- Where jealousy and selfish ambition exist, there is disorder and every foul practice...
- From a letter by the apostle, James
This monthly piece usually highlights tidbits on interesting news. This month, the aspects of the news that is interesting, carries over into October. We have the continuous coverage of the pandemic. We now are told that even vaccinated people can catch the virus. The booster will help, but healthy people with a good immune system is the best protection.
We have Evergrande Group. In China, you can have an monopoly. This real estate developer is so big that the numbers are off the charts. They are the biggest in the world. They have pushed out paper and investors around the world have bought. First point - the founder is a gambler. He expanded into electric cars, solar and who knows what else? The company has $300-B in liabilities. It only has $15-B in cash. They had a bond payment due last Thursday for $84 -B. The Chinese government "suggested" that they pay. Keep in mind in China, the government owns all the land in the country. The real question is about default. If they fail to meet their obligations, who else will suffer? How large will the contagion grow? Finally, real estate is 17% of China's GDP. The firm will have an additional 30-days to come up with the money. I think the corruptness of state sponsored entities will show its face. If not, Houston, we have a problem, especially if the derivative market is connected.
We have the continuous unemployment problem that here at Evolution, was highlighted earlier in the year. It is persistent and the proof shows in the low participation rate of workers.
We have more and more corporate firms like Nike, Costco and FedEx complaining about higher costs, the supply chain and labor shortages. The Fed Chairman keeps saying that inflation is temporary. How long will he stick to this script? Does anyone ever challenge him or the Federal Reserve? We do. We say it all the time - End the Fed!
Speaking of the Fed...
They made their notes known after their last monthly meeting. Along with the BS on inflation, they talked about their techniques to combat the I-N-F word. The thought of them ending QE surfaced recently. The chair stated that some time in the future, possibly in June 2022, they will end tapering. Sebastian predicts that they are trapped. They are already offering "negative" rates when compared to inflation. They failed to raise rates when they had the opportunity. Why, you ask? Because in the last few recessions, the Fed was able to lower interest rates to stimulate the economy. Today, at .25%, they have no working room. They trapped themselves with their old playbook of low rates and printing money. Someone suggested the "bond vigilantes" will surface. I don't think so. Again, why, you ask? Because the Fed buys almost all the treasuries. No one in their right mind will offer to buy falling rates. Yet, there are speculators who do. One more time - why, you ask? Because they can make money as the rates fall lower than their purchase price. They know the government will return their capital. The return is not as important as the loss of capital. This game is ending too. The Fed is trapped!
Second opinion?
How about Doctor Doom? Roubini agrees with us. He recently stated on the Firing Line, "The Fed trapped themselves in this super cycle of debt." He goes on to say that the Fed is hoping that they can rollover the present debt by the effects of inflation like in the 70s.
Rigged?
When you have buckets of money as well as government connections, one should step back and observe the big investment houses. There are 100 large caps in a Bear Market. Yet, the big shots on Wall Street are saying that 35 of them will soar. The others will rise to neutral. How about this firm that Vanguard, Geoge Capital and others are buying. The question is why? The firm just announced it lost $6.8-B for the third quarter. The virus negatively effects its future which is clouded by more debt borrowing, share dilution and losses. They are parlaying an old adage on Wall Street. Find a firm that is rising while the market looks tenuous. This is a form of rigging the market and especially, most of these big shots bought at lower prices. They are only leveraging their investment and trying to fool you.
Bond Market
is showing all the negative influences of the Federal Reserve. Junk Bonds are lower than the normal range of the 10-Y note. Investors are flocking to buy any of the 1900 issues that are available. By the way, at least 700 of these are rated distressed. How about this? The last high on US bonds was in February of 2020. It has been straight downhill since then. This is why some investors have bought, however, the margin is gone. Of course, the Fed could change course again and introduce a "negative" rate issue. They have no shame! Again, We say, End the Fed!
China
has outlawed cryptocurrency. For an atheist nation this is God sent. Good for China.
What would you do?
Last week, there were pictures of border police on horseback using straps to push back Haitians from sneaking over the border in a rural area. People jumped on the police for brutality. The way I see it, there was NO brutality. The police asked the immigrants to turn back. They did not. The police did not charge into these people, seeking to cause harm. They showed restraint. The strap is only symbolic. It is not that harmful. The illegals also showed restraint as no one sought to fight the police. This is just another sad day on our Southern Border because all the critics do not have any solutions other than condemning those caught up in the problem.
Change in Europe
As for now, the Social Democrats' won a narrow vote. They need to get partners to form a controlling bloc in Germany. They have many questions - immigrants, Brexit, gas pipeline, EU and their economy are all up front. We will know by the end of the year.
One more report...
Investors use a guideline of three "Red" flags in investing. Is the liability to asset ratio less than 70%? Is the total debt divided by shareholders under 100% of equity? Is the cash ratio to short term debt in balance? China's Evergrande Group fails all three tests. For-warned is for-armed. Peace.
