I trust everyone has returned to their baseline levels of angst. Personally, I’ve adopted exercise as my new religion and personality. So far, it’s going great.
As a reminder, my writing mostly focuses on:
Finance because our greed can save us
Tech because it’s the least obnoxious way to discuss the future; and,
Culture War because what would an online platform be without a bit of snarky social commentary?
And since I’m the author the tone tends to be more than a bit inappropriate and irreverent. As always, hit that unsubscribe button if you don’t find the content useful.
Are we fucked? China real estate edition
There’s really nothing I enjoy more than the confluence of greed, government incompetence, and a plausible conspiracy theory. Well, this delivers on all counts:
There’s a lot going on in that thread. Here’s the mainstream media version. There’s a lot to unpack so let me just give the high level run down.
TL;DR: Evergrande is a very large property development company in China. They did in fact build property but probably did not sell or lease these properties as fast as they said they did. Property prices still go up (because of course they do, it’s China) so no one really notices when Evergrande hides it’s excess inventory as a current asset. Or when they use pre-built revenue to service their debt. This is a creative accounting practice to paint lipstick all over a $300bn insolvant pig. But also, these practices may be par for the course across an industry that touches something north of $500bn (maybe a trillion, no shit) of assets. But also, maybe these insolvant property development companies are the financial backer of stablecoins like Tether. At least if you believe these crank jobs on Twitter.
Who knows how much outside of the Evergrande insolvancy is true. The talking points from the PRC media are all about how Evergrande is an isolated case. Here’s the 2025 bond price for one of Evergrande’s competitors, Country Garden:
So at the very least all the chatter made some adults in the credit markets nervous. If only WallStreetBets found credit trading entertaining, this could start a real frenzy…
Here’s a guy who sounds like he knows something about Chinese real estate:
If half of what he says is true then, Jesus, what a dystopia on so many levels.
Here’s my own $.02:
Of course this isn’t an isolated case. What was the last Chinese financial scam that was “an isolated case”? Don’t be naive. Markets are efficient even if that means efficiently fraudulent.
PBOC/CCP has the broadest mandate and set of tools of any financial regulator in the world. Their toolkit includes imprisonment and torture. So if this can be fixed, it will be fixed. The question is more around what’s their perception of the scope of the problem.
My bet is these assets end up on the balance sheet of some state owned enterprise (SOE). Equity investors get trounced. Credit investors get trounced. PRC offloads the assets over the course of decades.
No one understands how deep the Chinese real estate capital stack goes. What do I mean? Well, think about that house your cousin bought but borrowed money from your uncle for the down payment. But your uncle got that money as an advance on this other thing. Anyway, you get the idea. There’s going to be a lot of off balance sheet activity in real estate. It’s basically the kind of thing crackheads would do if they had more impulse control and better hygiene. The scale and scope here could be the real deal. Do you really think the least responsible people in the room were the property developers? There’s probably some buy now, pay later thing (BNPL). There’s probably some insane securitization product of that BNPL thing . There’s almost certainly some provincial governments scamming the central government. There’s going to be double, triple, quadruaple pledged collateral. Someone credible needs to speak on this. I’m just extrapolating what a sophisticated crackhead would do.
As an example of weird ways this falls apart. “In line with industry practice, the group [Evergrande] pre-sells properties prior to their completion – as a result, banks providing financing to end purchasers require China Evergrande to guarantee their customers’ mortgage loans. If a purchaser defaults on a mortgage loan, the group may have to repurchase the underlying property by paying off the mortgage.” So Evergrande sells property that doesn’t physically exist to a customer who pays for it with a mortgage guaranteed by Evergrande (because the property doesn’t exist yet so you can’t use that as collateral). I got news for you - the buyers of that phantom property aren’t going to be making those mortgage payments which means the banks will be looking at Evergrande to recover their losses.
(Construction) Commodity prices had a great run but that show is over. The appetite to build more vacant real estate will 100% not be a thing going forward. Maybe that’s good for U.S. core inflation. Maybe that’s terrible for the Australian economy whose sole purpose is to supply dirt to China. Maybe I wouldn’t be so cocky about building a $3bn steel mill right now.
The kids will be alright
Maybe you’ve seen this graph before. It’s the latest infographic at the millenial pity party:
Unless you were tuned out for the last two Bernie Sanders presidential campaigns, this has become the orthodox view within the media and millenial thought leaders.
But how about if we show that graph in terms of actual wealth:
Well this graph isn’t nearly as helpful as a source of sorrow.
I’m saddened to see such innumeracy from WaPo, and honestly from the economist who created the original graph. It serves as a great reminder of how disconnected the business of media is from intellectual honesty. I would call it marketing but that would imply there’s an actual product.
h/t: https://economistwritingeveryday.com/2021/09/01/who-is-the-wealthiest-generation/
Warning: Culture War Below
The inevitable fall of Afghanistan marked a true capstone of dark irony last month. I remember a few years ago when someone I knew volunteered for an Afghanistan deployment. In an effort to convey some perspective on the value of their life, I quipped, “Are you trying to be the last American to die there?”
Well, my friend deployed anyway and they didn’t die nor was anyone who did die during that time the last to die. My question wasn’t just wildly macabre and inappropriate but also far too optimistic: there wouldn’t be a last American to die - there would be 13. I will highlight some of them here:
I don’t really remember what I was doing when I was 20 but it was probably more like trying to find alcohol and a girlfriend and not putting my own life at risk to evacuate those our government turned its back on.
So what would be the most ironic way to end to the Global War on Terror (GWOT)? If you guessed hellfiring a NGO worker and his kids while he fills up his car with water. Yes, that would be an appropriate bookend.
There’s an expression that’s probably as old as war itself (In fact, there are many versions of it): “Never before have I seen such lions led by such lambs”.
And 20 years later after it started, it ends as it began with the committed and brave being led by the self involved and the meek.