Shaun Scott No Comments

China’s ‘Evergrande’ Invigorates a Stock Sell-Off

The S&P 500’s ongoing 18 month run without a 5% setback is in jeopardy, courtesy of Chinese real estate firm, Evergrande. The company is vulnerable to defaulting on an $80 billion loan payment due Thursday, should the CCP refuse to bail it out, and fear of contagion Monday delivered the U.S. averages their biggest daily decline since May.
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Warren Buffet once said, “Only when the tide goes out (credit market tightens) do you see who’s been swimming naked”; the Lehman-like failure of behemoth, Evergrande, could be the catalyst of such a tightening. What does this situation mean for the markets going forward, and what are investors to do?

A healthy market advancement involves the indices periodically stooping to their respective 200 day moving averages, and occasionally “correcting” with declines between 10%-20%. These are important adjustments which keep valuations ‘in-check’ and hold speculators accountable, but have been absent this market since March, 2020.2 Further evidence the present market is a dangerous bubble which departed economic reality long ago is the fact America has for over a decade suffered more than $1 of new debt for every $1 of economic growth produced. A gardener who spends $5 on fertilizer to produce $4 worth of vegetables year after year would be dealt with expeditiously by a free market, yet it’s essentially what our government is, and has been, doing. The bull market in stocks is built on the foundation of money-printing and interest rate suppression, and requires both for a continuation. Proof of this assertion is the fact 25% of every corporation in America today is a “Zombie”, failing to produce sufficient revenue to meet interest payments on existing debt, and surviving only by borrowing more money at artificially low rates in an artificially ‘loose’ lending environment.

As bad as all that sounds, these disturbing facts do not mean the market party must end today. The stock market has been searching for a reason to correct, and Evergrande, along with the formality of a debt-ceiling debate, and possible Fed tapering, have finally provided a few. The euphoric sentiment which accompanies major market peaks briefly appeared in the first quarter, but subsequent bearish sentiment from institutional money managers suggests the party may yet continue. When every available investor is “all in” on stocks and “wildly bullish”, the lingering bear market will charge, but that’s not the case today. I expect the present setback in stocks will once again prove a “buy the dip” opportunity for investors starved of income and desperate for growth.

Pay no attention to the “China bashing” you’re hearing on TV; the Evergrande debacle will by no means deter, or even slow, China’s global economic domination. Look for evidence of this in the coming blog.

Think about it, Shaun.

1 Bloomberg, “Evergrande’s Total Liabilities Swell To Over $300 Billion”, August 31, 2021

[https://www.bloomberg.com/news/articles/2021-09-01/evergrande-s-falling-debt-masks-dues-swelling-over-300-billion][0]

2 CNBC, “Market’s record price action is mimicking late 1999 and it could spark a 10% to 20% correction, long-term bull Julian Emanuel warns”, August 30, 2021

[https://www.cnbc.com/2021/08/30/market-is-mimicking-1999-it-could-spark-10percent-to-20percent-correction-btig.html][1]

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The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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Shaun Scott No Comments

Inflationary Deleveraging & the Illusion of Wealth II

This week I would like to offer a self-correction on a particular thought conveyed in the last blog, or perhaps better articulate the point, and offer some final thoughts on this important and emerging subject.

First, certain points regarding inflationary deleveraging must be reiterated:

  •  Excessively indebted societies must periodically deleverage bad debt to avoid an otherwise certain social and economic downfall.

  • The two deleveraging options available to central planners are inflation and deflation.

  • Inflationary deleveraging involves controlling a high inflation rate while keeping real interest rates negative over a long period, such that nominal economic growth outpaces government debt, thereby lowering the debt/GDP ratio.

  • Inflationary deleveraging is the Fed’s clear choice.

  • The Fed has limited real control over the U.S. economy and financial markets but gets participants to do its bidding by controlling the narrative.

  • The Fed’s narrative involves talking up the economy, talking down inflation, talking up stocks and other “risk assets”, talking down gold and other dollar alternatives, talking up taxes, talking down interest rates (that’s a lot of talking!).

  • The Fed’s attempt to deleverage America’s bad debt through inflation has a small probability of success, requires the market to swallow the narrative long-term, and will have many unintended consequences, most notably the impoverishment of the middle class.

Last blog I inferred “the Fed’s inflation policy results in persistently high asset prices, commonly referred to as “The Wealth Effect”, but in reality it is “The Illusion of Wealth Effect”, which recently played out in Venezuela, as the cost of living outpaces asset appreciation”. A more accurate assessment is ‘in reality it may at any moment become’, “The Illusion of Wealth Effect”. This is a better statement and an important clarification in the argument because in America the rate of consumer price increases has not yet surpassed the growth rate of “risk assets”. My sincere apology for the misstatement, and this, of course, leaves one unanswered question.

Is inflationary deleveraging worth the risks of increasing America’s distribution of wealth, impoverishing her middle class, having to endure repeated systemic crises due to the weight of trying to carry a mountain of bad corporate debt, risking the global reserve currency status of the dollar, and risking the credibility of the dollar itself? You be the judge.

Think about it. Shaun

Did you know the ridges on quarters and dimes, originally 90% silver, were put there to prevent our government from cutting and melting the edges of coins to arbitrarily create additional currency units? Do you know what other nation’s government very famously did this?

“You have sown much, and harvested little. You eat, but you never have enough; you drink, but you never have your fill. You clothe yourselves, but no one is warm. And he who earns wages does so to put them into a bag with holes. “Thus says the Lord of hosts: Consider your ways.”

~Haggai 1:6-7

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.