Category: News

In the wake of the COVID-19 crisis, an €800 billion debt facility was created to prevent Europe from repeating the aftermath of the 2008 global financial crisis.

This debt facility is called the Next Generation EU fund.

Recently, some business executives have expressed dismay over the way the funds are being handled.

Here’s a Jan. 19 headline (EURACTIV):

Spanish CEOs worried about good management of EU Next Generation funds

However, those who manage the Next Generation EU fund may face even bigger problems than fielding complaints from CEOs. Here’s a chart and commentary from Elliott Wave International’s January Global Market Perspective:

A new bear market will drain the EU’s coffers, and the resulting negative mood trend will cause investors to question the very solvency of the pandemic fund. On this point, the price of these bonds is illustrative. After issuance near par in July 2021, prices jumped 4% and peaked at an all-time high on August 4, 2021. Prices then fell for two months, bottomed on October 12 and underwent a countertrend rally that petered out in December 2021. As we go to press, the bonds just sunk to a new all-time low. Given the sheer mountain of shaky debt that exists across the EU, it’s hard to overstate the negative economic impacts of a long-term trend toward rising interest rates. What we can say with confidence is that because the Next Generation fund is supranational — essentially relying on cooperation among EU nation states — a bear market in bonds should hit the facility especially hard.

When governments transition from excessive spending to frugality, that’s a sign of a developing deflationary psychology.

Consider a recent “surprise announcement” by Hungary’s prime minister (Dec. 14, Bloomberg):

Hungary will delay the purchase of Budapest Airport because of a ballooning budget deficit, Prime Minister Viktor Orban said.

In the same neighborhood of Europe, a cautionary financial mindset is also evidenced (Jan. 6, Reuters):

New Czech government plans cuts after budget deficit hits record

Elliott Wave International’s January Global Market Perspective offered commentary, along with this chart:

In December, the incoming [Czech government] coalition pledged to “re-write the 2022 state budget to slash billions of dollars in spending and cut the deficit.” (Reuters, 12/7/21) Ten-year borrowing costs in the country have pushed steadily higher for more than a year. … Fiscal conservatives have applauded the new administration’s apparent proactive move, but, in our view, it’s the markets that are forcing the government’s hand.

Eventually, the twin forces of rising interest rates and mounting public anger will force all European governments to massively curtail spending.

You can call them asset classes or financial markets. Some describe them as “risk bubbles.”

This latter phrase is what Bloomberg chose to use in this January headline:

Risk Bubbles Are Deflating Everywhere, Some Market Watchers Say

Bubbles in crypto, high-growth tech stocks are ‘popping’: BofA

Back in November, The Elliott Wave Theorist provided a warning for an even longer list of assets that have been due to deflate:

No stock market has ever been so absurdly overhyped and overowned. The same is true for junk bonds, real estate, cryptocurrencies and digital art. It is a unique era.

And, speaking of tech stocks (mentioned in the Bloomberg quote), the January 7 Elliott Wave Financial Forecast provided this insight:

You may not realize it from reading the headlines, but the NASDAQ indexes, the Russell 2000 index and the FANG+ Index all failed to accompany the Dow and S&P to this week’s highs. While the NASDAQ closed yesterday 6% below its closing high on November 19, nearly 40% of the index’s firms have plunged by at least half from one-year highs, a near-record number (Bloomberg 1/6).

These three charts were among many others that were shown in the January EWFF. Notice that these indexes topped in November.

Back in October, China’s central bank governor described China Evergrande’s debt problems as an “isolated case.”

In December, Evergrande – the nation’s largest real estate developer — was declared in default.

Apparently, however, it turns out that Evergrande is not an “isolated case.”

A Jan. 7 CNBC articles notes:

Shimao, one of China’s healthiest real estate developers, has reportedly defaulted — a sign of how more pain is ahead for the heavily indebted industry.

Elliott Wave International’s Global Market Perspective, a monthly publication which provides analysis of 50-plus worldwide financial markets, is not surprised by this development. The October issue noted:

A plunge in Evergrande’s share price will foreshadow a decline in China’s real estate market.

The November GMP followed up:

Last month, GMP cited previous calls for an ever-widening Chinese property decline and stated, “That is happening now.” [emphasis added]

Clearly, the crisis ranges far beyond China Evergrande.

And, here’s another noteworthy comment from the GMP – this one is from the December issue:

Despite the recent deterioration in China’s real estate market, belief in the Chinese government’s capacity to manage the crisis continues to run high. This is true even as it turns further away from capitalism and further toward communism. As GMP noted in October, China’s government recently revealed its willingness to micromanage every aspect of the economy in the name of “Common Prosperity.” The slogan comes directly from the original communist party chairman Mao Zedong, who introduced it in 1953. It didn’t work out so well the first time as China saw no material growth in GDP from 1958 to 1975. The irony of its reintroduction should prove even more profound this time.

In October, Britain’s Chancellor of the Exchequer Rishi Sunak announced plans to increase spending for infrastructure, education and to help British citizens with the rising cost of living.

And, at a Dec. 14 International Monetary Fund press conference, Sunak remained firm (www.gov.uk):

We must stick to the Government’s existing public spending plans.

The affordability of this increase in spending, amounting to tens of billions of pounds, is at least partly based on an optimistic economic growth forecast.

However, Elliott Wave International’s December Global Market Perspective presents a different perspective with these charts and commentary:

In our view, Sunak has based his public policy initiatives on … wayward official forecasts. On October 27, the Office for Budget Responsibility (OBR) revised its forecast for economic growth upward from 4% to 6.5%. The OBR forecasts uninterrupted economic growth from now until at least 2026, as the left-hand graph shows. The right-hand graph illustrates the OBR’s rosy forecast for public borrowing. After skyrocketing to 15% of GDP in 2020, the OBR expects this metric to fall every year from now until 2026.

According to Bloomberg, “Sunak’s firepower was boosted by a significantly improved outlook for the British economy.” (10/27/21) We say, not so fast: Negative mood will soon replace his ammunition with blanks.

In November, sales of newly built U.S. homes were down 14% from a year ago.

With that in mind, a Dec. 23 CNBC article says:

[H]istorically prices lag sales by about six months, and sales are coming down.

Elliott Wave International agrees that the trend in home prices tends to follow the trend in home sales – not only in the U.S., but elsewhere.

For example, the October Elliott Wave Financial Forecast discussed China’s real estate market:

The average new home price in 70 Chinese cities fell 0.1% in September. As we’ve been saying, a decline in home sales leads to a decline in prices, and land and home sales are now falling by larger and larger amounts. In September, major real estate developers reported declines of 24% to 34% in one-year home sales.

The same issue of the Financial Forecast showed this chart and continued with this commentary:

Once the shares [of China Evergrande] started to trade again on October 21, the stock price resumed its inexorable decline. It now has lots of company. The shares of most Chinese property developers are plumbing new depths. This chart shows a freefall in four companies: Fantasia Holdings (where trading is suspended), Modern Land Co. (where trading is suspended), Yango Group and China Sunac Holdings, which are down 63%, 68%, 70% and 71% respectively from the beginning of 2020.

China’s real estate market faces mounting woes.

In addition to China Evergrande recently going into default, investment and construction in China’s property market has been in decline. And, property developers are strapped for cash.

On Dec. 14, Reuters reported that …

… [China’s] new home prices fell 0.3% month-on-month in November, the biggest decline since February 2015.

Elliott Wave International has been keeping subscribers posted on the weakness in China’s property market well before this latest news.

Here’s a quote from the September 2021 Elliott Wave Financial Forecast:

[Regarding China’s housing market], heavy losses are suddenly turning up in many formerly sizzling neighborhoods. On August 25, the South China Morning Post reported, “China’s home prices are falling in districts where the most prestigious schools are located.” In many cases they’re not just falling, they’re plunging. In Shenzhen’s Futian district, for instance, the Morning Post said a home sold for 42% less than a similar home in the same neighborhood three months ago.

The October 2021 Elliott Wave Financial Forecast followed up by saying:

On September 20, Sinic Holdings, a smaller real estate developer, suffered a one-day decline of 87%, followed by a halt in the trading of its shares. From January through July, home prices in Futian, a Shenzhen district that was once among the hottest housing markets in China, fell 15%. In the first half of August, they plunged another 29%, according to data from the Shenzhen Real Estate Intermediary Association. The decline is attributed to “educational reforms,” but we think it will be long remembered as the beginning of the end for China’s great housing boom.

It’s been all over the news that China Evergrande Group, the world’s most indebted property developer, failed to make two coupon payments to bondholders by a designated deadline.

Thus, this Dec. 9 headline (CBS News):

Evergrande defaults on $1.2B in foreign bonds …

This is no surprise to Elliott Wave International.

As far back as June 30, 2017, the monthly Elliott Wave Financial Forecast warned about China Evergrande’s debt levels:

From 2011 to 2016, China Evergrande’s assets grew 750% to make it mainland China’s second largest property developer. Along the way, the firm accumulated a debt to common equity ratio of 1209.5%. The average of the same ratio in 10 different U.S. home builders is 80%. The figure is understated, as it does not reflect the company’s $6.6 billion international bond offering last week.

Fast forward to the Oct. 1, 2021 issue of EWFF, which showed this chart and reflected back on its June 30, 2017 commentary:

As the chart shows, the market has already rendered its verdict with respect to China Evergrande’s solvency. The company’s share price is down 91% from its peak, and its bonds are selling for 24 cents on the dollar. In 2017, EWFF stated, “China Evergrande’s ‘Teflon’ appears ready to dissolve.” Four years later, it has.

Since 2018, the global demand for cars has slackened off considerably.

Indeed, in the U.S., total new vehicle sales peaked all the way back in August 2015.

And, here in the waning weeks of 2021, car sales continue to disappoint. This is from Investor’s Business Daily (Dec. 2):

Automakers reported lower-than-expected November U.S. auto sales

The December Elliott Wave Financial Forecast showed this chart and explains why this is a portent for the economy as a whole:

Demand for cars appears to be a thing of the past. This chart suggests consumers are souring on the whole idea. It shows buying conditions for vehicles from queries issued by the University of Michigan’s monthly consumer sentiment survey since the mid-1950s. Since the mid-1960s, a decline in consumers’ view of car buying conditions invariably preceded every economic contraction. The measure has never experienced a more dramatic plunge than in recent months. Economic headwinds are likely much closer than economists realize.

Residential real estate observers know that the U.S. housing market has been red hot.

You may have heard the stories of eager home buyers “signing on the bottom line” without even doing a walk through.

Yet, the U.S. is not the only nation where prices have gone through the roof.

Here’s a Nov. 25 CNBC headline:

German central bank warns of overblown property prices with the problem spreading

Interestingly, a high-ranking official at the Bundesbank says fully 90% of households expect prices to keep increasing.

This elevated housing-market optimism in Germany may be a sign that the upward price trend is on the verge of reversing.

An even bigger day of reckoning may be ahead for China. This is from Elliott Wave International’s November Global Market Perspective:

China’s exposure to the housing market is far greater than that of any other country. At $52 trillion (as of 2019), the total value of Chinese homes and developer’s inventory is twice the size of the U.S. residential market, “outstripping the entire U.S. bond market.” In the 12-months that ended in June, $1.4 trillion was invested in Chinese housing. According to the Journal, at the peak of the U.S. boom in 2006, $900 billion a year was invested in housing. At the end of 2020, 96% of China’s urban households owned at least one home. In the U.S., the homeownership rate is 65.4%. In 2017, 21% of China’s homes were unoccupied and, in 2018, 87% of “home purchases were by buyers who already had at least one dwelling.” Given the continuation of real estate’s boom through the middle of 2021, these last two figures are probably even more extreme now. …

As China enters what many economists say is the final stage of one of the largest real estate booms in history, it is confronting a staggering bill: more than $5 trillion in debt that developers took on when times were good. That debt is more than double what it was at the end of 2016 and is more than the entire economic output of Japan.