Tanking shares and bonds — here’s w hat to do

Friday, 15 October 2021 — Wollongong, Australia

[7 min read]

Dear Reader,

Shares and bonds of Chinese real estate companies tanked yesterday.

Evergrande — more than US$300 billion in liabilities and 1,300 real estate projects in play — just missed a third batch of interest payments on its bonds.

This coincides with an important piece of personal research I’m releasing today.

It’s to do with the growing China crisis.

The second-order effects it could have on Australian investment portfolios in 2022.

And a counterstrategy which you can start employing now.

You can be one of the first to read the full report by clicking here.

China’s embattled property sector faces an onslaught of downgrades between now and the end of the year.

But as you’ll see in my new report, the crisis goes much deeper than that.

A bit of quick background…

Late last year, Beijing implemented a ‘three red lines’ policy aimed at curbing leverage and risk in the property development sector.

Developers were to be assessed against three different financial criteria (called three red lines) to ensure they weren’t taking too much risk.

If the developers failed to meet any of these ‘three red lines’, regulators would place limits on the extent to which they could grow debt. Not meeting all three, for example, means no growth in debt is allowed.

This is the background story to the problems you’re now seeing in the property development space.

And this has really ramped up a level in the last few days…

Shares in Evergrande have been suspended in Hong King trading.

International bond sales by Chinese developers have all but halted.

There are urgent implications for Australia here.

And you need to understand them now.

The only question is whether investors will receive some sort of bailout or not.

In the past, ‘bailouts’ have been in the form of state-directed lending growth. That is, when debt goes bad, just create more of the stuff to paper over the cracks.

But that’s not going to happen this time around.

China has been doing that — to Australia’s benefit — for the past decade…and look where it’s got them.

Now President Xi is determined to follow a different path. One that puts his position of power ahead of the wealth of the nation.

This different path has a name — it’s called ‘common prosperity’. As Reuters explains:

‘President Xi Jinping has called for China to achieve “common prosperity”, seeking to narrow a yawning wealth gap that threatens the country's economic ascent and the legitimacy of Communist Party rule.

‘“Common prosperity” as an idea is not new in China, but a sharp escalation in official rhetoric and a crackdown on excesses in industries including technology and private tuition has rattled investors in the world's second-largest economy.

‘Xi, poised to begin a third term in 2022, is turning towards inequality after concluding a campaign to eliminate absolute poverty, pledging to make “solid progress” towards common prosperity by 2035 and “basically achieve” the goal by 2050.’

The message is clear:

China will not be our get out of jail free card in 2022

I’m convinced you’re going to see the bottom fall out of our iron ore sector by the end of the year.

As I’ve pointed out previously, it’s already started.

But it’s going to get much worse.

And then you’ll experience an even worse Australian economy in 2022 than you’ve seen so far, lockdowns or not.

Why?

‘Australia-China relations doomed to fail’, reports The New Daily.

I explain in full here why that’s true.

When your main economic partner is also your main security threat…well, that poses some issues, doesn’t it?

A Lowy Institute poll just reported ‘unprecedented shifts’ in Australian public opinion. That we feel ‘unsafe’. That our optimism about our economy is at an historic low.

And there is a ‘precipitate decline’ in trust in China.

The tension you’ve seen between Australia and China since the COVID crisis began is just the start.

People don’t realise what this break-up is going to mean.

‘What we are witnessing now is the beginning of the end of the Chinese economy.’

That was David Robinson, CEO of RTS Private Wealth Management, quoted on 8 June 2020.

He’s one of the few analysts on the planet who sees what I see and is speaking on record about it.

You need to see what we see

Because if you’re trying to figure out how to steward your wealth for the final 20, 30, 40 years of your life, understanding the Australia-China divorce is, I believe, the most important thing you can do.

As Robinson points out, this end ‘is now being catalyzed by geopolitical tensions stemming from the coronavirus 2019 (COVID-19) pandemic.’

It will have a FAR more transformational impact on local investment markets than COVID.

And the implications for Australia — and your wealth — are even starker than what’s going on right now.

As Robinson concludes:

‘Investors who get their arms around the situation sooner rather than later and assess potential impacts on their portfolios will be better able to limit damage and position to benefit.’

Over the past 20 years, a few lone voices — me being one of the loudest — have warned of the dangers of having all our eggs in the China basket.

Of relying too heavily on resources, other trades, students, and free-spending tourists. That being a ‘remora’ to China’s great white shark would be our undoing.

Few listened.

What could possibly be wrong with hitching a ride with the next US?

Well, the true costs of our ‘special relationship’ or ‘strategic partnership’ are about to be felt.

As Alan Dupont writes:

‘The coronavirus crisis has exposed the fragility of just-in-time supply chains and the folly of relying on a single country for critical goods and infrastructure.

‘Some economic separation is unavoidable and necessary.’

And so, we come to what all this means for Australia.

And for YOU…

This China divorce will likely be the biggest hit our modern economy has ever experienced.

Yes…even bigger than the Great Depression.

That’s hard to wrap your head around.

Let my try and help you. Click here for the full story.

Regards,

Greg Canavan,
Editor, The Rum Rebellion

‘When a government loses its legitimacy, its only recourse is authoritarianism.’

Dear Reader, Craig W

Yes…we’re cantering across the broad pampas…looking for tomorrow’s headlines.

And what’s this? Today’s headlines already have a tango beat. Here’s The Wall Street Journal, ‘Accelerating Inflation Spreads Through the Economy’:

‘U.S. inflation accelerated last month and remained at its highest rate in over a decade, with price increases from pandemic-related labor and materials shortages rippling through the economy.

‘The Labor Department said last month’s consumer-price index, which measures what consumers pay for goods and services, rose by 5.4% from a year earlier, in unadjusted terms. That is the same rate as in June and July as the economy reopened, and slightly higher than in August. The so-called core price index, which excludes the often-volatile categories of food and energy, in September climbed 4% from a year earlier, the same rate as in August.

‘On a monthly basis, the CPI rose a seasonally adjusted 0.4% in September from August, also faster than in August, which rose 0.3%.

‘[…]

‘“It looks like some of these supply-chain and inventory challenges are going to stick with us for a bit longer — at least through the rest of this year,” said Omair Sharif, founder of Inflation Insights LLC.’

So much for inflation being ‘transitory’, as the Federal Reserve has claimed. Here’s Breitbart:

‘Federal Reserve Bank of Atlanta President Raphael Bostic said Tuesday that inflation is likely to last longer than expected and should no longer be called “transitory.”

‘Bostic is the first Fed official to so clearly break from the central bank’s leadership on inflation. Fed chair Jerome Powell has insisted for months on describing inflation as transitory, although he recently admitted that it could last into next year. The Biden administration has also repeatedly claimed, without evidence, that inflation would only be transitory.

‘[…]

‘Bostic argued that the word “episodic” better describes pandemic-induced price swings than “transitory.” He said he still believes that the price hikes are tied to the supply chain disruptions stemming from the pandemic and will eventually unwind as the global economy adjusts. But it is becoming increasingly clear that the intense and widespread supply chain disruptions will not be brief, Bostic said.’

Buying votes

Yesterday, we saw what happens when inflation gets worse. Hungry mobs are butchering cattle in the streets of Buenos Aires…

…but the World Bank says Argentine inflation probably won’t go beyond 50% per year.

(The World Bank’s role is to support the corrupt elites who run the world’s nations. It was set up in 1944 by Harry Dexter White, who was later accused of being a Soviet spy. Running the institution has been a sinecure for disgraced scalawags ever since, including Robert McNamara, after making such a success of the Vietnam war, and Paul Wolfowitz, after getting the US into a war with Iraq.)

And here’s another recent headline with an eerie ‘coming soon to theatres near you’ feel to it from Bloomberg, ‘Argentina Accelerates Money Printing Ahead of November Elections’:

‘Central bank financing of the government reached 250 billion pesos ($2.5 billion) in the first 22 days of September, the most of any month this year, according to central bank data published Tuesday. With the government cut off from international credit, the central bank helps meet the shortfall by creating pesos and transferring them to the treasury.’

No! Really? Thank God US politicians are not so craven…so reckless…or so single-minded in their pursuit of power and money.

At least, we can count on them not to print more money just to try to curry favour with the swing voters.

But wait…according to Bloomberg, Argentina’s ‘primary fiscal deficit’ is only 4% of GDP in 2021. In the US, it’s headed for US$3 trillion — over 13% of GDP.

Who’s the spendthrift?

Puzzling questions

Now emerging in this rich Argentine topsoil, like a toxic mushroom behind an antique oak…may be an answer to some puzzling questions: Why are the US and most European countries — along with much of the rest of the world, including Japan — all following the same trends…the same arc of history…the same policies — even though they appear to be leading to bankruptcy and chaos?

Why is the US elite so eager to control our money…our movements…and even our speech?

Why are growth rates falling in the US…when we have more capital, more patents, more new technology, more smart, educated young people…and more stimulus…than ever before?

Tune in on Monday as we take a bite of the mushroom.

Regards,

Bill Bonner,
For The Rum Rebellion