price Action
Ethereum
Conclusion
1. Chinese Corporate Junk Bonds
I often cover how much the western sphere is losing control to the Eastern sphere, and it wouldn’t be too hard for someone reading this substack to get the impression that China is going to take over as the global hegemon. They’re trying of course, but they have significant internal problems which we have discussed previously, and they view deception on the global stage as a necessity to create the impression that they are stronger than they are.
The best way to understand China’s proxy war with the west as I did in February.
I have previously described China and US relations as two neighbors whose houses are on fire and are pointing guns at each others front door. Whoever is forced to flee their fire first, dies.
This blog covers the internal fire threatening the US extensively, because I live in the US and am most familiar and invested in its internal function, so you’re likely very familiar with the issue at hand. At the Macro level, this blog focuses on western currencies as they dominate the FX reserves on SWIFT which directly deals with my banking and the valuations of most investments I am interested in, particularly crypto. We don’t really focus on the Chinese central bank nor on inflation in China, but they are struggling in much the same way.
Today, we’re going to discuss the ongoing implications from the current collapse in the Chinese corporate bond markets and the contagion its causing. We discussed this last week and developments have continued to spread since then.
In the post linked above from last week we discussed how many of the current bond defaults were emanating from a real estate sector that had mis-represented itself (putting it nicely).
But in truth, the construction company did little more than pour some cement, used bamboo as rebar and then disappeared with the money.
Many parts of China are covered in these incomplete, crumbling structures. The west generously called this a “real estate bubble,” but it was far more significant than this. Because most of what was built can barely even be called real estate as you can see in the video above.
Well, as a result of that there are many Chinese home-buyers that have been increasingly refusing to pay their mortgages on stalled constructions, incomplete projects, and empty promises.
Homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, according to researcher China Real Estate Information Corp. That’s up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group Inc. analysts including Shujin Chen.
Chinese authorities held emergency meetings with major banks this week to discuss the mortgage boycotts on concern that more buyers may follow suit, according to people familiar with the matter. Some lenders plan to tighten their mortgage lending requirements in high-risk cities, two of the people said.
If you paid for a modern unit in a high-rise that was supposed to be completed 4 years ago, but every time you visit it’s just a concrete skeleton, how long would you continue to pay the mortgage during construction before you just said “fuck it?” This is a real question for Chinese property developers to consider. I explained last week how a corporate bond for a construction company could essentially evaporate $1 billion into nothing. That contagion is further spreading among more Chinese corporate bonds and represents a real problem for the country.
The average yield on Chinese junk dollar debt, which is dominated by developers, has surged to almost 26%. Selling has also spread to investment-grade builders, with a bond issued by China Vanke Co., the nation’s second-largest builder by sales, falling to a record-low of 81.6 cents on the dollar on Tuesday.
Think about that, if the average yield is 26%, that means that a bond sold by an average Chinese corporation is selling for just 74 cents on the dollar, and falling fast. The country is losing faith in these developers, and for good reason too. These ghost cities, and crumbling grey skeletons of a home that dot the Chinese landscape are not worth the promises they were built on. The Chinese government will either have to backstop these promises, or allow a significant portion of their economy and wealth to vanish into the thin air that it has always been.
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