Warning, I’m writing about economics and investing, which for too many means their eyes glaze over, or the page is closed quickly and the search is on for lighter fare.
For the few who will make it through this tome, congratulations, it’s an important topic even if few find it worth the time and effort to follow.
Major United States stocks indexes were down big Monday as worries continue that a huge Chinese property development company, Evergrande, is in danger of defaulting on its debt.
Why should you care? Glad you asked.
First, it’s naive to think that what happens in China doesn’t affect us here in the U.S. From viruses that the Chinese might have cooked up in weapons labs or could currently be creating, to shipping gridlock in China that has hamstrung the worldwide supply chains and created notable price inflation, to this potential debt market meltdown in China, we’re in this together.
Donald Trump wanted to change that. But Joe Biden has spent his presidency puckering up and asking the Chinese leadership to drop the pants of their Mao suits so he can smooch their behinds. That’s looking like yet another questionable Biden call, making the Afghanistan debacle a mild senior moment by comparison.
In a bit of delicious irony, the Chinese government is threatening to let Evergrande fail, if that is the wish of the investment markets. The Chi-Coms are sounding more free-market than us.
As an aside, got to love the name, Evergrande. It’s the sort of overkill we’re used to witnessing when the neighborhood Chinese takeout joint is called something like A-1 Yankee Doodle Dandy Super Panda Wok.
Evergrande, it just sounds so great, so impeccable, so bulletproof. It is none of those, and probably doesn’t even have a good buffet.
What Evergrande does have is interest payments coming due this week on about $300 billion or so of debt. That’s a lot of won tons! It doesn’t look like Evergrande has the scratch to meet those obligations.
And that has led many analysts to use to the D word, as in default. What that does to global credit markets is being debated, but most don’t expect it to be shrugged off.
U.S. humorist Will Rogers, speaking of this nation’s bank failures during the Great Depression, is credited with saying of putting money in banks that he was more interested in return of his money, than the return (promised interest rate) on that money.
Because central banks have kept interest rates suppressed, there has been a reach for yield on debt and that has led companies to lower their standards in the pursuit of return on their investment capital.
Economies and markets are inter-linked and when operators such as central banks attempt to influence them with artificially low interest rates, there are ripple effects and often unintended consequences.
In 2008-09, when overreaching U.S. investment corporations, emboldened by interest rate suppression by central banks, pumped up the mortgage market, many organizations quickly went belly-up as the figurative house of cards imploded.
At first our nation’s central bankers were willing to let markets work and purge the offenders, sending them into bankruptcy oblivion. But then they blinked and bailed out the remaining big banks.
Fast forward more than a decade and central banks around the world have inflated a debt bubble of historic dimension by dramatically increasing money supplies in their countries, and keeping interest rates at historic lows – even negative interest rates in some countries, which means you are guaranteed to lose money buying a bond.
This exercise in economic voodoo cannot work forever. Perhaps the time is upon us for the piper to be paid.
Debt markets function only if there is confidence that borrowers will pay interest income to the lenders, not to mention eventually paying back the principal.
When confidence fails, the demand for institutions to get their money out of the hands of questionable borrowers becomes a frenzy and markets lock up. It happened briefly in 2008-09.
Think of the bank run scene from the movie “It’s A Wonderful Life,” but on a global scale.
In 2008-09 it took worldwide cooperation by central banks, led by the U.S., to avoid a complete meltdown of investing markets. Remember “Too Big To Fail?” If idiots blew billions of dollars, they had to be bailed out to protect the system.
Meanwhile, smaller fry were left to die for lack of oxygen in the form of monetary liquidity.
This Evergrande-induced example could be a repeat, or worse, of what we saw in 2008-09.
The usual suspects on cable news financial channels were out yesterday telling nervous investors to buy the dip. That has worked in the past for those with deep pockets and steel stomachs.
But, if this is the big one, it won’t work this time.
Watching this unfold over the rest of the week sure will beat viewing anything offered up in the sporting world, or by the ongoing theater of the absurd that is our nation’s political scene.
Ignore this potentially watershed moment in the debt markets at your own peril.
Sam Ross Jr's site 