China home prices fall as property slowdown threatens economic outlook
Beijing introduced measures aimed at constraining borrowing at developers over asset bubble fears
New home prices in China fell for the second consecutive month in October, as a property slowdown and mounting distress at real estate developers clouded the country’s economic outlook.
Prices for new homes across 70 of China’s biggest cities fell by 0.25 per cent in October compared with the previous month, according to data from the country’s National Bureau of Statistics.
The metric, which also edged lower in September for the first time in more than half a decade, highlights rising pressure on policymakers who have sought to limit debt growth across the real estate sector but are now confronted with liquidity issues at many developers.
Last week, the US Federal Reserve warned that stresses within the property sector, which directly and indirectly accounts for more than a quarter of economic activity in China, posed “some risk to the US financial system”.
Tommy Wu, an economist at Oxford Economics, a research group, pointed to a 24 per cent decline in residential sales in October year-on-year, and suggested the real estate downturn was “weighing on industry” at a time when economic momentum remained weak.
“We think that China’s property downturn will be significant but contained, due to a low stock of unsold housing, room for policy easing, continuing urbanisation and significant income growth,” he said.
Goldman Sachs analysts said that prices rose 3.4 per cent year-on-year but added that “only a few cities saw higher property prices in primary and secondary markets in October”.
A crisis at Evergrande, the world’s most indebted property company, emerged over the summer and has since spread to a range of developers, which account for a large portion of Asia’s wider high-yield bond market. Many are struggling to access new financing.
Over recent months, against a backdrop of falling land sales, state developers have accounted for the majority of land purchases at auctions across 22 big Chinese cities.
China introduced measures constraining borrowing at developers last year amid fears over asset bubbles in its property market, and added caps on mortgage lending. Last week, reports in state media indicated a potential easing in some aspects of its approach.
Iris Pang, chief China economist at ING, noted concerns that real estate developers would default and construction activity stop, but said the worries “may be overdone” and pointed to the prospect of continued work on uncompleted projects and local government measures to limit price falls.
On Monday, Sunac, one of China’s biggest developers, said it had raised close to $1bn in a sale of new shares as well as shares in its services unit. Kaisa, a big borrower on international markets, said on Friday that it would not pay an interim dividend after a week in which its bond payments came under scrutiny.
Official data on Monday also showed retail sales beating expectations to rise 4.9 per cent year-on-year. Industrial production, which last year was a big driver of China’s rapid recovery from the pandemic, added 3.5 per cent. In the third quarter, the economy grew at its slowest pace in a year.
Nominal real estate investment contracted 5.4 per cent in October, according to Oxford Economics’ calculations based on official data, but remains up 7.2 per cent over the year to date.
Are Semiconductor Sales Peaking?
Semiconductor stocks have been on a tear lately as chip demand is robust, as US firms have been piling in.
Further helping the cause, semiconductor manufacturers can’t produce enough chips, which gives them significant pricing power.
The graph below warns, investors may be over-exuberant.
As shown, courtesy of Stouff Capital, semiconductor sales strongly correlate with credit growth in China.
Given China produces a large number of goods using chips, the relationship makes sense. Recently, China has clamped down on credit creation resulting in negative credit growth and, not surprisingly, weak economic growth.
If the semi-credit relationship holds up, the graph portends semiconductor sales may appreciably underperform sales estimates for 2022.
However, the shortage of chips and demand for products using chips, such as cars, provides a decent base of demand for future sales.
Inflation In Irrational Exuberance
Market Stalls Ahead Of Options Expiration
Unlike recent weeks, this past week saw the market begin to consolidate recent gains ahead of options expiration next Friday. As we discussed previously, pullbacks have occurred with regularity. Interestingly, as noted by the vertical lines in the chart below, these pullbacks occur near option expirations.
Given the options expire next week, is there more volatility coming? Maybe. As noted in the chart above, the MACD signal is very close to triggering a short-term “sell” signal from an elevated level and the market remains very overbought.
Furthermore, as noted last week, our “money flow sell signal” triggered a “sell signal.” The combination of the sell signals, combined with very light volume, and weak breadth certainly warrants some caution heading into next week.
Does this mean the market will experience a significant contraction? A pullback to the short-term moving averages would not be surprising and would encompass about a 3-4% drawdown.
What would cause such a correction? I don’t know. However, we are entering the mutual fund distribution season where fund managers need to distribution capital gains, dividends, and interest. Given most funds are carrying very low levels of cash, they will likely have to sell holdings to make those distributions.
The good news, however, is a pullback would set the market up for the traditional end-of-year “Santa Claus” rally.
But at the moment, a correction is the furthest thing from investors’ minds. While price inflation may be a problem, there is clearly inflation in “irrational exuberance” as of late.
Inflation In Irrational Exuberance
In our recent Daily Commentary (click the banner above for FREE pre-market email delivery) we touched on signs of inflation in “irrational exuberance.” To wit:
“The S&P 500 “buying” stampede continues, pushing stock market valuations to extremes. As of Friday, the Shiller PE valuation rose above 40. Current valuations now dwarf that seen in 1929 and only bettered by the latter months of 1999.“
Of course, “valuations are a terrible market timing device,” but they tell you much about investor psychology and future returns. However, there are other measures also supporting inflation in irrational exuberance.
For example, the chart from TheMarketEar shows the price of Bitcoin to Tesla shares. The surge in both in recent weeks is a good proxy of the inflation of irrational exuberance and a disregard for risk.
Furthermore, as retail investors pile into equity risk, Sentiment Trader also put out two gauges on Wednesday showing similar measures of inflation in irrational exuberance reaching worrisome levels.
The Panic/Euphoria Model, constructed using a methodology described by Citigroup in public posts, has rebounded and is once again above its ‘euphoria’ threshold.
“And the Bear Market Probability Model, described in interviews by Goldman Sachs, has soared to one of the highest levels in 50 years.“
As they conclude, and with which we agree:
“Choppiness among stocks within indexes pushed the composite model below 50% in late September. Now, enthusiasm is back, and the model is above 90%, challenging the highest readings in 23 years. The chart shows us that the S&P 500’s annualized return when the composite model was above 80% was a miserly -9.2%. When the model was above 85%, accounting for about 2% of all days since 1998, that return was a horrid -15.6%.”
Such is why being a bit more defensive near-term may be well advised.
What Driving & Portfolio Management Have In Common
A bit of a timeline is required for our newer readers.
In mid-August, we were discussing a very similar situation where markets got very elevated and we needed to reduce risk in our portfolios.
Then, in late September,following a 5% decline in the market that reduced the momentum chase, we added exposure. To wit:
“With the markets now deeply oversold on a short-term basis, we deployed some of our cash throughout the week to rebalance the portfolio toward normal allocation levels. We don’t expect a tremendous amount of upside, given the ongoing weakness of market internals, but a retest of previous highs is not out of the question.”
Importantly, notice that we state “decrease” and “increase.” Such does not mean being “all-in” or “all-out.”
Portfolio and risk management is a process of making small moves and adjusting for changes in the market as they come. It is much like driving a car. Therefore, when the car is moving, you are constantly making small adjustments to keep the car in the proper lane, accelerating or decelerating as needed, and paying attention to the constant flow of signals from all around you.
Most of this we do subconsciously, but the actions all insure two things:
- A reduction of risk
- Getting to our destination safely.
Investing is much the same. Paying attention to the warning signs, adjusting the “speed” of the portfolio, and keeping the allocation in the “proper lane,” can ensure safe arrival at your destination.
Not doing so can have very damaging consequences.
We are currently driving a little slower, have our foot over the brake, and have added a bit of “liability insurance” to our portfolio as warnings rise.
One of those warnings is the Fed’s choice to ignore inflation.
Inflation Is Surging
On Wednesday, the latest print of the consumer price index came in much hotter than expected. The chart below shows 3-measures of inflation:
- CPI
- Core-CPI (Less food and energy,) and
- Variable-CPI (Less healthcare and rent.)
The surge in inflationary pressures is evident with “Core CPI” surging to 6.2% on an annualized basis. However, for most Americans, the consumption of food and energy is something they deal with every week. Therefore, the impact on discretionary incomes is far more insidious when those are included.
As my colleague Doug Kass noted:
“My eyeballs tell me inflation is running a fair bit hotter than what is being reported now. I think the average person would also think that based on their buying experiences today.”
Furthermore, most individuals have their rent or mortgage payments under a contractual agreement for a certain period. The same goes for healthcare costs as premiums stay stable under a contractual term. The “Variable CPI,” shows what inflation looks like from a consumer’s point of view. At 8.5% it is not surprising consumers are getting upset.
Consequently, the surge in variable CPI is even more problematic when wages fail to keep up with inflationary pressures. Therefore, despite headlines of rising wage pressures, real wages are currently 2% below the annual pace of inflation. Again, the implications on economic growth, and the market, are not great.
The Fed Has To Be Sweating
As discussed in “Did The Fed Set The Market Up For A Crash,” the choice of ignoring inflation in hopes of getting back to historically low unemployment rates may be problematic.
“Ignoring the inflation risk is likely unwise. Previous spikes in the inflation spread aligned with weaker economic growth, stock market contractions, or crashes.“
When it comes to ‘full” employment, Michael Lebowitzran some analysis suggesting the Fed may be overly confident in its abilities to support economic growth.
“The U6 Unemployment Rate is not as well followed as the U3 shown above. U6 includes those unemployed in the U3 number but also those underemployed and discouraged from seeking jobs. Jerome Powell thinks the U6 figure is a more credible indicator given the pandemic-related dislocations. As shown below, the U6 rate is 0.4% below the average of the five years leading to the pandemic.”
As Michael concludes, the Fed has already met its mandate of full employment. However, the reason they are ignoring inflation is to support asset valuations which the Fed recently admitted were excessive.
“Prices of risky assets keep rising, making them more susceptible to perilous crashes if the economy takes a turn for the worse. Asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stalls.” – Bloomberg
Ignoring the surging rates of inflation, to support asset prices, may result in a “policy mistake” that leads to the one outcome the Fed is trying to avoid – a stock market crash.
Of course, such would not be the first time the Fed’s hubris exceeded their grasp and led to unwanted outcomes.
It is likely to be no different this time.
However, I am sure the Fed is starting to sweat.
"I Keep Forgetting That You're Still Alive": Musk Taunts Bernie Sanders, Asks If He Should "Sell More Stock"
Elon Musk has been on a roll with his tweets in the past month. Starting two weeks ago, Musk infuriated feminists the world over, when he said he was "thinking of starting new university: Texas Institute of Technology & Science", which of course abbreviated to "TITS"...
... and which according to QZ tech reporter Ananya Bhattacharya showed how "the world’s richest man’s poor sense of humor is exposing how much of a boys’ club tech still is."
Or one week ago, when after his infamous "should i sell Tesla stock which i decided i would sell back in September" poll, Democratic Senator Ron Wyden - who is also the chairman of the Senate Finance committee - criticized Musk's stunt on Twitter, saying "whether or not the world's wealthiest man pays any taxes at all shouldn't depend on the results of a Twitter poll," he said. "It's time for the Billionaires Income Tax."
Musk then fired back at Wyden, focusing on his appearance and claiming Wyden looked like he just had an orgasm. Musk wrote: "Why does ur pp look like u just came?"
Perhaps Musk was referring to Wyden's "pfp", or profile pic, but the typo was more than strategic.
Moments later, Musk, who briefly changed his name on Twitter to "Lorde Edge," added in his tweets on Saturday: "Note, I do not take a cash salary or bonus from anywhere. I only have stock, thus the only way for me to pay taxes personally is to sell stock."
Fast forwarding to today when in this most surreal and absurd of timelines, in response to the latest demand from democrats socialists to redistribute wealth in a way that's "fair" or in other words, in a way that "socialists" find most beneficial to their own selfish interests, when failed presidential candidate Bernie Sanders, 80, said "we must demand that the extremely wealthy pay their fair share. Period"...
... Elon Musk pulled off his best "Donald Trump at twitter" impression responding as only the world's richest man would: "I keep forgetting that you’re still alive."
And just in case Musk still had any democrat/progressive/liberal supporters left, Musk hinted that he was happy to send TSLA stock sliding even more, perhaps until such time as it dragged the broader market down with it, when he said "Want me to sell more stock, Bernie? Just say the word …"
So far Bernie - who chairs the Senate Budget Committee and as a socialist has long demand that the wealthy should pay more taxes, tweeting in March that the amount of wealth accumulated by Musk and Jeff Bezos was “immoral” - has not said the word, although we are confident the outraged army of bluecheck op-ed writers at the WaPo/NYT/CNN won't have a problem saying more than one word in the coming days.
Airbus Says It Can’t Meet Current Demand for Single-Aisle Jets
European planemaker’s sales efforts hindered by production capacity constraints for its popular A320 over the next three years
DUBAI—Airbus SE said it can’t ramp up production of its popular single-aisle jet fast enough to meet demand and forecasts delivery constraints for another three years as airlines clamor for new planes again.
Airbus Chief Financial Officer Dominik Asam, in an interview ahead of the Dubai air show that started Sunday, said airlines are asking for delivery of new aircraft after most of them stopped ordering new jets and tried in many cases to defer or cancel orders during the Covid-19 pandemic. Airbus is pushing sales—what the industry calls sales “campaigns”—but is constrained on what it can promise, Mr. Asam said.
“There is a really vibrant activity on campaigns, especially on the single aisle,” he said. “One real challenge we face is the lack of near-term delivery slots.”
After slashing production amid the pandemic last year, Airbus earlier this year told suppliers to start ramping back up, optimistic that demand would snap back. But aerospace suppliers—just like other manufacturers around the world—have struggled with supply-line disruptions and soaring costs. Mr. Asam said they can’t make parts and components fast enough to allow Airbus to deliver all the jets it thinks it can sell. Each aircraft has about 500,000 parts and components. Airbus receives some 1.7 million parts a day across its factories, he said.
Airbus said earlier this month that it faced delivery shortfalls as it struggles with on-time delivery of components and quality lapses. The restart in production of Boeing Co. ’s 737 MAX after its recertification is also adding pressure to the aerospace supply chain.
Mr. Asam said that is all hurting Airbus’s ability to sell new planes. Boeing is outselling Airbus this year, for the first time since the grounding of the 737 MAX, the rival to the A320. He said Airbus is also balking at customers who are pushing for the “fire-sale pricing” that was available during the peak of the crisis last year. With a lack of delivery capacity, those prices are no longer viable.
“There is more pressure now because there is a scarcity of [delivery] slots,” Mr. Asam said. He said airlines are asking to take planes between 2022 and 2024. “For us, there are severe constraints on that time window,” he said.
In a signal of the demand for new aircraft, Airbus on Sunday reached a deal for 255 new narrow-body aircraft from a consortium of airlines backed by private-equity firm Indigo Partners, including Colorado-based Frontier Group Holdings Inc. and Hungary’s Wizz Air Holdings PLC.
Airbus Chief Commercial Officer Christian Scherer said deliveries of those aircraft—all A321neo variants—will trickle over the next few years with the vast majority scheduled for the second half of the decade.
Airbus has outlined plans to exceed its pre-pandemic production rates of its A320neo single-aisle after cutting rates by more than a third at the start of the pandemic. It plans to lift production to 65 a month by 2023. The plane maker is also aiming to go further, telling suppliers that it wants to lift that rate to as many as 75 a month by 2025 or possibly higher. Airbus Chief Executive Guillaume Faury said Sunday that the Indigo deal supports that plan.
The higher rate proposal has triggered pushback from some suppliers and from leasing companies, who have warned that with travel still subdued, Airbus risks flooding the market.
“I’m trying to convince our [supply] partners to come along,” Mr. Asam said. “We also will probably need more support from our customers going forward to help us do that.”
Boeing has been more subdued over its output plans after halting all production of its popular single aisle for more than four months in 2020. It aims to reach 31 737 MAX jets a month next year before deciding on increasing that.
After burning through cash at the peak of the pandemic, Airbus has since rebuilt its cash levels thanks to continued deliveries of the A320neo—Airbus’s most profitable program.
That cash is critical to supporting Airbus’s new development programs in the coming years, Mr. Asam said. It is providing funds for a longer-range variant of its A320neo, dubbed the A321XLR. It is also funding the recently launched freighter version of its A350 wide-body. Airbus also wants to develop a hydrogen-powered jet for entry in service in 2035. The latter is expected to cost in the “low double-digit billions” at least, Mr. Asam said.
After two slow months of deliveries, the CFO said he is still confident that Airbus will hit its target to deliver 600 aircraft this year. “We have a lot remaining to do for November and December, but you’ve seen in prior years that we were able to handle such orders of magnitude,” Mr. Asam said. “It will certainly be a run towards the finish like every year, but we are still sticking to that 600 aircraft delivery guidance for 2021.”
The Chip That Changed the World
Most of the wealth created since 1971 is a result of Intel’s 4004 microprocessor.
The Intel 4004 microprocessor, 1971.
The world changed on Nov. 15, 1971, and hardly anyone noticed. It is the 50th anniversary of the launch of the Intel 4004 microprocessor, a computer carved onto silicon, an element as plentiful on earth as sand on a beach. Microprocessors unchained computers from air-conditioned rooms and freed computing power to go wherever it is needed most. Life has improved exponentially since.
Back then, IBM mainframes were kept in sealed rooms and were so expensive companies used argon gas instead of water to put out computer-room fires. Workers were told to evacuate on short notice, before the gas would suffocate them. Feeding decks of punch cards into a reader and typing simple commands into clunky Teletype machines were the only ways to interact with the IBM computers. Digital Equipment Corp. sold PDP-8 minicomputers to labs and offices that weighed 250 pounds.
In 1969, Nippon Calculating Machine Corp. asked Intel to design 12 custom chips for a new printing calculator. Engineers Federico Faggin, Stanley Mazor and Ted Hoff were tired of designing different chips for various companies and suggested instead four chips, including one programmable chip they could use for many products. Using only 2,300 transistors, they created the 4004 microprocessor. Four bits of data could move around the chip at a time. The half-inch-long rectangular integrated circuit had a clock speed of 750 kilohertz and could do about 92,000 operations a second.
Intel introduced the 3,500-transistor, eight-bit 8008 in 1972; the 29,000-transistor, 16-bit 8086, capable of 710,000 operations a second, was introduced in 1978. IBM used the next iteration, the Intel 8088, for its first personal computer. By comparison, Apple’s new M1 Max processor has 57 billion transistors doing 10.4 trillion floating-point operations a second. That is at least a billionfold increase in computer power in 50 years. We’ve come a long way, baby.
When I met Mr. Hoff in the 1980s, he told me that he once took his broken television to a repairman, who noted a problem with the microprocessor. The repairman then asked why he was laughing.
Now that everyone has a computer in his pocket, one of my favorite movie scenes isn’t quite so funny. In “Take the Money and Run” (1969), Woody Allen’s character interviews for a job at an insurance company and his interviewer asks, “Have you ever had any experience running a high-speed digital electronic computer?” “Yes, I have.” “Where?” “My aunt has one.”
Silicon processors are little engines of human ingenuity that run clever code scaled to billions of devices. They get smaller, faster, cheaper and use less power every year as they spread like Johnny’s apple seeds through society. These days, everyone’s aunt has at least one. Today’s automobiles often need 50 or more microprocessors to drive down the road, although with the current chip shortage, many are sitting on lots waiting for chips.
Mobile computing paved the way for smartphones, robotic vacuum cleaners, autonomous vehicles, moisture sensors for crops—even GPS tracking for the migratory patterns of birds. It also has created an infinitely updatable world—bugs get fixed and new features are rolled out without a change in hardware.
The separation of hardware and software, of design and control, is underappreciated. It enables global supply chains, for good or bad (mostly good). Apple can design in California, manufacture anywhere, and add its software at any point in the manufacturing process.
I’m convinced that most wealth created since 1971 is a direct result of the 4004. All of tech. All of finance. All of retail—ask Walmart about its inventory system. Oil? Good luck finding and drilling it without smart machines.
So 50 years later, have we reached the limit? For the past 20 years, microprocessors have boosted performance by adding more computing cores per chip. That Apple M1 has 16 processor cores. Graphics processing units, often used for artificial intelligence and bitcoin mining, can have thousands of processor cores.
Someday Gordon Moore’s Law from 1965—the number of transistors per chip doubles about every two years—will poop out. Some day John von Neumann’s architecture of processor and memory, first described in 1945, will no longer meet our computing needs. My guess is that we have another decade or two to squeeze more gains out of our current chip technology and computer architecture.
Luckily for us, computing doesn’t stand still. The neural networks used by Amazon’s Alexa to recognize your voice and Google to pick out faces in photos won’t replace the microprocessor, but they will likely serve as a complementary technology that can scale up for the next 50 years. Google is about to introduce a next-generation Tensor chip, updating the ones found in the company’s Pixel 6 phones. It is basically an artificial-intelligence accelerator in your pocket, allowing your phone to adapt to you—your own personal neural network to train. It is exciting and scary at the same time. What will we do with all this power? That question is like seeing the 4004 and being asked what microprocessors will be used for besides calculators in the future. Your answer would probably be off by a factor of a billion
Chinese state developers step up land auction activity to rescue local governments
Evergrande and other private sector groups have been driven to the edge of bankruptcy
State-owned developers are rushing to the rescue of cash-strapped local governments in China by stepping to the fore at land auctions previously dominated by private sector groups.
Over the past three months state developers have bought three-quarters of residential land sold at auctions in 22 big cities by value, according to a Financial Times analysis of public records. They had previously purchased only about 45 per cent of land plots sold at auctions, which is the biggest source of income for local governments.
A year-long drive by Beijing to reduce leverage across the property sector, which is estimated to account for about one-third of total output in the world’s second-largest economy, has driven Evergrande and other private-sector Chinese developers to the brink of bankruptcy. That, in turn, has damped buyer demand at land auctions, hitting local government finances hard.
“Local governments are counting on state groups, which have access to cheap credit, to keep land sales from falling off a cliff,” said Chai Duo, a professor at Central University of Finance and Economics in Beijing and a government policy adviser. “Debt-laden private developers are focused on reducing their leverage.”
State-owned bidders include highly leveraged local government finance vehicles, which have traditionally focused on infrastructure projects rather than real estate. According to the public records reviewed by the Financial Times, LGFVs have accounted for about a third of land purchases by value at auctions since September, compared with just over 10 per cent earlier in the year.
“Our land purchases are political decisions, not business ones,” said an official at Fenghua Urban Investment Corp, who asked not to be identified. Fenghua is an LGFV in the eastern city of Ningbo, where it paid Rmb682m ($107m) for two plots of land earlier this month.
State-owned bidders, however, have not been able to fill completely the vacuum left by retreating private-sector developers. Since September, almost a third of all auctions have failed, with no bidders willing to pay the minimum price. The previous auction failure rate was just 6.5 per cent.
In Beijing, traditionally one of China’s hottest property markets, 26 out of 43 plots on offer at the city’s latest auction in October failed to attract even a single bidder.
“We are at the beginning of a systematic collapse of land auctions if policy tightening continues,” said the head of research at a leading real estate consultancy in the capital, who asked not to be identified.
While the Chinese government has eased some policies to relieve the pressure building on China’s property sector, it has shown no sign of backing down on the strict “red line” leverage limits that pushed Evergrande and a few other developers to the brink.
China’s central bank recently published data showing a strong year-on-year increase in mortgage lending in October — a departure from its normal practice of publishing only quarterly mortgage lending data.
“The unusual disclosure of a monthly figure is clearly another attempt to calm market sentiment,” Wei He and Xiaoxi Zhang at Gavekal Dragonomics, a Beijing research firm, wrote in a recent report. “Banks have been allowed or encouraged to pick up the pace of mortgage lending.”
“There is no way the land market can recover without policy easing,” added Ai Zhenqiang, a researcher at Mingyuan Real Estate Research Institute in Shenzhen.
Private sector developers that bid freely at auctions earlier this year said that the market’s recent downturn had dissuaded them from returning to the fray.
On November 8, Niu Wei, an executive at Shenzhen developer Excellence Group, told a meeting that his group “lacked the capacity” to bid at auctions after spending more than Rmb21bn for land plots this year, according to a transcript seen by the FT.
The meeting was attended by multiple Shenzhen developers, banks, trust companies, bond investors and a think-tank affiliated to the State Council, China’s cabinet.
“It makes more sense to stand by than burn cash to bet on an uncertain future,” added a real estate executive in Beijing, who asked not to be named.