Monday, September 27, 2021

Evergrande Contagion Threatens To Collapse The Everything Bubble

Evergrande Contagion Threatens to Collapse the Everything Bubble

The U.S. economy is staring down the barrel of a financial shotgun thanks to the Chinese real estate bubble that just popped.

The trouble started at a developer called Evergrande, which is suffering a major crisis. One Wall Street Journal article sharply summarized the company’s problems:

The party has ended. Years of aggressive borrowing have collided with Beijing’s crackdown on debt, leaving the giant developer on the brink of collapse. Construction of Evergrande’s projects in many cities has stopped.

The Guardian referred to it as “China’s Lehman Brothers moment.” Of course, Lehman Brothers collapsed during the U.S.’s own 2008 financial crisis.

“The mess in China does not stop with Evergrande,” according to Mike Shedlock.

How huge? Well, we’ve seen this before in the U.S. (the Great Recession) and in Japan, where the real estate bubble of the late 1980s led to a “lost decade.” These economic events don’t respect national borders. They go global.

With that in mind, here’s how bad it might get

China officials asked to get “ready for the possible storm”

Get ready for the possible storm ahead…

That’s exactly what the Chinese leadership warned local authorities after the Evergrande collapse became apparent. According to a Kitco report:

[Chinese] officials noted they are being asked to get “ready for the possible storm,” including all the potential economic and social consequences that could come along if Evergrande fails to meet its financial obligations.

And fail the company did, as reported by Market Rebellion in a tweet on September 23: “Evergrande reportedly missed its $83.53 million March 2022 bond payment that was due today.”

Here’s why this isn’t a “run of the mill” economic crisisfor China:

Chinese banks make up four out of the five largest banks globally, with the “big four” having around $14T in total assets. Evergrande’s shock is significant, but it pales in comparison to the total amount of potential debt implosion we may soon see across China’s highly intertwined real estate and banking industry.

The same article highlighted the risk factors for the U.S. economy if a financial “contagion” were to develop and spread to the U.S.:

Jim Rickards...writing the following on Twitter:

Evergrande is going down. Expect financial contagion. Don’t believe the happy talk. Interesting contrast in how U.S. and China deal with crises. China will ‘set up law-enforcement teams to monitor public anger, a euphemism for protests.’ No bailout for you.

Could the “financial contagion” that Rickards and others expect trigger the “big one” in the U.S.? Unfortunately, we won’t know for sure until it’s too late.

1 comment:

AudioOutlaw said...

More trickle down coming...

The storm's coming y'all!