In today’s Market Slice, we dive right in and discuss how what happens in china affects your trading and investments.
China’s Real Estate Bubble is Everyone’s Problem
As traders, we tend to focus on short-term developments. This tendency is reinforced by the 24-hour corporate news cycle. Yesterday’s headlines will be forgotten tomorrow – it’s on to the next story. As a result, China’s debt crisis is out of the news… the Evergrande crisis passed without an immediate worldwide crash, so – “move along. There’s nothing to see here.” Except there is.
China’s Real Estate bubble, with its massive attendant debt, has enormous implications for U.S. and world markets., To understand why, we only need to look at two critical factors:
1) The percentage of Chinese wealth tied up in real estate.
2) The amount of US and international capital invested in China.
Evergrande is the largest private borrower in the world, with over $300 billion in debt. While investment markets in China are opaque, and private equity deals are even more obscure, there is no doubt that much of the foreign investment in China is tied up in the real estate market, which accounts for 25% of China’s GDP.
What happens to those lenders around the world if (when) the debt crisis in China deepens?
Nothing to Worry About?
When this story hit the news a couple weeks ago, there was a momentary panic. Pundits started talking about a “Lehman moment,” referring to the collapse of investment giant Lehman Bros, which signaled the onset of the global financial crisis in 2008. But the Lehman moment, when the biggest-ever bankruptcy was filed on September 15, 2008, was not an isolated event.
It was preceded by months of troubling signs, as shown on this chart:
In other words, Lehman was in trouble long before the bankruptcy that led to the 2008 meltdown. And just like in the months leading up to the Lehman collapse, there’s no shortage of politicians and policy-makers assuring us that “there’s very little chance of contagion at this time.” Hmm.
What will it mean for markets as the Evergrande debacle – which also involves dozens of other deeply indebted real estate firms in China, and their lenders — unfolds in the months ahead?
Your trading and investments have never been at greater risk. In today’s entwined global economy, an earthquake in China can mean a tsunami at home. Don’t wait until the crisis hits to position your trading and investment portfolio. FFR’s Strategy Team can help you decide how your trading strategy fits into your broader financial plan. Call today for a no-risk evaluation. (800) 883-0524 or contact us here
But Wait… There’s More
China’s real estate crisis isn’t the least of their problems, or ours.
Another story that has passed from the headlines is the global supply chain bottleneck that has clogged U.S. ports, and led to empty shelves around the country. As usual, the media focused only on the “sensational” aspect of this structural problem… Johnny can’t have an Xbox for Christmas, because there aren’t enough computer chips!
What no one has really thought about is the other end of the supply chain… where all the manufacturing takes place. And as if you didn’t know this already, most manufactured goods Americans consume are “Made in China.”
Chart courtesy of statista.com
While ships stack up waiting to unload stateside, something else is going on where the stuff gets made.
China’s Energy Shortage
Underlying potential problems on the supply side of U.S. supply chains in China’s serious energy crisis, Here’s how Forbes described it last month:
China’s multi-month energy crisis is deepening, with coal and natural gas prices now at record highs while temperatures are poised to plummet across the country. Emergency power rationing policies are still in effect, meaning that many households and factories alike could be left with intermittent power as winter sub-zero (Celsius) temperatures approach. Further supply chain shortages, inflation, and public discontent are on the horizon.
Internal supply chain shortages, power rationing with extreme cold expected, and the dampening effect of the real estate/debt crisis are combining to contribute to a very unstable situation in China. And this has profound implications for businesses and consumers in the U.S.
Certain “stopped clock” analysts who have been predicting a crisis in China for the past five years (or longer) may finally be proven right. Even though China’s command economy is firmly under the control of the CCP, events there could prove beyond the management capabilities of the central planners.
“The line of dominoes that is already toppling extends around the entire global economy and financial system. Plan accordingly.” – Charles Hugh Smith
Short-term trading based on a long-term investment outlook is a mistake many new traders make. Just because someone says China is going down doesn’t mean the best idea is to run out and buy gold! You need a trading plan that puts your speculative investing together with your long-term asset management strategy. Consult your financial planner for the big picture, then call FFR’s Strategy Team to work out your trading and investments. The number to call is (800) 883-0524.
Don’t Fall into this Psychological “China Syndrome”
Here at Market Slice, we believe in free markets. I’m sure you do, too. We believe in freedom. Democracy. The right to privacy. All the liberties we cherish as Americans. All of which are absent in China. This all makes for good political discussion, and may well inform our votes when it comes to selecting leaders. But it shouldn’t determine our trading positions.
When it comes to the markets, good traders are apolitical… even when we have strongly held beliefs (which is most of the time!) we have leave them at the door when we trade.
This doesn’t mean you have to trade against your principles. If a market, or a particular trade, rubs you the wrong way, just don’t go there.
If you don’t approve of the “vice” industry, don’t invest in tobacco stocks. If you support green energy, don’t buy oil companies. But don’t short these stocks just because you don’t like the industries. That’s a prescription for losses.
There are three reasons not to trade based on your opinions about geopolitical events:
- Political views are subjective, Right or wrong is in the eye of the beholder. The market doesn’t care about any of that… the markets care about profit and loss, short- and long-term prospects for a business, an industry, or even an entire country.
- Political views are emotional. You already know that trading when you are in your feelings is a bad idea. If you take a position because you want to see things go a certain way, you are asking for trouble. Then when it arrives, you are not in a balanced mood. This makes rational decision-making much harder.
- Political views are subject to confirmation bias. “Confirmation bias” is a term psychologists use to explain how we “see what we want to see.” Allowing our feelings to direct our decisions leads to only seeing the evidence that supports our initial opinion.
What this means in regard to China is that it doesn’t matter how we feel about their government, politics, or philosophy. If we let those opinions shape our trading or investing decisions, we limit our own profit potential. Instead, be objective. Do your own research, and decide what you think the events described in this week’s issue really mean. Maybe you will decide that shorting a China-focused ETF is a good trade. Or you might learn which U.S. institutions have funds invested in Chinese real estate, and sell those stocks.
On the other hand, you may decide that the long-term outlook for China is bright. Then you can go long on China… or you can leave it alone, because you don’t wish to participate in the growth of a regime you can’t support.
In either case, you are now making an informed decision, rather than a subjective, emotional one.
Your trading will benefit when you apply this approach.
FFR’s Strategy Team is here to work with you in thinking through every aspect of your trading. Seeking the expert advise of professionals with decades of industry experience is one of the best ways to avoid the dangers discussed in this article. Give us a call at (800) 883-0524, and we will walk you through your options. When it comes to making rational trading decisions, there’s nothing better than partnering with a pro.
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