From Birch Gold Group
“Evergrande, a real-estate colossus in China, is collapsing. Don’t expect the collapse to be contained to China. The global macro implications are huge.” – Mike Shedlock
The U.S. economy is staring down the barrel of a financial shotgun thanks to the Chinese real estate bubble that just popped.
The trouble started at a developer called Evergrande, which is suffering a major crisis. One Wall Street Journal article sharply summarized the company’s problems:
The party has ended. Years of aggressive borrowing have collided with Beijing’s crackdown on debt, leaving the giant developer on the brink of collapse. Construction of Evergrande’s projects in many cities has stopped.
The Guardian referred to it as “China’s Lehman Brothers moment.” Of course, Lehman Brothers collapsed during the U.S.’s own 2008 financial crisis.
“The mess in China does not stop with Evergrande,” according to Mike Shedlock.
How huge? Well, we’ve seen this before in the U.S. (the Great Recession) and in Japan, where the real estate bubble of the late 1980s led to a “lost decade.” These economic events don’t respect national borders. They go global.
With that in mind, here’s how bad it might get…
China officials asked to get “ready for the possible storm”
Get ready for the possible storm ahead…
That’s exactly what the Chinese leadership warned local authorities after the Evergrande collapse became apparent. According to a Kitco report:
[Chinese] officials noted they are being asked to get “ready for the possible storm,” including all the potential economic and social consequences that could come along if Evergrande fails to meet its financial obligations.
And fail the company did, as reported by Market Rebellion in a tweet on September 23: “Evergrande reportedly missed its $83.53 million March 2022 bond payment that was due today.”
Here’s why this isn’t a “run of the mill” economic crisis for China:
Chinese banks make up four out of the five largest banks globally, with the “big four” having around $14T in total assets. Evergrande’s shock is significant, but it pales in comparison to the total amount of potential debt implosion we may soon see across China’s highly intertwined real estate and banking industry.
The same article highlighted the risk factors for the U.S. economy if a financial “contagion” were to develop and spread to the U.S.:
Near-record equity valuations, minimal remaining individual investor “sidelined cash,” goods and labor shortages, immense recent corporate debt growth, record (yet slipping) investor margin debt, and falling expected economic growth. All that’s missing is a catalyst that will bring these issues to light. In my view, the problems facing China’s property sector are large enough to do so, as implied by the widespread declines on Monday.
Fed Chairman Powell tried to downplay this massive development and its potential as a catalyst for a U.S. economic crisis:
The Evergrande situation seems very particular to China, which has very high debt for an emerging economy. Corporate defaults in the U.S. are very low right now … You would worry that it would affect global financial conditions through confidence channels.
Which might strike you as unexpected. (Wouldn’t you think Powell would be happy for any economic news that isn’t talking about our 30-year-high inflation?)
Well, no. Powell knows his market history. And he knows the “everything bubble” in the U.S. is an already-precarious house of cards, and the last thing he wants is tremors from a collapse on the other side of the world destabilizing his carefully-engineered illusion of prosperity.
Powell is whistling past the graveyard.
Jim Rickards sees things quite differently, writing the following on Twitter:
Evergrande is going down. Expect financial contagion. Don’t believe the happy talk. Interesting contrast in how U.S. and China deal with crises. China will ‘set up law-enforcement teams to monitor public anger, a euphemism for protests.’ No bailout for you.
Could the “financial contagion” that Rickards and others expect trigger the “big one” in the U.S.? Unfortunately, we won’t know for sure until it’s too late.
But market uncertainty alone can become a catalyst for panic that triggers a market meltdown. There’s plenty of uncertainty already, and another dose of reality just isn’t what today’s faith-and-hope-based stock bulls need.
Are you ready for the possible storm?
At some point in the near future, constant interventions by the Federal Reserve and Treasury won’t be able to stave off a major crisis. Stimulus must eventually dry up, and the Fed can only “print money” for so long before the dollar becomes worthless. If they decide to taper, the relentless flood of easy money, markets could panic. And as we can see from even a cursory glance at the Evergrande situation, the fragile state of the U.S. economy just can’t withstand any shocks.
Now is a great time to consider your exposure to financial risk. If you haven’t taken back control of your own retirement savings, now is the time to think about diversifying into assets that can withstand the storm we can clearly see is coming.
Physical precious metals are one of those asset types. Gold and silver have both specifically provided a hedge during past market uncertainty, and could help you add the blessing of stability to your portfolio if things go sideways in the near future.
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