Watch the US bond market closely. Today saw a sharp selloff on the 10-year maturity, a favorite "asset" of foreign governments and companies. When those organizations get into trouble, they sell treasuries to raise cash. "Trouble" often comes in the form of dollar-denominated debt which must be serviced in dollars.
As the dollar rises, borrowers of dollar-denominated debt must raise more local currency to buy the dollars to service their loans. That puts further upward pressure on the dollar, distressing foreign usd-debtholders even more. It's called a "short squeeze":
https://www.lynalden.com/global-dollar-short-squeeze/
The entire world (including the US federal government) has taken a short position on the US dollar by assuming obligations requiring them to pay later in dollars. Ask any Ape on WallStreetBets what happens to shorts during a short squeeze, and you'll get the same answer: they get rekt.
The dollar spiked past a key technical level today.
https://www.tradingview.com/chart/?symbol=DXY
In 2020, a similar dynamic took hold, with stocks, bonds, and gold falling in price as the dollar surged. We may not be there yet, but the scramble for dollars in China (and possibly all of Asia) is just starting.
PROTIP: Anyone like Lyn Alden that is offering premium stock tips is by definition a fraud, if you can beat the markets you just beat the markets and Scrooge McDuck-it, you don't run a damn newsletter.
On the contrary, the worst advice comes from people who have no accountability or reputation to worry about.
Lyn Alden's site is a wealth of knowledge but I don't subscribe to any newsletters.
For all I know you are right about Alden's ethics, but the EMH is not baked into the definition of fraud.
In fact, many investors do offer public trading advice: it's common among short sellers to both short their targets and publish analyses explaining why they think their target is overvalued. This is controversial, but if it is clear to receivers of the advice that the advice comes from a short-seller whose positions are known, then I do not regard it as particularly unethical.
I've been reading everything I could on economy and finance in my early twenties and Lyn Alden blog is the only thing I needed then and wasn't available. She is pure gold — I know no one that is able to explain complex topics in this context with such clarity.
Hmmm , depends on what these "tips" entail right? What if another website offers long term hold advice via a newsletter and charges you for it? As a matter of fact, I do subscribe to one in India (no , I am not going to publicise it. DM me if you want to know) where the holding periods are anywhere between 2yrs to 5 yrs. There are disclosures that say whether the stock analyst holds the stock/bond etc.
Also, while the dynamic you describe is real (1) the mechanics are not similar to an equity short squeeze , not a good analogy and (2) unlikely this type of pressure comes from China. They need to hold/buy treasuries to manage their currency (ie keep it weak). If they don’t, their export competitiveness suffers which is last thing that gov will allow. They have other ways of managing the situation.
I'll save you the time. There are no examples.
Every currency crisis has debt denominated in a foreign currency. - Germany in the 1930 (WW1 reparations were gold marks) - Argetina (foreign borrow and currency peg to USD). - Thailand. - Turkey (now, borrowed in Euro).
https://en.wikipedia.org/wiki/War_reparations "Germany agreed to pay reparations of 132 billion gold marks"
https://www.federalreservehistory.org/essays/asian-financial... "Heavy foreign borrowing, "
https://economics.rabobank.com/publications/2013/august/the-... "Argentina’s hard currency peg to the US Dollar, pro-cyclical fiscal policies and extensive foreign borrowing"
If you're going claim a coming currency crisis, test that assumption against the historical record at your earliest convenience.
But yes, it has happened. Russia 1998 is the most well-known example. Everyone believed that because Russia could issue GKOs in RUB, they wouldn't blow up like Asia...they did. This also happened, to a large extent, in Mexico in 1994 (Mexico actually issued tesobonos, they were domestic currency denominated but shifted the currency risk to taxpayers, they were quite a security).
The reason why is fairly simple: it doesn't matter if the debt is denominated in domestic or not, because people buy the bonds and then hedge their currency exposure which leads (eventually) to the domestic banking system having the same synthetic position as if your debt was denominated in a foreign currency.
The slight issue with historical examples is that the situation is correlated to high levels of financial globalization, which largely didn't happen until the 90s. But because something has never happened, doesn't mean it is impossible.
The point is confused though. The causes of currency crises are changes in capital flows. That is really just saying: the reason why currencies fall is because people sell. They don't really need some "explanation", they definitely contra-indicate with stuff like domestic currency debt...but there is no universal theory possible beyond: people sold the currency (and so currency crises have happened with capital outflows for some exogenous reason, war, etc.).
I don't know much about "technical" forex trading, but I can say that USD/CNY didn't really change today, neither did USD/CAD, or USD/GBP. Everything is around where it's been over the past few weeks. Are you saying the real exchange rates will significantly change soon?
The US Government sells treasuries and bonds to raise dollars. These have to be approved by congress, which is why every so often you'll hear about government shutdowns, because, yes, if for whatever reason, the US Congress doesn't pass a debt ceiling lift, the US Treasury will not have enough money to run things anymore.
Then there's the Federal Reserve, which loans dollars to banks to create liquidity and velocity in the monetary system depending on certain conditions (Primarily inflation and unemployment I believe).
(Presumably there's a fair amount more to it than that as well).
If OP is right I don’t see the federal reserve acting to bail out China.
They might happen to do QE for another reason but not to help out other countries with their problems.
It has to stop somewhere. Doesn’t it? (Genuine question!)
We may spend 10 times more than any other nation on our military … but due to bureaucracy and other inefficiencies our spending doesn’t quite get the same bang for its buck if you will.
[0] or 6.2 or whatever depending on what version you use.
If their economy continues its downturn then this precedent would hold for all debt. I would really watch personal funds and investments and insure they dont hold any chinese debt as an asset.
If you've got your "thumb on the scale" as the saying goes, there will always be forces that try to exploit that condition.
The idea that tying the money to some physical (gold standard) or mathematical (Bitcoin) “reality” is somehow preferable is just the naturalistic fallacy wrapped in cynicism, namely that today’s institutions are incapable of making better decisions than the completely arbitrary whims of these alternatives. And all the ghosts people seem haunted by (hyperinflation) are figments of history a century removed.
The reason why Evergrande has accumulated so much foreign debt in the first place is because no domestic bank wanted to touch them with a ten foot pole. After all they have effectively defaulted once already by unilaterally declaring an equity swap on 130 billion CNY worth of maturing bonds in September last year.
Sounds like this is mostly domestic debt, so they cant make this go away by saying they wont support international debt holders. Seems like the CCP in a tough spot here.
This will put a huge hamper on China's FDI: if foreign investors are given a worse place in line in case of insolvency, they will either shy away from investing at all or demand higher returns for the extra risk.
I think it's safe to say that even if every last dollar of FDI dried up, China would be more than fine with its domestic capital supply.
Furthermore, the identities of the big FDI investors are dominated by physical manufacturers investing in onshore operations. Not so much liquid global securities trading.
this is the funniest meme, “we made it up” https://youtu.be/GM-e46xdcUo
Its a pretty clever meme because pointing out how dumb it is makes it seem like that person doesnt believe there is anything else wrong with tether, immediate derailing their criticism of the latest rumor, allowing for literally any rumor to be masqueraded as truth.
B) Why should the US do anything? If your risk profile when dealing with Chinese companies doesn't include the risk that the CPC will change the rules of the game later to benefit the domestic economy, you're a sucker.
But what would you call it when American investors make boatloads of money investing in Chinese stocks? And should the US regulate away their ability to earn those returns?
Since US investors can also lose money when US companies default, should investors also be prevented from investing in those too?
Incidentally, this "protect investors" logic is the same reason for the accredited investor regulations that prevent the masses from investing in startups.
That's a wide ranging / impossible mandate there.
How is Evergrande's foreign debt default translate to "waging economic warfare via equity markets"? Of course China is responsible for its own domestic debt, because evergrande borrowed from state-backed banks. Are foreign debters also backed by Chinese government? Are you suggesting Chinese government should take responsibility for foreign investors?
And "for a while"? Name another case remotely matches "economic warfare".
China has basically been the single biggest driver of global growth over the past decade. Its highly overleveraged real estate market is a huge threat to its overall economy, and that has plenty of potential to create a massive knock-on.
https://www.reuters.com/article/us-economy-global-kemp-colum...
I think what Western observers are missing is that this was an intentional "let fail" in order to prevent this structural weakness from becoming too big of a problem.
China is basically euthanizing this industry because they perceive it as a structural weakness.
Something I've found interesting about these kinds of theses (although I'm sure there's more to his) is that just believing that a company/country/whatever is going to be successful doesn't make it a good investment. It's all about the pricing of the asset and ultimately, for assets priced by a market mechanism, about what other people think. So a thesis for investing more in China could be "US is in decline and China will take its place faster/more fully than the market thinks."
Of course even if you don't have any special knowledge about China's future, the default position should still be to invest a part of your portfolio according to it's market weight, which in the FTSE All-World Index [1] is 3.9% currently.
[1]: https://research.ftserussell.com/Analytics/Factsheets/Home/D...
The thing is investing in China a foreigner is a complete dice roll where you have no real power and no visibility into what you are investing in.
I feel like someone has mistaken 100 years for 10 years.
Until recently they were considered (by most people) to be a relatively safe bet, so why wouldn't there be a load of money in there...
Here in the west we've just extended indefinite credit (13 years and counting). So it's a bit of a pivotal moment for the CCP imho. It might turn out they're more committed to markets than we are :)
https://www.nytimes.com/2021/11/10/business/evergrande-bond-...
"China Evergrande meets a Wednesday payment deadline for two of its bonds."
On multiple levels, too.
"It was not immediately clear whether it had made payment on the third bond, which matures in 2024, or if all of the investors in the other two bonds had received payment."
So basically they MIGHT have made payments on 2 of the 3 bonds. How is this being treated as anything other than a default? Is the financial press just afraid of upsetting China here?
https://www.forexlive.com/news/!/evergrande-met-todays-bond-...
The title on Google News is "Evergrande Met Today's Bond Payment Deadline" but if you click to the article the headline changes to "Evergrande met at least part of today's bond payment deadline".
What is going on here?
However in this case it seems that a bondholder has explicitly stated that they have not been paid by the deadline https://twitter.com/dhthakur745/status/1458499174026997760?s...
Which means that, if true, Evergrande have now defaulted.
Evergrande bondholders say they have not received $148m interest payments https://www.ft.com/content/88dcb535-3945-4138-b394-dda82292b...
Basically, selective default by Evergrande. Full official default likely very soon, and for most of the Chinese real estate companies.
加速加速加速 更快看到结局
Will this be the Chinese version of Japan's real-estate crash of the '90s...?
Haha, trying to buy an apartment in Shenzhen? I can't say the sentiment here is much different amongst young people.
BlackRock is the biggest foreign owner of Evergrande bonds.
Next there are Vanguard, and a few other equally big Western funds.
https://www.reuters.com/business/finance/blackrock-hsbc-amon...
It says: "BlackRock, HSBC among largest buyers of Evergrande debt"
Those are relatively recent purchases and they were tiny re BlackRock -
"BlackRock added 31.3 million notes of Evergrande's debt between January and August 2021, pushing its stake in the company to 1% of the assets in its $1.7 billion Asian High Yield Bond Fund, according to Morningstar."
1% of $1.7 billion, or $17 million.
That's equal to 1/100th of 1% of BlackRock's assets. And they've got $9+ trillion under management.
BlackRock has taken a hit on their equity in Evergrande, which is already largely toast:
"The data also shows that BlackRock, the world’s largest asset manager, has suffered a $95.3m book loss on its Evergrande holding, which at the start of the year stood at just over $111m."
https://www.fnlondon.com/articles/blackrock-vanguard-shareho...
The Financial Times in late September estimated BlackRock's total exposure to Evergrande at $400 million. At their scale they can take a $250-$400 million loss and shrug it off. Evergrande represents a several hundred billion dollar problem for China domestically, and that's before you get to the cascade risk for their property market (which represents 65-70% of all household assets in China).
Furthermore, it seems to me that saying a company has defaulted is a pretty serious statement that would constitute libel if not appropriately checked. And so even with a few unofficial reports of bond holders not getting paid, it would be irresponsible to prematurely declare a default.
The facts that have been reported certainly don't look good, but it's also the press's modus operandi to sensationalize.
If they can't pay that, what can they pay on their 300B in other debts?
Other news sources indicate they don't have money coming in, possibly NONE, the real estate market in China is getting cold... and they have unfinished projects that they already collected money on that require money to complete.
When you have 0 liquid dollars then $148 million is more than you have.
Or have we moved on to something else?
No, and it never was.
With Lehman, the banks stopped lending to Lehman and then to everyone else. In China, Beijing can let Evergrande default while compelling lending to peripheral players. Thise players know this. The market knows this. That makes contagion risk de minimis. (For Western central banks, the analogous policy tool is “extraordinary measures,” i.e. committing to buying everything in sight.)
Keep in mind that Evergrande is defaulting because Beijing implemented debt limits. They’re wilfully deflating the bubble American policymakers ignored in ‘08. I’m a China hawk. But this whole episode is a show of strength for their system.
They've been using real estate as a place to stash everything bad for a while:
https://noahpinion.substack.com/p/what-if-xi-jinping-just-is...
The Fed was aware of the real estate bubble and tried to deflate it in 07-08. But it's hard to deflate a bubble gradually without triggering a catastrophic downturn.
The Fed played a huge role in triggering the recession. They intended to deflate the housing bubble, but didn't realize it would cause several banks to implode and risk the entire financial system.
It's not Lehman-like in that the company isn't a tangled octopus in the middle of the financial system. Lots of investors exposed to developing markets will get burned, but I don't think the knock-on effects will be huge.
A major housing market panic in China could create a lot of despair and unrest in China.
Now, given how many things in the US are at terribly inflated prices, especially housing that people need to live in, maybe in the long run it's a good thing. But between here and there it could be quite turbulent.
Imagine there are EU/US banks that have loaned money to Evergrande or any related domino that may fall.
I imagine a loan from a bank is listed as an asset for the bank because they are charging interest monthly and it produces income for the bank. Now they don't have that income because the company isn't paying. It now moves to the liability part of the balance sheet.
One of the elements of the 2008 crisis was mortgage backed securities, bundling of mortgages sold as a security. What if these banks have done the same thing with Commercial mortgages/bonds? How many derivatives are based on these loans/bonds Evergrande isn't paying on? Zero, then likely no "contagion". Many? maybe they are isolated to China?
I think its likely an onion that is peeling back its layers and we don't know the full impact until its done.
Seriously misleading title though. A default is a well-defined event. “Defaults” implies that it has happened. “Teetering” is something else. Needs fixing.
Bonus points for that PDF using the phrase "great reset."
"Please use the original title, unless it is misleading or linkbait; don't editorialize."
My reading from above pieces of information:
it's not that important yet. Maybe they will pay late again as they did previously when they were late one day.
As someone that is financially versed, even I have trouble grasping the why this is a big deal. Complicated things don't get run.
Whereas J&J factory problems, that sounds like a covid thing and it's easy to see why that might be important.
It's important to watch but the ripple effects on this look to be small and likely to be contained in China.
But your right, it hasn't hit major media in any form.
Maybe the typical Economist readership cares more about this. I for one did not quite grok the importance or the implications, but it's been interesting to hear about.
It seems they didn't but we won't know until tomorrow or so.
That’s not the end of their debt obligations, just the first one to come due that they’re not able to pay. There are many more debt obligations behind this one, so paying off this obligation just kicks the can a few days down the road.
To pay off all the debt obligations, would likely be billions of dollars.
https://www.ft.com/content/e0a447f9-b4c2-45dc-bfc8-755b284d1...
As to how you've jumped from "rich individuals don't want to pay corporate debts" to "government bailouts clearly work" I have no idea.
https://asia.nikkei.com/Spotlight/Society/China-s-largest-gh...
Wade Shepard, author of Ghost Cities of China:
> Today, China’s so-called ghost cities that were so prevalently showcased in 2013 and 2014 (...) have filled up to the point of being functioning, normal cities
I would be really, really skeptical of post-2012 reporting on China. I understand why people are increasingly anti-China (the Uyghur stuff is disgusting) but you really don't get close to a neutral perspective from most of the Western media.
Or even closer to Beijing in Tianjin's new financial district. Actually, the tallest building in China is an incomplete sky scraper in Tianjin (https://en.wikipedia.org/wiki/Goldin_Finance_117), which hasn't had any work done on it since 2015 or so (similar to North Korea's Ryugyong Hotel).
> but you really don't get close to a neutral perspective from most of the Western media.
If anything considering my 9 years living in Beijing, western media holds off on a lot of crazy things that happen in China. No one would actually believe the reality, they would think it was all made up (e.g. the incomplete sky scraper in Tianjin).
There's pros and cons to either system, but so far, the demand has largely arrived. The ghost cities of 2010 are now bustling metropolises. The ghost cities of 2020... Are on track to become bustling metropolises.
China has added ~500 million people to its cities over the past 50 years. 'Build in anticipation of demand' seems like a sensible approach to this sort of thing.
That really isn't true. Kangbashi (a district of Ordos in Inner Mongolia) is still pretty empty for the amount of infrastructure they've built. They "lowered" their population target and claimed success, and are trying to get people to move there by putting in a good school, but you can still go there to see empty boulevards.
Likewise, China's tallest building is an incomplete skyscraper in Tianjin that hasn't had any work done on it since 2015. Tianjin also overbuilt on a new financial district that no one is really interested in.
Many of these overbuilt buildings are never going to be lived in before they are torn down. They just aren't in very convenient locations (e.g. not enough jobs to sustain those areas and no one wants to commute in traffic to where their are jobs).
Glad I’ve been building a solid crypto portfolio, looking forward to cashing in the last few years gains to buy some houses on the cheap again after the economy implodes.
And before the strawmen start piling up - that doesn't mean all crypto is forever useless, but right now crypto it is absolutely over-invested in relative to liquidity.
it's evident crypto is not a hedge against uncertainty or bad news, but rather is highly correlated with the stock market and overall US economy.
In combination with high U.S. inflation, slow economic recovery in the aftermath COVID-19, labor shortage/great resignation/ supply chain challenges , there can be potentially large domino effects, however is hard for anyone to say how bad it can become, or will we be lucky.
Paying off the current payment doesn’t deal with the remaining $300B debt that they need to service. It just kicks the can down the road a few days.
Good luck finding a multi-billionaire that’s going to swoop in and make $148M payments on a regularly recurring basis for the next decade.
https://twitter.com/SahilBloom/status/1439920043404546050
https://twitter.com/FabiusMercurius/status/14392189567791513...
https://twitter.com/INArteCarloDoss/status/14389444317349191...
