China Starting to Leak Some Oil

Hey There Income Hunters,


One area where the US has a leg up on China is in the private sector … China’s bubble is their private sector debt market …


The reason why it’s important to understand this is because it could be the reason the dollar has not weakened …


It also can give us insight on what countries go into default first.


So, the ratio represents the ratio of a company’s debt service payments as a ratio of net operating income.


China’s ratio is the highest among the G4 (US, Europe, Japan and China), which is also weighing on China systemic risk signals … 


Today I’ll show you how bad it has gotten in China and a low risk/high reward trade to play it …


Debt Service Ratio (DSR) for the G4 


This ratio is key in determining which country’s will crumble underneath their debt first … 


The US is not in bad shape because our private sector was smart enough to reduce their debt burden when liquidity was injected into the system during Covid …



The next thing you need to review is corporate bond spreads to Government spreads. This is a critical signpost for a possible debt crisis developing.


Back in September when the US stock market closed below the 50-day moving average (DMA), and there was panic in the street, I alerted Option Pit members that corporate bond spreads did not budge, so it was time to buy the dip. You can read it here.


This however, is not the case in China, as you can see in the chart below:


More Trouble Ahead for China


Fantasia Holdings, another Chinese property developer, limited trading in its Shanghai bonds on Monday. This is usually done to limit volatility ahead of default, and post a ratings downgrade.


Modern Land China Co, another developer, is asking holders for a three-month extension on a $250 million dollar bond due to mature October 25th.


Ratings cuts and disruptions to production across industrial sectors are credit negative; electricity cuts will also add to economic stresses. 


Watch for the Yuan to Breakdown Against the Dollar


The ETF to put on your dashboard is the Wisdomtree Chinese Yuan Strategy (Ticker: CYB).


CYB is sitting just above the 50 DMA, and if it makes a new high it will set off a negative price/RSI divergence.



The fundamentals and technicals may meet as the Fed moves closer to being forced to raise rates, while China is in a debt crisis and must lower rates.


If that is the case, the Yuan could decline rapidly to the dollar.


Bring It Home 


There are so many global cross currents, and knowing where the cracks are and who will suffer, the most is essential to maximizing your profits.


Because the US is still the reserve currency, the US could hang on longer than Europe and China before suffering our own debt crisis …


There is no escaping it, but we may be last to go. That just allows us to make a killing as the dominoes fall … 


Organize your dashboard so you can follow the weakest link as we move forward and be ready to jump on a market that is overwhelmed with investors trying to exit at once …


That is where the big money is … until next time …


Live and Trade With Passion,

Griff


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