You might want to take a look at China …

Thursday, 9 September 2021 — Albert Park

[6 min read]

US stocks fell marginally overnight. The Dow was down 0.2%, the S&P 500 around 0.15%, while the NASDAQ declined nearly 0.6%.

More interesting things are occurring in China. But that’s not really receiving much attention right now.

For example, China’s second-largest property developer, Evergrande, with US$300 billion in debts, has effectively defaulted on its debts.

According to Reuters:

‘Fitch Ratings cut the ratings of China Evergrande Group and two of its subsidiaries on Wednesday, the latest in a series of downgrades targeting the property firm over its struggles to restructure huge debts.

‘Regulators have warned that Evergrande’s 1.97 trillion yuan ($304.79 billion) of liabilities could spark broader risks to the country’s financial system if not stabilised.

‘Fitch said in a statement that it had downgraded the long-term foreign-currency issuer default ratings of Evergrande and subsidiaries Hengda Real Estate Group Co and Tianji Holding Ltd to CC from CCC+. Fitch defines a CC rating as indicating “very high levels” of credit risk.’

And according to Channel News Asia:

‘SHANGHAI: Property developer China Evergrande Group plans to suspend interest payments due on loans to two banks on Sept. 21, financial intelligence provider REDD reported on Wednesday, citing four sources briefed by bankers.

‘Evergrande has delayed payments to several trust firms, REDD reported, adding that the company may suspend all payments to its wealth management products starting Sept. 8.’

Sounds like a default to me.

But in a roaring bull market, news as significant as this is all but ignored.

You shouldn’t ignore it though.

This is potentially significant. Here’s why…

Xi Jinping is trying to curb speculation in the housing market. One of his slogans is ‘housing is for living, not for speculation’. While this is true, Xi is not acting out of any genuine concern for China’s citizens. Rather, he is trying to avoid future social unrest as more and more become locked out of the housing market.

So he’s trying to take some short-term pain now.

Part of his strategy is to curb leverage in property developers. Which is why the heavily-indebted Evergrande has been under the pump for a while now.

The problem for Xi is that things could spiral out of control. According to Bloomberg, property accounts for 28% of China’s GDP. The Wall Street Journal says land sales accounted for 30.8% of local government revenue in 2020.

China has been trying to ‘rebalance’ its economy for a decade now. It hasn’t been able to do so. I don’t know why now is going to be any different.

The pain becomes too great. Then the authorities resort to their old playbook.

Still, China looks like it’s going to give it another crack. The WSJ reports:

‘The slowdown in construction is already becoming a major drag on the economy through lower demand for construction materials and retail goods like appliances. That could soon spill over to the banking system. At the Bank of China, the impaired loan ratio for real estate stood at 4.91% in June, compared with 0.41% a year earlier. So far, it looks manageable but it would become a much bigger problem if falling prices or a weaker job market start to hurt mortgage repayment. Real estate, construction and mortgages accounted for 41% of the BOC’s loans in mainland China, for example. The housing boom has fueled an enormous rise in household borrowing: It stood at 62% of gross domestic product as of June, compared with 44% five years earlier.’

Now you know why iron ore prices have started to plunge. They’ve got a long way to go…

I wonder if any of the idiots running this country have noticed what’s happening?

Is anyone really thinking about this?

This is the sort of ‘groupthink’ that my ultimate boss, Bill Bonner, talks about in his latest book. He even points the finger at our own newsletter industry:

‘Even the investment newsletter industry, of which we are part, has fallen for the go-go, buy-the-dip, prices-only-go-up bubble credo.’

To get your hands on Bill’s book, go here.

But to get back to our story…

While they spend all their time promoting COVID fear and compliance, have they noticed what’s going on in our largest market?

In the year to July, iron ore accounted for an astounding $180 billion in export receipts for Australia. Just two years prior, the figure was $75 billion.

Back in the much smaller post-credit crisis iron ore boom, the Reserve Bank was so concerned about the economy overheating that it raised interest rates from 3% in September 2009 to 4.75% by November 2010.

This time around, we’ve had the biggest positive hit to exports in our history (which boosts the terms of trade and national income) at the same time as record monetary and fiscal stimulus!

No wonder the property market is booming despite state tyrants doing their best to turn this country into a version of China.

No wonder the stock market is at record highs!

All this money has to go somewhere.

The only problem is that the tide has started to recede. The woes of China’s Evergrande are evidence of that. The plunging iron ore price is too.

This doesn’t mean the stock market is going to collapse. But it will put pressure on the Aussie dollar for starters. And if you think the RBA is going to normalise interest rates anytime soon, you’re dreaming.

Interest rates are going to remain near zero for many years to come.

The party is now getting into the wee hours…

Regards,

Greg Canavan,
Editor, The Rum Rebellion

‘What is it worth?’ is the question on the table.

‘Not much,’ is the answer from most of the US’s intelligentsia. The elite, that is. It maintains that freedom should not be allowed to get in the way of what it wants now.

It wanted the War in Afghanistan…and for 20 years, it hijacked the nation’s wealth to pay for it — US$2.3 trillion worth, according to the Watson Institute for International and Public Affairs at Brown University.

It wanted the war on poverty, the war on drugs, the war on terror, the Wall Street bailout…then the COVID-19 bailout. All of these were sold as ‘investments’ that would give us a better future.

What American citizen — however civic-minded — would have willingly paid for these things? Very few.

And had they been good investments, they would have paid dividends. Instead, year after year, the money goes out the door and into the pockets of the elite…adding US$27 trillion to the nation’s debt since 1980.

About the elite…

And now, the elite is advertising even bigger ‘investments’ — to change the planet’s climate…and bring equity (whatever that is) to all.

But the elite is running into trouble. Inflation is on the upswing. It will have to bring that under control by raising rates and curtailing its big-borrowing, big-spending, big-printing plans.

Can it turn around? Can it back off?

We need to do more thinking about ‘the elite’.

Republican or Democrat…European or American…members of the elite go to the same schools. They live in the same areas. They owe their allegiance, first and foremost, to their caste.

Members of the elite are, almost by definition, rich and powerful. And while the public is distracted by party politics — an empty, gaudy, and tawdry spectacle — it is this elite caste that rules. It controls the government, the media, the universities, the military, et al.

Like cream, members of the elite have risen to the top. And now, corrupted by power and money…curdled, degenerate, and incompetent…they want to hold onto their privileges at all costs.

Dilemma

Our friend Merryn Somerset Webb wrote in the Financial Times recently that central bankers had better get their act together. Inflation is rising. They need to get it under control quickly, she warned, or it will soon be too late.

But there’s a growing awareness of the fix they’ve gotten themselves into. ‘Inflate or die’ is how the late, great financial writer Richard Russell described it in his Dow Theory Letters.

Last week, British industrialist Sir Andrew Cook wrote a letter to the FT editor, spelling out for readers why central banks can no longer control inflation:

‘If they raise interest rates to around 5 percent — which is needed to stamp out inflation — the economies collapse. If they stop printing money, there will be riots from those millions who are now dependent on state handouts.’

At the top, the gamblers and grifters need more money printing to keep their stocks and bonds from crashing…and to keep the feds flush with cash.

At the bottom, people face eviction…unemployment…and destitution.

In short, central bankers — working on behalf of the corrupt elite — have broken the economy.

Now they own it. And whichever way they go — more money printing or less — will bring on disaster.

Freedom to choose

Free people don’t ‘invest’ their own, real money in unwinnable wars and jackass projects. They don’t bail out Wall Street. They don’t shut down a whole economy to fight a disease that poses a threat to relatively few. They don’t lend money to those who can’t afford to pay it back.

In theory, the freer the economy, the richer the people in it. They devote their entire energies to doing what they want…rather than to doing what others want them to do.

After all, that is what freedom is all about. Choices always need to be made. The question is: Who makes them?

In a free economy, people make the choices for themselves. They eschew the bad bakeries and go to the good ones. They drop losing investments, and put their savings into ones that pay a real return.

They bid and ask, in free markets, to determine real prices…which then guide producers and consumers to increased efficiency and great wealth.

Elite deciders

Freedom made the US rich and powerful. But then, its elite caste became the deciders. Instead of allowing the rough and tumble of real capitalism, it rigged the system to protect its own wealth, power, and privileges.

Rather than let savers and borrowers decide on interest rates, for example, the Fed used its fake money to queer the market — with its key lending rate below the inflation rate for most of the last 12 years.

The artificially-low rates, along with the fake money itself, skewed the whole economy from producing goods and services (real wealth!) to jigging up stock and bond markets, supporting zombie businesses, and funding the elite’s goofy ‘investments’.

The result is so much debt — US$86 trillion for the entire economy…not including the feds’ many unfunded obligations — that honest interest rates would quickly cause a painful and immediate reckoning. In a matter of hours, the elite would lose much of its wealth and power.

Freedom to live

But if freedom is so important to an economy…what about the rest of life?

Can free people beat the coronavirus? Or do they need to be forced to take the shot, whether they like it or not?

Stay tuned…

Regards,

Bill Bonner,
For The Rum Rebellion