Chinese Investor Ping Pong
Beijing loves Ping Pong as much as the everyday man and woman. Beijing’s version of investor ping pong involves pumping and dumping asset classes over multi year cycles.
Ping. Real estate is the government’s favorite Ping Pong game. The government pumped it until 2013. When things got too hot, they had to cool the market. Higher mortgage rates, limits on the number of houses one could own, and higher down payments were implemented and crashed the market.
Pong. To help a comrade in need, Beijing decided to corral investors into the equity markets. They liberalised margin trading, futures trading, and the ease of opening brokerage accounts. The deluge of money caused the market to skyrocket from 2014 to mid-2015. Once Chinese companies were trading at nose bleed P/E ratios, the government started cracking down on P2P stock margin trading and other means of skirting their margin trading rules. Surprise! The market crashed and Beijing effectively stopped large holders from selling their shares. Like all great policy, this spooked fickle comrades even more, creating a stampede for the exit.
Ping. Real estate in tier 1 cities (Beijing, Shenzhen, Shanghai, and Guangzhou) is on fire once more. All those market-cooling measures have been withdrawn, and desperate savers are frothing at the mouth to obtain over priced, poorly built properties in these marquee locations. Prices in Shenzhen were up over 50% YoY in January.
Caixin, a leading economic publication in China, has uncovered the real reason why property is booming once more. At the heart is an elaborate scheme for wealthy Chinese business owners to spirit their cash out of the system.
- Mark up a property you already own to nosebleed levels.
- Give your employee the 30% down payment, plus fake their income so that they can pass the bank’s mortgage affordability test.
- Your employee buys your mansion at the inflated price. You receive the cash minus the down payment.
- Take your cash and fake some invoice receipts to convert CNY into USD.
- Wait for the CNY to devalue.
- The employee lives in their new mansion for free until the bank forecloses on them, and then they goes back to the hovel from whence they came.
The author of the article has an even more sinister interpretation of the recent property easing measures from the PBOC. He believes that the PBOC wants to trap CNY inside China by fueling a property boom. Investors will gladly speculate in the illiquid property market. Once their CNY is locked up, the PBOC can devalue without too many Chinese front running the policy action.
If Caixin is writing about this, Beijing will not be far behind in crashing the party. Desperate Chinese investors will do anything to get their money out of the country. The PBOC has not slowed down credit growth, it is actually increasing. The purchasing power of the Yuan inside and outside of China will be significantly lower in the near future. How long before the masses discover Bitcoin and other digital currencies? Desperate times call for non-standard wealth preservation methods. The risk appetite and creativity is already there. All that is needed is further actions by the PBOC and regulators to close off the popular throughputs out of China.
The full translated article from Caixin is a must read.
Draghi Danger
European banks are crying out for an end to the NIRP (negative interest rate policy) madness. Their net interest margins are being crushed and as a result investors are loudly questioning their viability. Deutsche Bank is the lead supplicant at the Draghi cathedral. They beg for a pause of NIRP and a restart of QE.
Kuroda-san, the emperor of the BOJ, surprised the world in January with NIRP and JPY strengthened like a Boss. The ECB is already in negative territory and so are billions of Euro-area sovereign bonds. The ECB cannot buy bonds that have negative yields. So either the ECB begins buying more trash off of banks balance sheets or they double down with more NIRP.
Given the recent noise around ceasing issuance of 500 Euro notes, my bet is on more NIRP. The ECB holds mass this Thursday. The immediate effects on Bitcoin of their policy decision are unknown; however, more negative rates will further incentivise savvy savers to begin converting digital fiat into paper fiat, gold, real estate, or possibly Bitcoin.
The big question is when the Fed will succumb and bite the apple. The policy divergence of the USD from the rest of the world is only starting to be felt. Domestic companies will be clamouring for easy money and a weak dollar. They will get their wish in the end. I believe that by the end of 2016 the Fed Funds will be at 0% or even negative. Once the Fed goes negative then the games really begin.
Satoshi Circle Jerk
All the big boys and girls (probably not since this is Bitcoin) met last week to discuss Bitcoin. The conversation focused on how to scale Bitcoin. Present were developers, CEOs and representatives from the major exchanges and mining firms.
From the sounds of the medium posts from Brian Armstrong (CEO of Coinbase) and Gavin Andresen (former Bitcoin core developer), the only thing the participants could agree upon was the type of lube to use for theelephant walk party. With the Bitcoin halving occurring in under 6 months, the scene is set for fireworks this summer.
The miners will have their seigniorage cut by half to 12.5 Bitcoin from 25 Bitcoin in July. This could put some miners out of business depending on their marginal cost of production and the price of Bitcoin. Some speculate that the saving grace for miners is higher transaction fee income. That means either much higher fees due to network congestion (no block size increase), or lower fees but on a higher number of transactions on a network that can support more transactions (block size increase).
The core developers insist that their new fangled Segregated Witness tech can achieve the same result of a hard fork to a 2MB block size. Others believe this is far too complicated, and a hard fork to 2MB should happen immediately. The Classic team claims it can achieve this goal safely. Either way, battle lines have been drawn and it doesn’t appear a solution will present itself before the July halving.
This will be a watershed moment for Bitcoin. Brian likened it to Bitcoin’s first real election that matters. Will the losing side throw their toys, or cooperate with the winners to create a stronger and better Bitcoin? Don’t hold your breath – humans are not rational creatures no matter how many economists say so.
The irrationality of humanity will create volatility around the halving and the Bitcoin scaling problem. In a few weeks, BitMEX will list a September Bitcoin / USD futures contract. Traders who want to speculate on the violence of Bitcoin price action around the halving can trade the spread between the March and September contracts.
I personally believe the market will over price volatility leading up to the event. That translates into selling September and buying March. September will trade at a premium to March and this short volatility trade will earn positive carry as time passes. We will make more noise around the September future closer to the listing date. Until then get your popcorn and Depends ready, because you will be babysitting Bitcoin rather than sippin’ bubbly in Monaco.