Much like the coronavirus in January and February of 2020, the situation facing Evergrande has been staring investors in the face for a while now…and yet they have ignored the growing negative situation (mostly due to the fact that the vast majority of Wall Street told them it was nothing to worry about). The problem with issues like these is that they don’t matter…until they do.
The HUGE decline in Evergrande’s stock and bonds that we have been focusing on for many weeks has now spread to other real estate giants in China. (One smaller developer…Sinic Holdings…had its trading halted after it fell 87%!) It is also weighing on insurance stocks and bank stocks in that part of the world, so investors are now finally starting to worry about a contagion. Of course, “contagions” are not all the same. However, the one component of the of the Evergrande disaster that has unfolded over many months that we’ve been focused on is finally come to a head: Investors have finally become worried about liquidity issues. In other words, there seems to be a spread of margin calls and “forced selling.”
It’s amazing to us that people could think that the leader of the world’s second largest economy could embark on a major de-risking/de-leveraging program…without it spilling over into other markets around the globe. Back at the beginning of 2020 (in January & early February), we kept telling investors that the consensus on Wall Street was wrong…and that the pandemic would become a major problem. Therefore, we said, investors should raise some cash and add some hedges…..Recently, we have been the exact same thing. We have simply believed that the overbought, overvalued and over-leveraged U.S. stock market could not avoid being impacted by the de-risking of such an important economy as ...
