Bubble Bubble Toil & Trouble: A Focus On Market Bubbles

Are asset prices too high and markets in a bubble that is ready to burst at any time?

There have been speculative manias for as long as human beings have been allowed to speculate en masse. US Housing, Dot Com, the South East Asian Tigers, Japan, the South Sea Bubble, Dutch Tulip mania… the list stretches on through financial history.

What do all these episodes have in common? People. The objects of speculative mania have changed, the century in which they have taken place has changed, but people haven’t.

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Is The Value Of Your Home Going To Fall As Rates Rise? 1

will higher interest rates reduce the value of your home? Probably not

The recent rally in interest rates has seen 30y mortgage rates in the US rise sharply to about 4%.

These levels were last seen in 2019, and have given rise to concern and commentary in some quarters that rising mortgage rates will cause home values to tumble.

Are these claims and concerns valid?

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Evergrande Update 4: On The Cusp Of A Banking Crisis

How will Evergrande's default affect other markets?

The Evergrande contagion continues to spread, and has now begun to affect the market’s perceptions of China’s largest property developer, Country Garden.

Should the company continue to struggle to raise financing, it could mark the point at which the contagion embarks on its next phase, and spreads more widely through the rest of the Chinese economy.

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A New Perspective On China’s FX RRR Hike 2

How will Evergrande's default affect other markets?

This scenario is the real threat to the Chinese (and global) economy, which makes it prudent to think of China hiking its FX RRR from the perspective of USD liquidity. In doing so, we can see that the hike has two main effects.

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A New Perspective On China’s FX RRR Hike 1

How will Evergrande's default affect other markets?

The apparent catalyst for last week’s plunge in the USDCNY rate was the Chinese government’s decision to increase the reserve requirement ratio (RRR) for domestic banks’ foreign exchange (FX) deposits. This effectively reduces the amount of USDs available in the Chinese economy, and was ostensibly done to halt the CNY’s continued strength vs the Dollar. Is this too simplistic?

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Evergrande Update 3: Default Is Here, Focus Turns To CNY

How will Evergrande's default affect other markets?

Evergrande has finally fallen into formal default, and is poised to undergo a major restructuring of its balance sheet. This hasn’t come as a surprise to anyone following the saga, as demonstrated by the Chinese fixed income market not plunging on the news, instead remaining close (and in some cases rallying slightly) to where they were trading in our previous update. What did plunge however, was the CNY, which isn’t a good sign for the rest of the world.

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