September Newsletter: How We Make Great Profits From This Correction
Hey Subscriber,
Yea so after a doing few biz TV and radio hits this morning and afternoon sharing the actual reality of the Evergrande fiasco, I want to make sure YOU don't get shaken by the Evergrande fiasco as if a world financial Lehmanesque meltdown is nigh (a fiasco that anyone with a brain has been watching building ever since my first meeting with the egomaniacal founder/CEO fo Evergrande Hui Ka Yan in Shenzhen, China in 2012).
His fortune now stands at $7.3 billion, down from a peak of $42 billion in 2017. Poor baby. Since Mr. Xi decided to show the Chinese $billionaire entrepreneurs who is really the boss in the China economy starting with Jack Ma last November, Chinese stocks have lost >$1.5 trillion in value.
No whoop.
Anyway--the short version I use to gauge the breadth of concern of bank solvency and the risk of financial contagion (which IS when financial insolvency metastasizes into negative financial event feedback loops where we have highly 20-30-to-1 leveraged banks, insurance companies, and hedge funds who ALL GET margins calls at the same time which forces them to "puke up" their riskiest assets all at the same time to cover their losses and stay solvent), let's use one of their largest banks HSBC out of Hong Kong (and large holder of Evergrande debt) and the price of their "credit default swaps" or CDS.
Think of CDS as a life insurance policy for bonds--speculators or bondholders buy them as speculation of a negative financial event or protection against a negative financial event.
PS- we used this CDS pricing data together with our contacts in the Chinese semiconductor industry to help us conclude that "A Market Meltdown Is Coming--Buy Put Options on QQQ and XOP January 23" and "Crash is Just about Here--go to CASH Feb 23."
>50+ CDS prices say the risk of corporate insolvency or bond insolvency is 50/50-- Yet the HSBC bonds are not close to the danger line at 36--they were up 16% yesterday but still significantly below 50 danger zone.
Here is the current CDS costs for HSBC
Now if you compared HSBC CDS prices today with Lehman Bros or AIG in July/August 2008--no comparison--they were pushing 90 even before the default in September.
NEXT: Why Evergrande Will NOT get $50 billion Bail Out from the CCP But Real Estate Will NOT ALLOWED to take down the Chinese Economy
The short version is the CCP just bailed out a state-owned asset manager of bad bank debt from the 90's Huarong in August for $55 billion because Huarong was an SOE (State Owned Enterprise) that by definition WAS TOO BIG TO FAIL.
PS: The crazy founder of Huarong Lai Xiaomin who was known as "The God of Wealth" was executed by the CCP this past January for his sins against the State for "corruption" which is a fancy word for losing too much of the CCP's yuan.
Note: In my many visits to China, I found that the CCP likes to help CEOs of private companies remember that no businessman or woman is above the Chinese Communist Party and reinforces the concept with highly impressive and graphic regularity.
But the new rules of the last 11 months in China capital markets tell us that publicly owned Evergrande will NOT be bailed out this coming Thursday when they default on $300 billion of debt with just a $4 billion market cap (oh the moral hazard Gods must be smiling).
Evergrande WILL get chopped up and sold for $1 RMB to various private, healthy, and adequately capitalized real estate development and management players and the owners will gain great "face" with the CCP regulators (in China, building and maintaining face aka prestige is culturally EVERYTHING).
THAT is the CCP Chinese way.
$300 billion of Evergrande bondholders will get 75% ish haircuts as the bond workout vigilantes swoop in and pick at the bloody carcass.
But we can also strongly infer that the 12 million Chinese urban class households who have 75% of their net worth in the 1.5 homes/condos they own...and the 2 million Chinese who have place BIG 75%+ cash deposits on Evergrande real estate under development... will NOT be left twisting in the wind and their wealth eviscerated in a Chinese real estate bubble popping.
Why? Well shockingly to the American investor class, most Chinese have their wealth in real estate, not stocks--75%+. Chinese save 40% of what they earn every month (no social security system) and put their savings into "wealth products" (fixed-rate debt syndications) and real estate (and some stocks).
But understand this: only about 15% of Chinese residential real estate has a mortgage (OK you can stand up now after falling over).
What China can NOT withstand is that, after 20 years of non-stop real estate valuation gains, is a 20-30%+ real estate equity wipeout because the homeowner's savings rate would skyrocket even higher and crater both the regular economy and their massive real estate development economy.
We can infer this outcome for many reasons that Westerners who have not walked the streets of Shenzhen (or Beijing/Shanghai for that matter) cannot conceive. First off--the commercial enterprise we call "real estate" in all its forms and permutations is today--even with the CCP attempts to cool down the real estate construction juggernaut in the last few years --about 27% of the ENTIRE Chinese GDP.
Real estate in China IS TBTF.
It is impossible to imagine the scale and size of Shenzhen unless you have seen it with your own eyes. It is a city/region of nearly 20 million people living in the same square mile footprint of Los Angeles county with just 10 million residents.
The other 10 million people live on the 2nd to 60th floors of over 100,000 multi-story apartments and condominiums.
Even in this area of Shenzhen where five apartment buildings collapsed and hundreds died, I took this picture of new apartment "homes" being built on the same land. They just built over the collapsed land--no whoop!
Another hard-to-imagine aspect of the China real estate economy is that cities, regions, and or Ministry of Finance car prevent people from selling houses 20% or lower from their acquisition price (or in some regions 20% below currently appraised value).
Really--they can legislate that you the homeowner can't sell your house 20-30% below a certain price. Welcome to China.
Bottom line: I am always amused and amazed when financial reporters who have never actually BEEN in China beyond Shanghai report breathlessly about the impending crash of the Chinese economy.
LOOK--they have their own sovereign currency. Their citizens save 30-40% of their take-home pay--in Chinese banks and then buy tangible real estate--its cultural.
Those banks may lose money--but it's China's money and they can print all they want! They don't normally sell C.D.s to foreigners, and if they do the foreigners convert their dollars or Euros to RMB--which the Chinese Federal Reserve bank manipulates simply buy selling US dollars that come in from Walmart, Target, Nike and Apple et al when they pay their bills to Chinese manufacturing companies.
Out of $300 billion of Evergrande debt, only $19 billion is denominated in $US dollars--and those will be the first bonds to get schmeissed ( a term I learned from Jim Cramer selling tax shelters and bonds to his hedge fund!)
So don't worry about a China financial implosion, ok? Look up the term "state-controlled economy" and "Confucianism" culture--note they are culturally a wee bit different than the good ol' USofA.
September newsletter and our 2022 Favorite Secular Growth Sectors and Stock Plays out this week!
Breath deep--we have enough real worries to get our shorts in a bunch over "China Contagion."