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. 1 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
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
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