The AFR is reporting on three big hedgie trades pushed at a major industry conference in New York:
[Jeff] Gundlach recommended shorting a home-builder’s ETF that had continued to appreciate even as other indicators like the price of lumber had flat-lined.
…Zach Schreiber, a protege of Stan Druckenmiller and an expert in energy stocks, said traders betting on higher WTI oil prices – to the tune of $US33 billion – “were picking up quarters in front of a dump truck”. He said oil traders had under-estimated the oversupply in the closed US market.
Chris Shumway of Shumway Capital said China’s credit growth had led to a surge in non-performing loans that would ultimately lead policymakers to devalue the Chinese currency, and recommended shorting the CNH.
Interesting stuff. For what it’s worth I don’t think the bottom is going to fall from under US housing. Price rises will slow a lot and new home building underwhelm, but both continue to grind out a recovery.
I’m no oil expert so will plead the fifth on that one.
China is the play. It’s where credit has been out of control. It’s where property is oversupplied. It’s where authorities have turned off the tap for good reason.
But will the yuan fall? Maybe, but it’s no sure thing. That would work against rebalancing, as Michael Pettis argues:
…First, and most obviously, the RMB is not overvalued. Looking at just the change in the value of the currency over some period is meaningless because China’s export competitiveness is based as much on low wages and cheap financing as it is on an undervalued currency, but in any “normal” world, in which China was growing at 7-8%, unemployment was low, and debt rising, while the rest of the world was barely growing, and was deleveraging amidst high unemployment, China should be running a huge deficit while the rest of the world ran a huge surplus.
More importantly, however, is the rebalancing process. Depreciating the currency will not increase household income. It will raise the cost of imports, including energy and food, and so reduce the real value of household income. Choyleva argues that once you exclude reprocessing, imports are relatively low in China, in which case the benefits to households are also low, but I look at it very differently. Revaluing the currency by, let’s say, 10% will cause the PBoC to book a loss of roughly 5% of GDP. This loss, as I explained in my book, is not a loss for China but mainly part of a transfer of wealth from those sectors of the economy that are effectively long dollars (the PBoC, exporters, and wealthy Chinese with foreign assets) to sectors of the economy that are effectively short dollars (importers and households)…
What is more, by reducing household income while boosting the tradable goods sector, devaluation will force up China’s already too-high savings rate. The idea that a depreciating RMB will make Chinese spend more because they will benefit from a wealth effect as their foreign assets appreciate in value assumes that ordinary Chinese already own a huge amount of foreign assets. They do not…
If the RMB were to depreciate we would need even higher wages or interest rates than we otherwise would in order to force up the household income share of GDP, and I think it would be a huge mistake to sacrifice the interests of both the capital- and labor-intensive sectors in order to make life easier for the tradable goods sector.
