Pulse of the Market - September 2021
The collapse of Evergrande, China's second largest property developer has given people flashbacks about 2008 and the Big Short. Will this create a Black Swan event for the entire market? Lets dive in
Evergrande: The Chinese Big Short
Evergrande, a massive property and real estate conglomerate finally started to cave under its massive pile of debt built up over many years of irresponsible building and investments. With the company being weighed down by an $88.5 billion debt burden and total liabilities in excess of $300 billion, bond holders are scrambling to see if they will get any principal back, let alone semi annual interest payments they are entitled to.
Just like in 2008, when you had Americans with low FICO scores, very little income, and massive debt buying several homes, Evergrande was loading the boat on debt while also investing in stupid things like a Chinese Soccer team…….. A SOCCER TEAM?!?!?!?!
And if you didn’t learn this in Finance 101, equity holders are below debt holders in repayment if a company were to default. As such, while Evergrande debt holders of bonds are getting wrecked as their “guaranteed” coupon payments aren’t coming in, the equity holders could see their equity, or ownership of the company, go to ZERO, if Evergrande were to default on its debt.
But in Jerome (Fed Chairman) type fashion, The People’s Bank of China pumped 120 billion yuan ($18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan. Seems like they learned from the OG that in order to fix an issue, you just print more money! If anything the fate of Evergrande is in the hands of Xi Jinping (a Communist Dictator).
China injects liquidity to stabilize Evergrande collapse
Maybe the mass hysteria and clickbait from CNBC about the whole market collapsing isn’t as valid as one may think. US and International investors didn’t get their interest payments last week and will suffer holding toxic bonds on their books, but to the average investor, this may fade away, given the small size of Asia HY bonds compared to the vast $1.6 trillion US HY bond market. As JP Morgan Head of Asia Pacific Equity Research, James Sullivan said in the above link, “Evergrande is still likely to default and will affect the entire Chinese property space, but will not be systematic” and frankly, I agree with him. My thoughts about this whole mess is summarized in the below meme:
**Please note HY refers to “High Yield” or bonds that pay a higher yield to compensate for substantially more risk for the investor, mainly default risk.
A Gambler’s Paradise: The WallStreetBets (WSB) Origin Story
WallStreetBets. The word every boomer likes to say as they loathe that 20 somethings made money in the stock market. A bunch of gamblers with zero brain cells is the common phrase of CNBC.
Ok, maybe true, but did you know WSB spent several years as a place of real fundamental value and technical debate on stocks, all while being spear headed by the infamous Martin Shkreli?
Story time: I was in WSB way back in 2015 (before it was cool). A friend at USC introduced me Reddit, and I stumbled into a subreddit were I saw people “YOLO”ing 10s of thousands on random stocks I never heard of. It was like watching a car crash everyday followed by someone winning the lottery once a week as these degenerate college kids would lose it all or make millions and update the subreddit about it (SCREENSHOT OR BAN!!)
But to understand the WSB origin story, you need to learn about the man himself, Martin Shkreli. If you remember hearing on the news about that crazy guy who bought a pharma company, then raised the price by 5000% of a single drug in order to make millions in profit, then you have heard the name.
But to WSB, Shkreli was more than a dude that had no morals buying pharma companies, he was a leader of the blind. Shkreli would do livestreams were he did deep fundamental (Mensa level) analysis of companies. His IQ was off the charts and a bunch of random college kids, including me, watched him live dissect companies like he was speaking another language. And fun fact, he used to be a hedge fund analyst at Jim Cramer’s old fund. No wonder he became a crazy, degenerate psychopath.
If you want to lose several brain cells and witness the rise and fall of Martin Shkreli, this video is the perfect summary:
With his wild antics of livestreaming himself shorting millions in random bio tech companies, he proved hedge funds were shorting pharma companies, or any particular stock, to the ground in order to run them out of business. Funny how that storyline is now the mainstream talking point about 5 years later. How fate loves irony with WSB, Shkreli, naked shorting, and the whole meme saga.
The Fed and the T-Word
The Federal Reserve announced last week that it will likely begin reducing its monthly bond purchases (tapering) as soon as November and signaled gradually interest rate hikes if “substantial further progress” is made on max employment and inflation.
So the punch bowl is being taken away? Its coming. But don’t worry, your Dallas Federal Reserve President, Robert Kaplan, was caught trading millions in Tesla, S&P leveraged futures, Chinese stocks like Alibaba, all while having insider information of the Federal Reserve and their programs. Corruption at its finest.
