Black Swan

Search of Black Swan

09/20/2021 – China Credit – Writing on the Wall – and How to Trade It. (9/15/21)

Evergrande’s crisis does not pose ‘systemic risk,’ won’t change housing regulations: experts

China Evergrande onshore bond trading suspended after downgrade

Evergrande: why most analysis is dead in water and how best to understand and navigate what’s happening? Both denialists and alarmists are getting it wrong. Let’s start by understanding this: what is happening is the result of a CCP-initiated policy change to curb leverage.

In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis

We develop a framework to theoretically and empirically analyze the fluctuations of the aggregate stock market. Households allocate capital to institutions, which are fairly constrained, for example operating with a mandate to maintain a fixed equity share or with moderate scope for variation in response to changing market conditions. As a result, the price elasticity of demand of the aggregate stock market is small, and flows in and out of the stock market have large impacts on prices.
Using the recent method of granular instrumental variables, we find that investing $1 in the stock market increases the market’s aggregate value by about $5. We also develop a new measure of capital flows into the market, consistent with our theory. We relate it to prices, macroeconomic variables, and survey expectations of returns.
We analyze how key parts of macro-finance change if markets are inelastic. We show how general equilibrium models and pricing kernels can be generalized to incorporate flows, which makes them amenable to use in more realistic macroeconomic models and to policy analysis.
Our framework allows us to give a dynamic economic structure to old and recent datasets comprising holdings and flows in various segments of the market. The mystery of apparently random movements of the stock market, hard to link to fundamentals, is replaced by the more manageable problem of understanding the determinants of flows in inelastic markets. We delineate a research agenda that can explore a number of questions raised by this analysis, and might lead to a more concrete understanding of the origins of financial fluctuations across markets.

How China’s Property Market Could Trigger a Crypto Crash

Some analysts say that a commercial-paper meltdown in China would rock other sectors much more than stablecoins. “I’d argue that pension plans would be more affected,” says Ouellette. “Stablecoins hold a decent portions of their assets in fiat currency. The Chinese banks would be in much bigger trouble in a paper meltdown than Tether.”

Even if stablecoins don’t “break the buck,” traders in Asia may be liquidating cryptos to raise cash in anticipation of more declines. Many traders use leverage to gain exposure; they could be facing margin calls as the prices decline, forcing them to liquidate positions, or their positions may be automatically liquidated by exchanges.

Institutional investors in Asia are more exposed to cryptos than those in the U.S. or Europe. More than 70% of institutional investors in Asia have allocations to digital assets, compared with 56% in Europe and 33% in the U.S., according to a recent survey by Fidelity Digital Assets. Those numbers are all up sharply from 2020.

Evergrande Has Debt Due Next Week It Can’t Pay. Why It Isn’t Just China’s Problem.

China Evergrande Group has debt due next week that it can’t pay, and investors should pay attention.

The woes of the property giant—the world’s most indebted developer—aren’t just China’s problem, and could spill over into global financial markets.