As the news cycle brings with each day a new leading headline, many have already moved beyond the stock market sell-off last week and credited it as just “another bad day.”
For those lacking a full understanding of the many pieces to the economic jigsaw puzzle, the roughly 2% drop in the market last Monday the 20th began to lend credence to the thought that the long-awaited "September Effect" appeared to be upon us.
A stern reminder of what some of us learned early on in life that what goes up does come down started to unfold as global markets saw one of their worst days in over a year, but opportunity-seeking investors buying the dip quickly returned market losses, allowing a sigh of relief.
What happened this last week; however, should serve as a harsh reminder specifically to investors in the U.S. exchanges that our markets may not be made of Teflon and no matter how hard administrations try, corrections do come.
A collision of negative economic activities has all conspired to occur simultaneously.
An ongoing battle in D.C. over whether to raise the debt ceiling (the failure of which would shut down the U.S. government and a default on Treasury Bonds), coupled with a Fed signaling that we are experiencing an overheated U.S. economy and that they plan to scale back their infusion of nearly $120 billion each month into the economy through the purchasing of bonds, combined with data showing that inflation may not be as “transitory” as we were led to believe were all jabs at an already volatile economy.
The proverbial right hook may be the downfall of Evergrande, one of China’s largest property developers.
You may be wondering why a company out of China may be the “straw that breaks the camel’s back” and for good reason, but the key here isn’t the company itself, rather the investors that will be impacted.
The world’s largest asset manager, U.S. based Blackrock, along with numerous banks including UBS and HSBC are all bondholders in Evergrande who is finally being noticed by the global economy as being unable to pay their bills and failing the acid-test ratio by holding $300 billion in liabilities but only $15 billion in assets.
These investors along with many other firms could be greatly impacted by the downfall of Evergrande and as such so could the portfolio’s they manage or those that would lose investment because funds would be pulled to cover losses – yes, I’m referring to those funds that are possibly going to stocks in your portfolio or 401(k).
With the property development sector making up roughly 28% of China’s GDP, and Evergrande being one of their largest developers, the second-largest economy in the world could be facing its own “too big to fail” moment.
Beijing, however, has stated that they do not intend to bail out Evergrande, and will, instead, use this as an abject lesson to this and other prominent sectors to not overreach, nor burden the State with their failings. Give it up for the Chinese Communist Party, as that is some ruthless politicking but the reality is their economy can take the hit.
In fact, this may end up again being a positive for China, as America’s asset bubble could be exposed.
Recent payments to the tune of more than $83 million due from Evergrande to bondholders were missed last week which could undoubtedly cause a larger market sell-off as trusted American institutions have to admit they were overleveraged and overexposed. Meanwhile, the CCP which does not run their country as a democracy could bail out their domestic investors and be able to pick up the pieces left by the U.S. asset bubble bursting.
A U.S. economy propped up not by the American worker, but instead, the continued liquidity infusion by the federal government under Biden's tenure thus far has been a mistake.
The American public, so focused on surviving the lockdowns neglected to notice; however, and the FED has all but used up resources that should have been saved for infusion when the economy was in free fall, or getting ready to tip over the edge, as it may be now.
Lockdowns combined with the concoction of financial ignorance lands solely upon the shoulders of an aging and doddering President, a Secretary of the Treasury who functions at the bidding of the White House, and a Congress whose members care more about reelection than they do their responsibility.
The downfall of Evergrande along with the aforementioned domestic factors has led us to a lethal combination of economic negativity that even I don't have a Texas idiom to soothe it over.
Great economic leadership under the Trump administration continued to extend a decade of growth, but those policies are gone now.
The U.S. economy has been in “extra innings,” but the game may soon be over.
Seth Denson is a business & market analyst, author and entrepreneur. He co-founded one of the nation's most successful consulting firms and authored the best-selling book, "The Cure: A Blueprint for Solving America's Healthcare Crisis." Read Seth Denson's Reports — More Here.