Markets Rebound To Avoid 3rd Consecutive Down Week
Markets rallied Wednesday after a narrowly avoided bankruptcy crisis in China’s home-building sector. Still lots of uncertainty heading into the next few weeks; Chinese banks have been warned by regulators to expect heavy losses. Stock indices are still near all-time highs.
💸 Key Events
Monday’s Market Downturn Was Caused By One Company
Let me introduce you to the world’s most indebted company: Evergrande Real Estate Group. They owe over $300 billion to various lenders, all of whom thought loaning money to the fastest growing Chinese real estate developer would be a great idea.
They loaned billions to Evergrande expecting the company to fill its buildings with tenants, who would theoretically pay rent, which would be used by Evergrande to pay off its debt.
The Weird Part About Evergrande’s Growth: They’re building real estate in cities that are almost entirely empty (Read More Here). The company has been building sprawling mega properties, one of which had 16,000 units and could hold 60,000 residents, along with commercial space for groceries, restaurants, a hospital, etc. 60,000 people is the size of a small city in the US.
Evergrande has $120 million due within the next two weeks and they’ve already said they might not be able to pay it back.
What Happens When A Company Can’t Pay Its Debt? Companies go bankrupt differently than people. When companies go bankrupt, their lenders will often work with them to see how much they can pay back over time and restructure the payments to be more affordable in the short term yet more profitable for the lender in the long term.
So Why Did Stocks Go Down? The price of nearly every asset in the world fell on Monday. Money flows around the world in bunches called “cash flows”. Bonds (loans) are often structured together, so their cash flows often move simultaneously. That means when one payment gets missed, other payments also get missed, which can create a large ripple effect as payment after payment can cause a shock in the system. So even though Evergrande hadn’t missed a payment yet (they missed on Thursday), just the announcement that they might miss, scared the everloving crap out of the markets.
The Big Picture: Evergrande is in deep trouble. They’ll likely survive, but the Chinese government has said they won’t help the company whatsoever (a very capitalist move by the world’s largest communist government). The extent of the damage could be far and wide, certainly affecting US stock markets. US stocks are overpriced already, so it’s likely this could cause a steep drop before year-end which is something most analysts are currently forecasting.
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The House and Senate Play Chicken With The Debt Ceiling
The Treasury Secretary, Janet Yellen, has issued multiple warnings since June about the pending debt crisis, even writing an Op-Ed in the Wall Street Journal.
What's A Debt Ceiling? There is a limit as to how much money the United States can borrow from banks, other countries, people, etc. The limit is set by Congress.
How Does The US Borrow Money? When the US government issues a Treasury bond, someone pays roughly $1000 for the bond; the US spends that $1000 today and agrees to repay the $1000 plus interest in the future. That “someone” could be a bank, another country, a person, a nonprofit, etc. and the United States owes them money. And to be frank, we owe so much money that each American personally owes more than $80,000 in additional unpaid taxes over the next 30 years in order to repay what we’ve already spent.
Let's Flash Forward...
Democrats control the House, Senate, and White House, so this one should be a no-brainer. Except there’s a ton of red tape and roadblocks surrounding this particular problem, so it’s not an easy fix. Both Democrats and Republicans will need to agree with each other in order to raise the ceiling, and right now neither side is playing fair.
What Did The Republicans Do? The Republicans have openly stated they won’t work with the democrats to raise the debt ceiling since Joe Biden plans to spend trillions of dollars in his economic plans. Republicans think that’s irresponsible considering the amount of debt the country is already in, and refuse to help resolve the problem.
What Did The Democrats Do? They put the debt ceiling proposal into a much larger bill that would have to be either accepted entirely or rejected. So it’ll obviously get rejected if the republicans have already said they don’t want to spend more.
Neither side wants to work with the other, which is a huge problem for America because this is an incredibly big problem that we face. And if neither side can get along, it will force a government shutdown for at least 30 days, during which time the US will most likely run out of money.
Why Is The Debt Ceiling Such A Big Problem? If the United States can’t borrow more money, it’ll be forced to pay for things only with the money we raise in taxes. According to our Treasury Secretary, we are going to run out of money by mid-October or maybe sooner. If the United States runs out of money (which has never happened), we won’t be able to repay our current debt, which will be catastrophic.
How Bad Could It Possibly Be? It can be really, really bad. It’ll change the way our currency is trusted. The US dollar is the most trusted currency in the world because it represents the world’s largest economy, and our economy has always been able to repay its debts, until now.
The Big Picture: A world in which the US dollar is not the world’s most trusted currency is much different than the one we live in today. The United States would no longer be able to print money at-will or control interest rates for nearly the entire world, which means we would have far less power to stimulate our economy when we need it most. Our safety net would be gone.
The Bottom Line: The United States can barely afford to pay the minimum payments on its debt, and that’s why the total debt continues to grow. Very similar to a credit card, if a person only makes the minimum monthly payment, they are going to be in a lot of debt very quickly. Raising the debt ceiling is a short term solution. We currently do not have a long term plan to get out of debt entirely.
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🤷 What To Watch For…
The Fed on Wednesday stated again that interest rates will not move and it will not reduce its stimulus of $120 billion per month. Inflation is set to continue indefinitely until both interest rates rise and the money printing stops. (Read More Here)
Cathie Wood, CEO of ARK Invest and future Hall-Of-Fame investor, said she believed stocks were not overvalued and that there isn’t a bubble. She makes a great point about the growth rates of these young tech companies. (Read More Here)
Snoop Dogg revealed through his previously-anonymous Twitter account that he holds more than $17 million worth of Ethereum. Wallets on the blockchain are public yet anonymous; people can see what’s in the wallet but they don’t know who holds it. And Snoop revealed himself to be a strong believer in the technology. (Read More Here)