The markets are currently reacting to the pending default of a Chinese real estate juggernaut called Evergrande. This company owes global creditors $300 billion is outstanding debt, and is supposed to make a $83.5 million interest payment on Sept. 23 on its March 2-22 bonds and a $42.5 million payment on Sept. 29 on its March 2024 notes. But unfortunately, Evergrande doesn’t have the capital to make these interest payments.
The heavily leveraged real estate market makes up 28% of China’s economy. If the contagion of Evergrande spills over into other parts of the Chinese economy, the contagion could ripple across global markets. For instance, American and European firms that are exposed to Evergrande and other Chinese real estate firms will be forced to restructure debts by international creditors; which could temporary freeze pipelines of global lending. Another factor is that the U.S. dollar will rise in value out of fear; this is what is causing the current contraction in all markets today.
China’s troubles may be good for the U.S. dollar in the very short term, but investors are also worried about the U.S. debt ceiling being raised this month. If its not raised by Congress, the U.S. will default on its debt which will cause economic devastation. In an event of a default, cryptocurrency, metals and energy look attractive to hedge against such an event. And even if Congress raises the debt ceiling, the assets mentioned previous still increase in value because of inflation and the FED’s money printing.
I am NOT a buyer in this over priced stock market; other than day trading volatility. These high stock prices are a direct consequence of the extensive money circulation created by the Federal Reserve (Hence, meme stocks). The FED is said to be tapering its $120 billion a month bond buying program in November ($80 billion of Treasury securities and $40 billion of agency mortgage-backed securities). Once the FED tapers, watch for a decline in the U.S. real estate market and stocks. The contraction will be worse once the FED raises interest rates, but the FED claims it won’t raise until 2023; lets see what happens.