This is Only the Beginning in China

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Anybody looking at their portfolios today or pulling up the financial news has seen the impact of China's interbank markets on world asset prices over the last couple of business days.

Now there are times when problems show up, cause a small correction, and then seem to fade away. Then there are those rare risks that have the capacity of inflicting large amounts of damage over a period of time. The situation in China is in the latter category.

Now just about every post I've made about the markets has come with a list of designated risk factors. Those were PIIGS + F, Japan, and China(and their primary suppliers Brazil and Australia). I always had my guess that China represented the highest likelihood of getting out of control because of the sheer quantity of new credit required to keep them from a large real estate crash and financial crisis. The other reason was that the Chinese were the only ones that seemed to be trying to poke the bubble, but then spooking when they saw the sheer size of the problem once they started that(it's created this jigsaw policy making of trying to cool things down, then not liking the view, and then reflating only to try to cool things down again several months later). The other countries dealing with different issues were primarily focused on just kicking the can down the road.

Naive investors and commentators kept on talking about the Chinese ability to engineer a 'soft landing' where they seek to pop it and then support it's decline and then pop it again and support its decline. People that actually understood the scale of the problem knew that was impossible. Their society required massive new amounts of credit to just maintain status quo; most new debt goes to pay for old debt often times at exorbitant interest rates in the informal marketplace. Even if they just tried to stop the growth of credit(not letting new credit fall just halting its growth) many participants wouldn't be able to rollover their entire debt stock + expenses + interest for the year and they would be forced to default. So there is no slowly letting air out of this tire. It's either keep pumping it full of air or jam a hammer into it keep it from growing any larger.


So the key question that always remained was when would the Chinese stop playing this game and when would they realize that they just had to let it blow up and unwind.

The announcement by the PBoC today was a huge change in the situation. They expressly stated that they will not be coming to the rescue and told their banks that they're on their own. Those that have been paying attention will know that the overnight SHIBOR hit 25% for a short period of time last week. It is largely believed that the PBoC engineered that intentionally. SHIBOR rates of 10% represents largely a shut down of the interbank markets in China. The entire SHIBOR rate regime is floating close to that number as we speak.

This has coincided with major announcements of reform by the new leadership headed by Xi Jinping(I profiled the new leadership on here a couple of years ago). Xi appears to be targeting corruption, the state owned enterprises, and the excesses their massive credit expansion has created. Given these reforms and details being discussed it would make sense that he would behind a move to let blood out of the property and credit bubble of China. It also makes sense that he would do it so soon because he could blame it on his predecessor where as if he kept going for a while he would no longer enjoy that luxury.

Personally, I'm growing a bigger and bigger fan of Xi. He appears to have the balls to tackle very painful problems in China today even with severe short term consequences.


So you have all the necessary conditions for the bubble to be popped. You have massive excesses in property markets(ghost cities, prices ~40 times average income, massive over supply), huge credit growth(50% of the new global money supply over the last few years has been from China they've 'printed' far more than the US has), there is realistically not much more policymakers could delay the inevitable, and finally(and in today's "No Lehman's world" the most important) what appears to be the final capitulation moment where policymakers are now content to let it happen.

You get that mix and you have a recipe for serious market correction China. Now some believe that this is the PBoC just instigating a really harsh dosage of pain before injecting liquidity. Others believe they're in for the long haul. And even if they're are now in for the long haul they could spook again in the future. Non performing loans spike from 1% to 10% they could slam the market with more liquidity and lending to make the problem go away again(hell just in the last month several small banks have announced that their NPLs have spiked from 1% to 5% just in 1 months time).

Last couple of thoughts here:
A) If this plays out bad there is no way Bernanke is tapering this year. That fickle SOB spooks easier than just about any other central banker on Earth. So that is definitely a mitigating factor.
B) There is some debate how much impact this would have on US markets. Due to capital controls in China US institutional investors have always had a hard time getting capital into China to even have at risk. Chinese have always had a hard time getting capital out of China to be worried about that capital leaving the US in the future. So the banking crisis likely wont spread that much outside of China's borders nor should the property markets. But on the other end many domestically traded companies have significant sales in China and many domestically traded companies have manufacturing in China. So there is impact.

What I would do about this:
1) Too many factors to think about selling all equity holdings
2) But significant enough risk here to maybe review how much 'dry powder' you have. I think anybody 100% long equities here is pretty crazy, but I've been saying that for a little while now. Ultimately you just want to make sure that you a nice percentage(maybe 20-50% depending on your risk tolerance) dry that you would actually feel comfortable redeploying at cheaper stock prices down the road.
3) You can get dry powder via cash, near cash, or a systemic hedge(put option on maybe the S&P for a period of time).

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This has been a concern of mine for a little while too. I've seen videos of Jim Chanos where he spoke about specific examples of bubbles in China for a few years now, and it might finally be time that he gets to cash in on his short positions. I don't know details of the bubble, but his videos might be worth checking out for some more insight.

Highly recommend Chanos on this as well. I never miss one. Many of the details he goes into are very interesting.

But ankitgu he's made money on his Chinese shorts almost uninterrupted since he put them on about 2 years ago. If you look up the H-Share market on China you'll see that even as China grew at 8% a year the share prices of their stocks continued to slide. He's basically said that he's holding his China shorts until pretty much the point of the large Chinese banks being recapitalized(read Chinese TARP) by the Chinese government because it's his contention that without new credit to rollover these massive debt loads Non performing loans would be in excess of 20% and that means insolvent banks(and the Chinese would then probably recapitalize them while wiping out all of the common equity holders which means he would get a 100% return on those positions).

The show Vice on HBO did a nice story on the Ghost Towns in China.. Its crazy.

No way in hell Bernanke can get out of QE. He is going to be forced to step in and buy even more treasuries to keep the bubble going... interest rates are rising so much that home prices are going to start falling again(as they naturally should in a non-manipulated market). We all know the fun things that happen when housing prices fall (people can't move to jobs, people walk away, banks fail, no one wants to buy, etc).

Rates are rising because the Fed simply said they will buy smaller amounts... can you imagine how high they would explode if they stop buying or actually tried to sell? I have been saying for years the fed has no exit strategy.

Bernanke has said that if the economy doesn't recover he will do more QE... no matter how many times it doesn't work he will just do it again. When all you have is a hammer every problem looks like a nail. He is going to use that hammer to bang on everything in the house including nails and windows.

Most of the Chinese banks are state owned... I have a hard time believing the government is going to sit back and let them fail. That would require politicians to admit they were wrong for many years with all their cheap money policies. Depositors taking massive losses would be enough to overthrow the current government. I think the more likely scenario is China will sell some of their trillions foreign reserves (bad for US economy and interest rates) or they run the printing presses and paper over the problem.

dshibb said:   Highly recommend Chanos on this as well. I never miss one.

What's the best place to find his newest commentary and videos?

Why do you think this calls for getting out of US equities?

wilesmt said:   dshibb said:   Highly recommend Chanos on this as well. I never miss one.

What's the best place to find his newest commentary and videos?


Google

Just type in Jim Chanos, then click more-->videos, and then click search tools-->month, year, custom whatever time frame you want to cut it off at.

Unfortunately that is the best way to do it. He grants interviews to Bloomberg, CNBC, and numerous online outfits. He also does conferences as well.

I would probably start with his recent presentation to the Wine Country conference.

China was supposed to collapse for decades now but that country seems getting better every time I visit.

anyways, hope this prediction holds.

valueinvestor said:   Why do you think this calls for getting out of US equities?

Did I say get out of US equities?

dshibb said:   
1) Too many factors to think about selling all equity holdings



Instead I sent this off as a warning to anybody that is too overexposed. 100%, 90%, 80%, and maybe 70% are in to high right now IMO. Too big of a risk.


US equities are very much global equities. Many US equities derive significant income Chinese operations. The question of the financial effects of severe issues here are tougher to answer. One would think that it being a very capital controlled country that it likely would lead to huge losses by let's say American or European banks. But you could also look at Forex once and realize the reverberations of a sharp change in the valuation of the Juan or the sale of some US assets by their central bank(which would be dangerous for the Juan Dollar and Chinese exporters to the US).

All I can say is that is no 'fiscal cliff' joke. This is real and this is going to be very painful for a lot of Chinese. If does manage to create worldwide waves they actually could be significant; China is the worlds 2nd largest economy after all and the US's largest trading partner.

sunspotzsz said:   China was supposed to collapse for decades now but that country seems getting better every time I visit.

anyways, hope this prediction holds.


You hope for people to experience large financial losses and the suffering and misery that come with them?

brettdoyle said:   
Most of the Chinese banks are state owned... I have a hard time believing the government is going to sit back and let them fail. That would require politicians to admit they were wrong for many years with all their cheap money policies. Depositors taking massive losses would be enough to overthrow the current government. I think the more likely scenario is China will sell some of their trillions foreign reserves (bad for US economy and interest rates) or they run the printing presses and paper over the problem.


Brett, in China the 4 largest banks are *majority* state owned. They are also publicly traded for the minority shares. They wont let them fail. They will recapitalize them, but they will wipe out the non state shareholders when they do it or at least like the US subordinate them. I find it highly unlikely that the Chinese will allow shareholders to remain while they bail out their banking system. It's quite likely that they'll wipe out the bond holders as well. They wont wipe out the depositors.


And Brett they can't use those trillions of foreign reserves. Those assets were purchased to keep the Yuan a cheap currency. Their ownership acts as a short of the Yuan. If they sell those assets the Renminbi goes higher and higher and all of their little exporters go bust. Not only that a little over $1 trillion of those reserves have corresponding liabilities associated with them. They can't sell.

An asset is something you can sell. They can't really sell these to fix their problem.

dshibb said:   brettdoyle said:   
Most of the Chinese banks are state owned... I have a hard time believing the government is going to sit back and let them fail. That would require politicians to admit they were wrong for many years with all their cheap money policies. Depositors taking massive losses would be enough to overthrow the current government. I think the more likely scenario is China will sell some of their trillions foreign reserves (bad for US economy and interest rates) or they run the printing presses and paper over the problem.


Brett, in China the 4 largest banks are *majority* state owned. They are also publicly traded for the minority shares. They wont let them fail. They will recapitalize them, but they will wipe out the non state shareholders when they do it or at least like the US subordinate them. I find it highly unlikely that the Chinese will allow shareholders to remain while they bail out their banking system. It's quite likely that they'll wipe out the bond holders as well. They wont wipe out the depositors.


And Brett they can't use those trillions of foreign reserves. Those assets were purchased to keep the Yuan a cheap currency. Their ownership acts as a short of the Yuan. If they sell those assets the Renminbi goes higher and higher and all of their little exporters go bust. Not only that a little over $1 trillion of those reserves have corresponding liabilities associated with them. They can't sell.

An asset is something you can sell. They can't really sell these to fix their problem.


The Chinese are foolish for propping up the US consumer and US debt markets. They would be wise to let the Yuan appreciate... once they do that the purchasing power of Chinese consumers will increase dramatically(rising middle class) and they can start consuming all of those goods they produce domestically. There is no point in exporting to a country that is too poor to afford your goods and needs their currency propped so they can buy your stuff.

As it stands now Americans get all of the goods Chinese produce without having to honestly pay for them... we just pay for it using treasuries that they can never sell... it is a good situation for us. It is essentially vendor financed consumption. Of course our gain is their loss.

brettdoyle said:   
The Chinese are foolish for propping up the US consumer and US debt markets. They would be wise to let the Yuan appreciate... once they do that the purchasing power of Chinese consumers will increase dramatically(rising middle class) and they can start consuming all of those goods they produce domestically. There is no point in exporting to a country that is too poor to afford your goods and needs their currency propped so they can buy your stuff.

As it stands now Americans get all of the goods Chinese produce without having to honestly pay for them... we just pay for it using treasuries that they can never sell... it is a good situation for us. It is essentially vendor financed consumption. Of course our gain is their loss.


You're mostly right, but it's not that simple.

Their population is employed predominately in manufacturing for export and to a lesser extent construction as the big 2. What you're describing: First they pull back on the credit markets causing real estate prices to crash and default rates to skyrocket. NPLs sky rocket and wipe out the equity of their banking system. They then ride to the rescue with their foreign reserves to save the banking system and the Renminbi strengthens. Then the manufacturing exporters go bust. That is a one 2 kick to the groin right there. Long term probably the right move, but immediately afterward they have massive unemployment and consumption falls not rises in China for a while. What rises out of those ashes is a strong China, but lets face it they're not going to do that.

Instead they'll crush the real estate and shadow banking sector and then China will issue sovereign bonds to bail out their own state owned banks and whatever other entities are seen as politically expedient. They'll shift some of the losses onto their balance sheet and let the rest go bust. Some over capacity exporters will go bust, but they're not going to add to their problems by allowing the Renminbi to appreciate during this time by using foreign reserves when they can so easily issue sovereign debt and keep the Renminbi where it is *for now*.

Bernanke has no option but to continue QE. If he decreased the money supply by 10%, we'll go back to the ages when hookers traded their services for tobacco and whiskey.

So dshibb and any others with a strong opinion, exactly how have you positioned your portfolio?

For the record, I'm still:

22% US total stock
11% US small and value
16% international
8% international small and value
20% total bond
20% stable value
3% I bonds

And I feel really comfortable no matter what the future holds. I don't think there's any 'obvious' call right now.

"Then there are those rare risks that have the capacity of inflicting large amounts of damage over a period of time."


I am hoping for it. I have sold 1/3 of my portfolio and I want to buy it back.

Not an expert by a long shot, but Bernanke continuing qe means he is going all in on housing..?

Weak Chinese consumer + already weak European consumer = global recession?

Sounds like a Chinese fire drill to me.

psychtobe said:   So dshibb and any others with a strong opinion, exactly how have you positioned your portfolio?

For the record, I'm still:

22% US total stock
11% US small and value
16% international
8% international small and value
20% total bond
20% stable value
3% I bonds

And I feel really comfortable no matter what the future holds. I don't think there's any 'obvious' call right now.


So you're 57% long equities. Is that roughly what you hold long term? If it's temporary it's one thing, but usually as a long term holding that is like the portfolio of a retiree.

I don't get into specific holdings. As of now it's very close to where you're at ~55%(net long) equities, ~45% fixed income(generally short duration stuff). For me I don't tend to get much more protected than that in a market like this(for example I'm okay going 100% long equities in a falling market though and on the way down--I don't do 'wait for it to bottom' crap).

I'm 60/40 because stocks aren't cheap. I was higher when stocks were cheaper. I'm with you, I don't believe in calling tops or bottoms, I look at risk-reward equations.

Have had about 25% of my holdings in China the past 5 years (much of it FXI, some through a Fidelity mutual fund). It's been a depressing 5 years investment wise!

I keep telling myself that it is these absolutely depressing times when holding horribly underperforming markets that one should add to them. I'm sure many would laugh but I am considering adding to my holdings... when I get the emotional urge to do something it seems that 9/10 times the exact opposite thing is what turns out to be the best investment move.

I wouldn't want to buy US treasuries with my worst enemy's money...

There is no upside... they are already overpriced as you get almost no yield. On the downside as interest rates rise you get wiped out. The interest doesn't even cover the inflation rate meaning each year that you "invest" you end up with less purchasing power.

40% bonds is just scary. A lot of people with re-balancing portfolios are going to be buying overpriced bonds all the way down as they collapse in value... that strategy worked during the 30 years of falling interest rates but now a lot of people are going to double down into the bond bloodbath.

Most of today's bond investors never experienced rising interest rates. They literally went down every year since 1980. People have become so delusional and complacent from hearing the mantra that US treasuries are risk free investments. In reality it is the riskiest investment you can make.

Over the short term I do think bonds have one more rally... I expect Bernanke to state that he was just kidding about tapering and double down on his failed policies... that should push bonds rates down as speculators look to front run the Federal Reserve. Over the long term holding bonds is foolish at today's rates. Bernanke will give the addict the cheap money heroin it is addicted to because rehab is unpalatable.

I just don't agree things are that bad because we have the luxury of having the world's reserve currency. And we are in much better shape than much of the world. Duration matters, a lot, too. I'm fine holding five year treasuries and short to intermediate corporates. Those have nothing in common with long bonds. And half of my bonds are stable value, not even bonds per se. My weighted average duration is something like 2.4. There's not much interest rate risk there.

psychtobe said:   I just don't agree things are that bad because we have the luxury of having the world's reserve currency. And we are in much better shape than much of the world. Duration matters, a lot, too. I'm fine holding five year treasuries and short to intermediate corporates. Those have nothing in common with long bonds. And half of my bonds are stable value, not even bonds per se. My weighted average duration is something like 2.4. There's not much interest rate risk there.

Then you'll just get wiped out by inflation and capital depreciation... the yields on those notes don't come anywhere close to retain purchasing power... or even the risk of loss an investor assumes.

Brettdoyle, 40% fixed income by itself is meaningless. You need to specify duration and whether they're variable or fixed rates.

Short duration is very similar to cash in a deposit account. Interest rate risk is almost non existent in short durations.

I think everybody would agree with you that you should avoid anything that has over 10 year maturity fixed coupons attached to them.

You all forget the easy out, an option the US has fallen back on when the economy stumbles: start a war. China has been feverishly building up its military, conventional and otherwise, in preparation of just this scenario. It's a quick distraction from the economy and gives people a sense of national unity.

OP please comment on this turmoil's effect the yuan/dollar rate...(I hold a small amount of CYB
WISDOMTREE CHINESE YUAN FUND)

Well first there is this:

Wisdom Tree said: Because the market for money market securities in China is less liquid and accessible to foreign investors than corresponding markets in more developed economies, the Fund intends to achieve exposure to currency markets in China using a variety of investment techniques. For example, the Fund will invest in short-term US money market securities and forward currency contracts and currency swaps that settle in U.S. dollars. The combination of U.S. money market securities and forward currency contracts and swaps is designed to provide exposure equivalent to money market securities denominated in Chinese yuan.

Wisdom Tree said: Asset Group Weights:
Treasury Bill 68.25%
Time Deposit 24.57%
Repurchase Agreement 7.22%


This isn't a straight position on the Renminbi. What's actually quite interesting is that pricing on the contracts are probably quite cheap considering how closely the Renminbi stays to the US dollar(low historical volatility leads black scholes modelers to price the derivatives like they're incapable of a large move). That could lead one to believe they could be an interesting tool, but honestly I don't know enough about the pricing behavior of FX derivatives to feel comfortable really commenting on it other than to say that the fund is not what you think it is(a straight ownership of RMB currency).

As to Reminbi vs. Dollar:
1) Let's first establish that we basically have a fixed exchange rate mechanism with the Chinese. The Chinese enter the market to purchase foreign securities and engage in FX to keep the RMB from appreciating against the dollar. It's how they have accumulated $3 trillion in foreign reserves; it's to effectively short their own currency and keep it weak.
2) Yet on the other side they don't care to intervene during a period of further RMB weakness. Historically they've just let it happen because that only happens when their economy is struggling and at that time they don't want to hurt their exporters(employment).
3) Limited people in China have the ability to convert Renminbi to dollars, but at the moment if you can it's basically a no-brainer right? If it stays in RMB you only have the choices of real estate, 'wealth management products'(the Chinese version of high interest debt to $hitty borrowers), way negative yielding deposit rates, and the mainland Chinese stock exchange of which the average Chinese thinks is rigged(and to large extent if there was a 'rigged' stock market in the world it would probably be China). So yeah you might not like those options either.
4) Courtesy of some rather fascinating additions to Jim Chanos's presentation given at his most recent Wine Country conference: There is an interesting reason why Macau is doing so well today and it's because for so many wealthy and upper middle class Chinese the special administrative zone acts as sort of an FX dealer in a country that isn't supposed to allow FX. Two methods mentioned are as follows:
a) A wealthy Chinese person will purchase a junket for a trip to Macau that would include hotel stay, transportation, etc. for I think it was the equivalent of $100k US and that would come with about $75k in US denominated chips of which they would play for a bit and then use Macau to then get the new US dollars out of the country and invested abroad. So to them the defacto exchange rate implies maybe a 20% lower RMB exchange rate.
b) An upper middle class Chinese person will show up in Macau and by an expensive watch from a store for maybe the equivalent $15k US and then walk across the casino floor to another booth where they offer to buy the new watch for about $10k US effectively exchanging into US dollars at a 30% lower valuation of the RMB.
So on the ground the RMB is worth less and increasingly as the turmoil gets worse the RMB wants to run out of the country and end up in places like the Bay area and Vancouver to purchase American or Canadian real estate once it's exchanged in Macau. That doesn't bode well for the currency over there.
5) On the other side you have foreign investors that bought RMB believing it to be a safe haven and hoping that continued strength of the Chinese economy and an eventual shift to a more consumption led economy would allow for the currency to appreciate in value; not to mention many of those deposit accounts carried higher yields than US deposit accounts(usually a carry trade from some other currency like maybe Japan). Waking up to the rude awakening that the Chinese likely would have to experience a crash in their property and financial sectors prior to that eventual outcome is likely sending those foreign investors to the exits. That also doesn't bode well for the near term in the Chinese RMB.
6) Then there is the question of how will they finance the bailing out of key players in their economy. Many talk about the sale of foreign assets by the PBoC to pay for these bail outs. The problem is that at a time when your market is fragile and employment probably isn't as strong and as the RMB now wants to strengthen on the back end the sale of those assets drives the RMB higher and higher(which would be good for someone who weathered the storm for the ultimate play in Chinese currency), but that isn't good for their exporters at a time when the Chinese need them employing people the most. So honestly I doubt they would ever want to touch that money at that time. So the ultimate pay off doesn't happen at that time.

7) Instead my guess is that the ultimate play on the RMB doesn't come until after the Chinese have pulled out from a property crash and only then do you see them have the ability to start to really allow the RMB to appreciate and focus on 'rebalancing' their economy on consumption.

By that time though the RMB could have already depreciated a bit and have to appreciate a bit to just get back to where it is today. If you're using a currency based derivative(like the Wisdomtree ETF) to try to mimic that those derivatives will increasingly get more expensive over that period because of more volatility in the interim and more volatility in their black scholes calculations to price those derivatives.

Do you have a link for the Chanos presentation? I would bet that is a good read

Chanos at Wine Country

Its a 35 minute video.

Living in the bay area Dshibb, It is very common that these oversea money comes in and buys houses for 20% over the listing price. We are talking about getting 32 offers in a single day!! Talk about being a sellers market!

So I guess the question is, I believe in your analysis. What can we do about this as an average investor? Sell our portfolio? Is there a ticker symbol that is short China to help us hedge? What is your stratedgy?

flyalexair said:   Living in the bay area Dshibb, It is very common that these oversea money comes in and buys houses for 20% over the listing price. We are talking about getting 32 offers in a single day!! Talk about being a sellers market!

So I guess the question is, I believe in your analysis. What can we do about this as an average investor? Sell our portfolio? Is there a ticker symbol that is short China to help us hedge? What is your stratedgy?


Buy companies that actually make production in the US and don't rely on imported raw materials/parts?

Or weaponry manufacturers.

freejunkmail said:   flyalexair said:   Living in the bay area Dshibb, It is very common that these oversea money comes in and buys houses for 20% over the listing price. We are talking about getting 32 offers in a single day!! Talk about being a sellers market!

So I guess the question is, I believe in your analysis. What can we do about this as an average investor? Sell our portfolio? Is there a ticker symbol that is short China to help us hedge? What is your stratedgy?


Buy companies that actually make production in the US and don't rely on imported raw materials/parts?

Or weaponry manufacturers.

"don't rely on imported raw materials/parts"

Is there ANY company that fits this description?

peas said:   You all forget the easy out, an option the US has fallen back on when the economy stumbles: start a war. China has been feverishly building up its military, conventional and otherwise, in preparation of just this scenario. It's a quick distraction from the economy and gives people a sense of national unity.

Peas that is what King George V and his minions thought in 1914. Viscount Grey was of different opinion "The lamps are going out all over Europe, we shall not see them lit again in our life-time" Great Britain went from being the world leader to deeply indebted to the US. Fifty years of declining fortunes for the empire ensued.

flyalexair said:   Living in the bay area Dshibb, It is very common that these oversea money comes in and buys houses for 20% over the listing price. We are talking about getting 32 offers in a single day!! Talk about being a sellers market!

So I guess the question is, I believe in your analysis. What can we do about this as an average investor? Sell our portfolio? Is there a ticker symbol that is short China to help us hedge? What is your stratedgy?


Don't sell your entire portfolio.

He're are a few decent options:
1) If you're under 70% in equities than you could just ignore it by pointing out that you have sufficient dry powder to buy more if stock prices fell.
2) You could short FXI(China H-Share ETF), but it's a volatile little bastard which makes it a not very great short(and shorting is tough already)
3) You could short EEM(the most liquid Emerging Market ETF) which has heavy holdings in China and the benefit of also having Russian giant Gasprom as a major holding and decent amount of Brazilian holdings. A little less volatile, but again shorting is tough.
4) You could attempt to reassemble your portfolio using something like Motif while trying to exclude US equities with large exposure to Chinese sales like Cat, Yum brands, the automakers, Apple, etc.
5) You could take out a long dated put option against FXI to partially insure your portfolio. Due to volatility an at the money 9 month out option would need FXI to drop about 10% in order for you to start making a profit on the trade. 10% is high. You could partially insure your portfolio for a couple of points. That way if nothing happens in 9 months your only out a couple of percent if things go to $hit in that period then the option should protect some of your downside.
6) You could take out a long dated at the money put option against EEM for about 8% for 1 year. 2nd most liquid ETF in the US so it's probably the better target for an option. Insure a quarter of your portfolio for 1 year for about 2%. Starts really kicking in if it goes down more than 8% for the year. A nice option if you don't want to go about reassembling a portfolio or even selling off some holdings to increase your dry powder.

7) Problem with the options is that what if problems don't really begin in earnest for more than 12 months? The option will expire worthless and your out the 2% of your portfolio or whatever quantity of hedge you want to put on. All of sudden the cost to rollover that option for another 12 months could be a lot higher.


No magic bullet there hence why this was mostly a warning to those that might be overexposed or potentially long just too much equities with such a looming risk. A long dated option contract is actually not a bad idea though IMO. I could actually understand someone doing something like 90% long equities while hedging half of that for about 4 pts with a long dated put option against an EEM. Systemically they would only be long about 45% equities with the hedge. The cost would be 4 pts. Even if the options expired worthless a 90% equity holding could return let's say 14% in an up year with Fed stimulus continuing and the net would still be 10%.

If on the flip side China and by extension Brazil goes down 35% EEC would probably be down 30%. 26% of that would be profit on half the portfolio(so 13% overall). If the US market is let's say down 20% combined that is like net negative 7% which isn't half bad when everybody around you took a 20% beating. Your option has then manufactured a decent amount of dry powder to be reinvested in lower stock prices.


Hopefully that gives you a pretty decent rough outline of options.

Screw it. We couldnt even foresee sh@t that was going to happen in our own playground.
If an expert talks about a bubble for X years, he will eventually be right at some point of time.

jigsaw1975 said:   Screw it. We couldnt even foresee sh@t that was going to happen in our own playground.
If an expert talks about a bubble for X years, he will eventually be right at some point of time.


If an expert talks about a bubble for X years, he will eventually be right at some point in time.
If an expert talks about a specific bubble and predicts specific institutions that will take most of the losses and describes what part of that market is the leading cause of that...etc. in a random world most likely he will not be right at some point in time.
If he is right about all of those details in a certain window of time there is talent there.


And plenty of people foresaw the real estate issues in the US. Hell there were even threads about it here. There just wasn't a sufficient number of people that foresaw it.

dshibb said:   jigsaw1975 said:   Screw it. We couldnt even foresee sh@t that was going to happen in our own playground.
If an expert talks about a bubble for X years, he will eventually be right at some point of time.


If an expert talks about a bubble for X years, he will eventually be right at some point in time.
If an expert talks about a specific bubble and predicts specific institutions that will take most of the losses and describes what part of that market is the leading cause of that...etc. in a random most likely he will not be right at some point in time.
If he is right about all of those details in a certain window of time there is talent there.


And plenty of people foresaw the real estate issues in the US. Hell there were even threads about it here. There just wasn't a sufficient number of people that foresaw it.


Plenty of people saw it, but greed can blur common sense.

Skipping 101 Messages...
Seems like it is very positive. FXI up for two days.



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