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China Is Heading Towards A Recession

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china receission

Could China Be Heading For A 2008 Like Recession?

Bad loans and flat profit growth have had people questioning whether China is heading for a recession.

How are loans affecting China?

China’s largest banks report that there is a large stock of rapidly lethal loans and China’s ability to absorb the potential losses from these loans is decreasing. The Non-Performing Loan (NPL) provisions being put aside to deal with these loans cannot keep up with the rate of bad loans.

China’s banking regulators have attempted to assist the banks by lowering NPL provision coverage requirements from 200% to 150%; however this has not proved successful. Bank of China, Bank of Communications, and Industrial and Commercial Bank of China have already pushed the limit by 149%, 151%, and 141%.

The bank with the highest NPL remains to be Agricultural Bank of China, with an NPL of 180%; this fell from 367% in 2013.

If the current trends continue to increase by doubling to 4% or 5%, this could then start consuming the banks own retained earnings.

How are flat profits affecting the China?

China’s growth has dried up. Currently, pre-provision operating profits for the first quarter were at 4%, and this is down from the last quarter in 2015 where they were at 8%.

When three major banks reported their 2015 results back in March, they revealed that they had written off a total of $21.85 billion in debts, 1.4 times more than they did in 2014. This shows the level at which their customers (mainly industrial companies) have struggled with debt repayments.

The same report also shows that profits were flat compared with growth rates of 40% a few years ago –

• Industrial and Commercial Bank of China reported 0.5% profit growth

• China Construction Bank Corp reported only a 0.1% rise in profit

• Bank of China reported a 0.7% increase in profit

What are the long-term implications?

The Chinese government’s failure to come up with a viable plan for economic recovery has led to falling confidence in the future of the country’s economy.

The reduction in growth in profits could force many Chinese banks to start investing in trust and wealth-management products. This could be a risky move as high yield assets, such as these, could affect liquidity if banks need to offload them.

The best outcome for China, should they decide to carry on this course, would be for them to remain in a state of long-term recession.

How is China currently being affected?

The markets value the banks’ Hong Kong shares at 60-70% of book share. Nonetheless, there is hope that the economy may be showing signs of stabilizing. Although growth is slow, there were reports of 6.7% growth in the first quarter of 2016.

China’s leaders are moving away from growth based on investments and export manufacturing and more towards growth based on sustainable services and private consumption. There is hope that this will raise chances of stability.

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The latest figures are in line with many economists’ predictions, and there is hope that China will reach their official full-year target of 6.5-7% growth.

How likely is another Chinese recession?

Experts predicted back in 2015 that unless China changes its strategy, it is heading for a long-term decline or collapse. This would see China’s rank returning to that of a weaker state. Although, if the recent reports of a possible stabilization of the economy are correct then is there still a chance that China may be able to avoid a complete recession?

Most economists see the recent improvements as a positive. However, they still believe that a recession or at least long-term stagnation is still the most likely outcome.

Despite signs of growth there is still the ever increasing debt. The country, so far, has resorted to bailing out bad debt with even more bad debt. The current level of debt is unsustainable and is affecting further economic growth.

Unless China can shrink its deficit, then the rate of current growth is unlikely to prevent a recession.

Should China’s economy concern us?

China’s economy is ranked the second highest in the world, the first being the US. These rankings do not indicate the overall wealth of the country.

China has connections with the US through exports; they are our third largest export partner.

Exports from China make up 5.3% of total exports into the country. Similarly, China is also our biggest import partner, accounting for 16.4% of our total imports.

This alone shows the imbalance of power between China and us. Any positive or negative activity in China is going to have an impact on the US. The slowdown of the Chinese economy is already causing concern, as this has negative impacts on markets which are closely linked to China, such as the US.

 

 

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Economy

Battle for 3000: Bulls and Bears Ready for “Dogfight”

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Battle for 3000: Bulls and Bears Ready for “Dogfight”

After climbing 33% since the late-March lows, the S&P 500 index closed at 2955 on Friday, putting the psychologically important 3000 level within reach.

In addition to the psychological importance of the 3000 level, that also happens to be where a key long-term technical indicator sits that is widely used to determine if we are in a bull or bear market.

The two most commonly used indicators are the 50-day and 200-day moving average. The 50-day is used by investors as a gauge of the short-term market trend, while the 200-day moving average indicates the long-term market trend.

“The fact that the S&P 500 is coming off a 35% rally and that this 200-day moving average lines up with a nice even 3,000 number seemingly makes this area especially important,” said Renaissance Macro Research analyst Kevin Dempter in a note on Friday. “A breakout is not likely to come easily and we expect a dogfight here around the 200-day.”

For 21-straight trading sessions, the S&P 500 index has bounced between the 50-day and 200-day moving averages. Jason Goepfert, head of SentimenTrader and founder of independent investment research firm Sundial Capital Research, stocks are “trapped between time frames.”

While bulls anticipate the S&P breaking above 3000 – and simultaneously the 200-day moving average – will signify a new bull market and push stocks to record highs, history indicates that may not be the case.

Dempter says that since 1928, there have been 29 instances where the market traded between the 50-day and 200-day moving average for at least 20 days. In 21 of those 29 instances, the S&P 500 ended up falling below the 50-day average, while only eight ended with a push above the 200-day, he noted, making for a roughly 72% probability the index will break down.

Mark Arbeter, president of Arbeter Investments, said in a note to clients last week that as we approach the key 200-day indicator, “One would think that after a big correction or bear market, and then a retaking of this key average, the bulls would go wild, the bears would capitulate, and the stock market would go into outer space.”

He points back to previous times the S&P tried to climb above the 200-day, and says it won’t be easy.

“When the S&P first cleared the 200-day in June 2009 as we were coming out of that major bear market and the financial crises, the index stalled and then pulled back about 7%, riding on the top of the declining 200-day for about a month. The index retook the 200-day in June 2010, after a swift decline, paused, and then fell to new corrective lows.

The 200-day was overtaken in August 2010, and rolled over again. After the major correction in 2011, the “500” rose back above the 200-day for 2 days and then fell 9.8%. We saw similar price action in 2015 and 2016 as the late rally over the 200-day in October 2015 failed miserably.”

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Economy

Trump Changes Course, Shows Support For More Stimulus Checks

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Trump Changes Course, Shows Support For More Stimulus Checks

There’s some positive news for the tens of millions Americans who are still struggling to make ends meet as the coronavirus pandemic lingers for the third month.

It appears President Trump has changed his mind, and is now in favor of sending out an additional round of stimulus checks to help Americans get through the economic uncertainty created by the coronavirus pandemic.

When asked about the likelihood of additional checks, the President replied, “I think we will. I think we’re going to be helping people out. We’re gonna be getting some money for them during the artificial — cause it really is it’s an artificial closure — and now we’re gonna be able to open it up,” Trump told reporters while he was in Michigan touring a Ford factory.

“I would say there could be one more nice shot. One more nice dose,” Trump said about a potential stimulus bill as the country struggles to recover from historic job losses and businesses are faced with an uncertain future.

Trump’s comments were echoed by White House staff, including economic advisor Kevin Hassett, who said during a CNN interview that another round of checks is “pretty likely,” and says “it’s coming sooner rather than later” before adding that if there are indications the economy is recovering quickly as more states reopen, the White House may look at other relief options.

Also supporting Trump’s outlook is Treasury Secretary Steven Mnuchin, who said Thursday that there’s a “strong likelihood” the U.S. will send out another round of stimulus checks.

“I think there is a strong likelihood we will need another bill,” he said during an online event hosted by The Hill newspaper, but added that the stimulus may not be needed immediately.

“We’re going to step back for a few weeks and think very carefully if we need to spend more money and how we’re going to do that,” Mnuchin said.

The change in course comes after Republican lawmakers were originally hesitant to continue adding to the deficit while attempting to generate an economic recovery. But with job losses continuing to climb every week and estimates for the second quarter GDP to plunge as much as 40%, the Senate GOP leaders are warming to the idea of an additional stimulus package.

While Democrats have pushed a $3 trillion plan through the House, Senate Majority Leader Mitch McConnell reportedly told President Trump last week any stimulus bill should not cost more than $1 trillion.

McConnell has also openly opposed the Democratic plan to extend the $600 per week additional unemployment benefit by six months when it expires in July.

Republicans have also shown little interest in the Democrat’s proposal of nearly $1 trillion in aid for state and local governments to offset increased costs and lower revenues due to the pandemic, mainly citing that the budget issues the cities and states are facing pre-date the pandemic and relief funds shouldn’t be used to fix old problems.

The White House and Republican leaders would also like to pass liability protection for businesses that reopen, shielding owners from lawsuits should an employee claim they contracted the virus while on the job. Democrats, however, have opposed the idea.

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Many Americans Put Their Stimulus Checks Into The Stock Market

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Many Americans Put Their Stimulus Checks Into The Stock Market

The government sent $1200 stimulus checks to help Americans pay their bills. However, it turns out that many people turned around and put most of that money into the stock market. This is according to research done by Envestnet Yodlee, a data aggregation company.

Bill Parsons, Group President, Data Analytics at Envestnet Yodlee said during a recent CNBC interview, “Covid is causing conversations among family members and family members with their advisors about what to do with their money and were seeing that in the data… Securities trading did see significant lift week-over-week and I suspect that that’s in part due to big changes in the market.”

People Investing in Stocks

In most income brackets, data shows that buying stocks was the second or third most common use for the funds. Fortunately, the most common uses of the stimulus money were increasing savings and cash withdrawals.

The company started tracking the spending habits of 2.5 million Americans in early March. It noticed a divergence in behavior in mid-April when the checks started to arrive in mailboxes. Those that received their check increased their spending by 81% compared to the prior week. Some of that spending went into the stock market.

In the $35,000 – $75,000 income bracket, stock trading increased by 90% in the week the check was received compared to the prior week.

In the $100,000 – $150,000 income bracket, trading increased 82% in the week the stimulus check arrived. Meanwhile, in the $150,000 or higher income bracket, stock trading only increased by 50%. The $150,000 or higher bracket would not have been eligible for a stimulus check. Therefore, it acts as a good baseline.

New Online Trading Accounts

All of this stock buying meant a whole lot of new online trading accounts were opened in the last month or so. However, the brokerage houses aren’t sure if that is due to the stimulus checks, or the opportunity to buy stocks cheaply as the market fell.

Charles Schwab reported “monumental volumes” as it opened 609,000 new accounts in the first quarter. Additionally, the stock trading app Robinhood reported daily trade volume was up 300% in March compared to the previous year. The company co-CEO also said during an interview with CNBC that over 50% of its customers are first-time investors.

You may believe the brand new investors were wise enough to buy stocks because they recognized they were cheap and the markets would rebound. Either way, it seems they have very good timing.

Since the market bottomed in late-March, stocks have staged a tremendous rally in the last two months, with the Dow Jones Industrial Average and S&P 500 climbing nearly 35% from their March lows, and the Nasdaq gaining more than 40% over the same time period.

It’s better than spending the money on weed, sneakers and video games.

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