We discuss deflation and China with Chris Temple
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Should the Chinese economy “implode” how would that affect the economies around the world? Our guess, and we believe a very good guess, is that the ramifications would be as serious as anything we have seen in recent times.
It’s what you don’t know that is most dangerous!
finally a cogent interview re china…& debt…
AL ? Corvus Gold Drop’s 23 % ? No News ?
Chris T. – I agree with the fact that we’ll continue to see more blood in the streets around the oil patch, related industries, and the financial institutions that financed them.
As for the junk bonds, CFS had a good strategy yesterday using the inverse ETF (SJB).
We’re starting to see the pain in the oil sector that we were discussing a few months back:
On May 18, 2015 at 9:13 am,
Shad says:
I also think when oil tops in the near term and turns back down and blows through the $50s into the $40s that this should time out with the Fall as well and create the real panic in the oil patch when everyone realizes the rebound we are seeing now isn’t going to stick.
Look at the charts for companies like Sandridge (SD) or Halcon resources (HK). Ugly.
Below is an article out yesterday discussing the bloodbath phase has begun in Oil.
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Oil Goes Down, Bankruptcies Go Up – These 5 Frackers Could Be Next To Fall
AUG 17, 2015 – Christopher Helman – Forbes
Some of those are the ones I was looking at for their preferred dividends but if I buy them, I’ll be left holding the bag. Heavy debt and preferred dividends don’t mix, especially with oil being so low. Good post, Shad.
Thanks Wiseguy. Yes I used to hold some of those as well and have traded a few of them on counter-trend rallies, but have been almost completely out of individual oil and gas stocks for the last 4 months.
I like going long with the ETFs – XLE, XOP, OIH, and UWTI. I short oil with DWTI, but that trade looks mostly over. I’m considering going long again in the near future for the first time in months because we are finally getting some real carnage showing up in the sector.
Here’s a telling passage from that article linked above from Forbes:
“The energy companies in the S&P 500 have fallen 27% in the past year. The broader collection of energy companies in the S&P Total Market Index (which also includes beleaguered coal miners) is off 46%. Holders of energy company debt have suffered as well. The average yield on $212 billion in high yield energy debt is 11.8%, reports Bloomberg. Fitch Ratings said in a note last week that the default rate on energy debt is already at 3% on the year and likely heading to 4%. The average default rate for the sector is 1.9% per year. According to Fitch, after a company has done an equity-for-debt exchange there’s a 66% probability of it ultimately being forced into bankruptcy restructuring.”
Yes, Shad, that’s a plain vanilla ETF to play that move – but little “oomph” to it. Those who really want to go nuts would buy puts on JNK and the like. Bear in mind, though, that we never know the day when the Fed will cry “Uncle” – or the Chinese will really go into stimulus overdrive. If/when that happens, junk bonds will have a big rally. So one who wants to short these needs to have a foot near the exit door.
Agreed and good thoughts on JNK Mr. T. Unfortunately, nobody knows when the Fed will cry “uncle” and when junk bonds may rally. Where is Uncle Ben when we need him? Instead we have Mother Fellen, as Turd referred to Yellen.
Until then……..they’re going to be under pressure. I expect more capsizing and sinking in the oil patch and related businesses as mentioned, but the financial institutions are also under the gun.
Between weakness in these areas, multinationals, and the rest of the commodity complex, the indexes will be under further pressure as the high flying stocks, and bio tech can only go so far to keep things propped up a little longer. There are more and more companies putting in 52 week lows and fewer and fewer putting in 52 week highs. I smell a correction on the horizon, and as mentioned earlier this year before it was in vogue, the Fall Sept/Oct is where we reach the tipping point.
Thanks for the discussion on China, Chris. I really appreciate your practical and plain outlook on macro scenarios that are hard to completely wrap my mind around.
I read an article saying that London held 20% of Chinese debt held outside of China. I think this is just debt generally not Chinese gov’t debt.
Here it is. I have no idea how I found it!
https://www.bbvaresearch.com/wp-content/uploads/2015/08/Global_Economic_Outlook_3Q15_Cap3.pdf
If you are British, you need to look at pages 16 & 17 as numbered on the pages themselves, Figures 3.10 and 3.11. Read the text and then gulp. Claims on China (% of total claims held by each country). UK has 20% they say.
I will have a read shortly. Might gulp a bit later.
Good article Silverbug Dave. Thanks for finding it!
If China implodes, the Vancouver real estate market is going to crash.
and the PPT has no history in our market…??!! HELLO