Evergrande: The Latest Chinese Financial “Crack”

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In his Daily Market Notes report to investors, while commenting on Evergrande Property Services Group Ltd (HKG:6666), Louis Navellier wrote:

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Evergrande Cracks

Interestingly, both China and Taiwan financial markets were closed on Monday, but other financial markets decided to sell-off in the wake of a Chinese real estate company, Evergrande, ongoing woes.  Evergrande’s contagion fears are not expected to spread to the U.S., but China is now dangerously close to slipping into a recession.

China’s junk bond market started to falter a few weeks ago, and heavily leveraged Evergrande is just the latest "crack" as Chinese financial companies start to deleverage.  Since China accounts for a significant proportion of overall GDP growth, there is a mini-commodity crunch underway on the fear that global demand will moderate.  The good news is that China’s economic woes and faltering commodity prices are helping to “prick” the recent inflation bubble.

Give The Fed Credit

So let’s give the Fed credit for making the call that inflation is “transitory.”  I expect that the Fed will remain accommodative and dovish.  The Federal Open Market Committee (FOMC) statement on Wednesday is expected to clarify when the Fed will begin tapering its quantitative easing.  Under no circumstances do I expect the Evergrande will adversely impact the U.S. economy If anything, China’s debt woes will just make more money flow into the U.S. as an oasis in a chaotic world.

I should stress that I do not expect that the U.S. will be derailed by higher taxes, like Britain, which recently raised taxes to fund its National Health Service (HNHS).  Interestingly, one of the reasons that the $3.5 trillion spending plan stalled in Congress is that representatives in deep blue states want the SALT (State and Local Tax) deduction raised.  The residential property boom has helped to boost property taxes for many states, but increasingly, property owners are becoming frustrated by the $7,500 cap on SALT tax deductions.

Budget Politics

The other reason that the House of Representative’s $3.5 trillion proposed federal spending plan that included massive tax hikes stalled is that West Virginia Senator Joe Manchin made it crystal clear that he cannot support this spending bill unless it is cut to $1.5 trillion.  This demand by Manchin, who is a big swing vote in the Senate, is forcing the House of Representatives to now pick whether or not it wants to pay for extended childcare, green energy incentives or free community college.  As a result, the proposed tax hikes and spending plans are collapsing as representatives fight with each other over the SALT deduction and various details. 

Of all the proposed spending plans, extended childcare is most likely to survive, since approximately 2 million of the 5+ million jobs that have been lost due to the Covid-19 pandemic are attributable to working mothers, who had to take care of their kids when schools closed.  Naturally, some of the jobs lost are now permanent due to productivity gains that are not going away.  These 5+ million lost jobs also have impacted the Fed, since they are gradually concluding that their low-interest rate policies are becoming increasingly ineffective at new job creation.

Raising taxes in the midst of a decelerating economy (the Atlanta Fed is estimating 3.6% annual third-quarter GDP growth) that is also characterized by surging inflation is also political suicide, so it will be interesting if any of the proposed spending plans and related tax increases will get passed.  Many Americans are mad and growing increasingly frustrated which is why the Biden Administration’s approval rating has plunged. 

Heard & Notable

China is leading the 6G charge, with 40.3% of around 20,000 6G-related patent applications coming from the Asian superpower. The US claims 35.2% of the applications. 6G is expected to be about ten times faster than 5G. Source: Statista