I published a stock market risk overview on Oct. 12 and listed several issues that had the potential to impact financial markets and the Fed’s TaperCaper decision process. One issue was overleveraged real estate development in China, and Evergrande was ground zero for global contagion if a major debt default on bond obligations was not mitigated by the Chinese Communist Party (CCP). During an interview on Nov. 7, I connected several talking points to how all was not well in China and Evergrande’s debt problem may lead to a financial crisis. The Federal Reserve published its Financial Stability Report on Nov. 8 and noted risks related to Evergrande and its exposure in crypto markets.
- Fed Warns of Peril in Run-Up of Risky Asset Prices, Stablecoins – Bloomberg, Nov. 8
- Fed Warns of Perilous Times Ahead – Gold & Silver Technical Analysis – TraderStef, Nov. 11
The U.S. stock market had already experienced wild volatility this past week due to concerns over the pandemic’s Omicron mutant, but news of a looming default related to Evergrande slipped under the radar until the evening hours on Friday. The following articles and graphic are worthy of a quote before continuing.
China property problem is bigger than Mt. Evergrande… “Sunac China Holdings, a real estate developer in China, considered sending a letter to authorities in eastern Shaoxing asking for ‘special policy support’ because operations in the city have become difficult, Bloomberg reported last week. Sunac has ‘run into big hurdles and difficulties in terms of cash flow and liquidity… Sentiment in the housing market has fallen to almost freezing point. We face huge pressure.’ This occurred less than a week after competitor China Evergrande Group’s default warnings contributed to sharp declines in global equity markets.” – Putman Investments, Sep. 29
China’s Plan to Manage Evergrande: Take It Apart, Slowly… “Beijing is working on a controlled implosion of the real-estate giant, selling off some assets while limiting damage to home buyers and businesses.” – WSJ, Oct. 10
What is Bitcoin’s exposure to Evergrande? – @Quinnvestments, Nov. 12
China’s Guangdong summons Evergrande boss after debt repayment warning… “The real estate developer said there was ‘no guarantee’ it would have enough funds to meet debt repayments, while regulators sought to reassure markets. Evergrande, once China’s top-selling developer, is grappling with more than $300 billion in liabilities, fueling fears of a potential collapse that could send shockwaves through the country’s property sector and beyond. On Friday, the company said in a filing to the Hong Kong stock exchange it had received a demand from creditors to pay about $260 million. It is already late paying $82.5 million in coupons due on Nov. 6.” – Reuters, Dec. 3
“Another miserable month for China’s real estate industry. Contract sales for the country’s 100 top developers plunged 38% from a year earlier in November, a sharper drop than October’s 32% decline, according to data published by research firm China Real Estate Information Corp.” – MrTopStep, Dec. 3
China Braces for Evergrande Restructuring After Months of Tumult… “China Evergrande Group’s long-awaited debt restructuring may finally be at hand, posing a fresh test for Xi Jinping’s government as it tries to rein in the country’s financial excesses without derailing economic growth. The embattled developer said in an exchange filing late Friday that it plans to “actively engage” with offshore creditors on a restructuring plan, offering its most explicit acknowledgment yet that its $300 billion of overseas and local liabilities have become unsustainable.” – Bloomberg, Dec. 5
Evergrande’s Dec. 3 notification to the Hong Kong Stock Exchange:
China Developer Sunshine 100 Defaults on $170 Million of Bonds… “The default highlights the ongoing stress for developers amid ongoing fears that the giant China Evergrande Group could default on its liabilities. Rising Chinese junk dollar bond yields has made it difficult for distressed developers to refinance their maturing debt. That helped contribute to a wave of defaults in October.” – BNN, Dec. 5
The Bitcoin/Tether price action has plunged 39% from its 69k high on Nov. 21, with a 27% flash crash on Dec. 3-4 that printed this weekend’s 42k low. Several analysts have noted that Stablecoin-Tether has enormous exposure to Evergrande and any hint of additional distress in China’s real estate market debt could result in a crypto crash. That concern manifested this weekend and @Quinnvestments graphic noted above lends credence to the underlying risk surrounding the crypto bloodbath.
One factor that few are aware of and many are not willing to accept is that fundamental arguments that cry incessant manipulation by government agents or banker boogeyman are more of a Trojan horse than ever before. The enormous elephant in the room is high-frequency trading (HFT), algorithms, and artificial intelligence (AI) wedded to automated trading platforms. The speed of technology and the deep-learning of headline semantics are the primary force behind upside and downside rips across all market classes.
Human traders that manually use a mouse and mercantile sense to execute trades are now a rare breed that ride the coattails of trains that already left the station. Naive investors are unaware of the high risk of being wiped out for numerous reasons that include their overuse of automated stop and buy orders. Seasoned traders noticed patterns that developed in bid and ask flows over a decade ago that translated into anomalous patterns on candlestick charts. Headlines and pundits that constantly repeat that traders are buying this or selling that, remain lost in a paradigm that no longer exists. Applicable language needs to be adopted by journos and analysts so that the message becomes clear and investors grow more aware of what they’re dealing with. Welcome to the machine and Wall Street is dumping gobs of new money into Quantum algorithms that are about to enter your sandbox.
- Oppenheimer: Algorithms drove the sell-off in stocks on Monday – CNBC, Sep. 2021
- I Lost $400,000, Almost Everything I Had, on a Single Robinhood Bet – VICE, Dec. 2021
- Artificial Intelligence Is Coming to Crypto Trading – Bitcoin.com, Nov. 2017
- High Speed Traders Dominate Bitcoin-making huge rips – Bloomberg, Nov. 2017
Stay on your toes as financial markets could be in for some choppy waters if the Evergrande debacle worsens this week. Those gold and silver coins in your safe still weigh an ounce no matter what happens in the paper fugazzi market.
Crypto Conspiracy Podcast – David Morgan Interviews John Perez – Dec. 4
DEC. 8-10 UPDATES:
- Fresh jitters in China’s property sector after Kaisa shares suspended – The Guardian
- Financial crash fears, second Chinese developer faces default- next Evergrande? – Express UK
- Evergrande, Kaisa cut by Fitch to default after missed payment deadlines – Reuters
- Evergrande slides into default while some ratings agencies keep quiet – CNBC
Plan Your Trade, Trade Your Plan
Headline Collage Art by TraderStef