Is Evergrande going to trigger a global economic meltdown?
Unlikely. We could argue that the meltdown is already underway, just carefully disguised. What’s the likely impact of Evergrande’s troubles? Think back to the 2008 financial crisis, the Western world had dominoes that rippled globally as they have interlocked financial systems with highly leveraged trigger points. Corrupt and crony as it is, a market-based system allowed players to take the game to greater levels of volatility via fluctuations in real estate prices.
When ‘too big to fail came’ along, it marked the end of risk and reward. Big gov grew an all-seeing eye for the purposes of protecting the system. This chain of events makes sense from a Western perspective, hence the anxiety of imminent doom.
What's going on in China, then?
Control. Centralized power dictates the price of real estate and pretty much everything else in the economy. Yes, it’s true that a majority of Chinese wealth is stored in real estate, and the destruction of value would be dramatic to the economy. This is why the Chinese government won’t flinch. ‘Find a solution’ is a likely dictate.
Where all parties involved have no option, but to find a solution, muddle through, and make something work. Whether that’s staying afloat or winding up.
Commercial banks have little exposure to junk real estate, so domino damage should be containable. Yet, commercial banks have loans issued through the rest of the real estate economy.
The bottom line is keeping perceived integrity in the CCP economy through control, even if this means sacrificing Evergrande. Effects will be minimized.
Will there be a big impact domestically?
The long crypto of Chinese commercial paper via tether is a domestic issue more than a global issue. If one is bullish on Bitcoin for fundamentals, this pullback is an interesting/big opportunity. The crypto pullbacks are because of capital controls in China that limit investor options, but if one likes Bitcoin the pullback could be the opportunity of a lifetime since maybe Chinese commercial paper is swapped for crypto and vice versa. But they all are systemic to USD, which is what Evergrande owes and what tether acts as a peg too (see below)
What about the global domino effect?
For anyone who hadn’t noticed, China has been at war for some time. Bio, civil, economic, currency, trade, drug, cyber, psychological, and space. All the while keeping up delivery in trade to fund the military regime. The point is that they have insulated themselves from any effects of sanctions, are ready for being under economic siege with a closed economy.
The closest things to systemic risk you have seen from closed economies as of late is a pandemic and global trade. These are not capital market-related implications, as these economies centralize more.
Meaning, any spillover into Western financial markets will be negligible. This is not systematic from a US equity exposure perspective. Issues in Asia are systematic when connected to the global economy, like a virus or supply chain. EVs are not looking healthy with their linkage to Evergrande.
How does all this relate to USD?
USD default and pegs are bullish USD. Relative to the economy that acts as the pair, which in this case is a closed one. It is inevitable that US defaults happen, which is demand, irrespective of the printing that’s happening. The defaults we have been projecting for a while proving the US is in demand irrespective of printing, as the allocation of printing is focused on the five eyes or demand countries rather than supply countries of Asia. Intel is Inside the Trade War
Where to? The Definitive Guide to Investing in Cultural Assets
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