PROTIP: Anyone like Lyn Alden that is offering premium stock tips is by definition a fraud, if you can beat the markets you just beat the markets and Scrooge McDuck-it, you don't run a damn newsletter.
~300 billion is the size of their debt (485 at the end of H1 2021). Their assets are at +2 trillion, +1 trillion in real estate alone.
Their problem is that with their current cash flow they can't pay their debt, ever, and now, they can't even keep up with the interest. But they're still in a position where selling off part of their inventory can offset the debt, and to my knowledge, that's what they've been trying to do.
That is, if their financial statements area real. That's the quid here, their position isn't particularly anomalous, but the market cap sits at 33 billion, very far from their declared assets, meaning the market doesn't believe those statements. Thats 60 to 1, where most REIT sit at around 2 to 1.
Their main problem is the large amount of unfinished homes (read: not producing any income) and you need money to fix that. My guess is that the government will step in to fix that point in particular.
From Wiki (https://en.wikipedia.org/wiki/Evergrande_Group), I looked at the source for total assets: https://finance.yahoo.com/quote/3333.HK/balance-sheet?p=3333...
At end of 2020: Total assets: 2.3T CNY -> 359B USD (@ 6.40 CNY/USD) Total debt : 0.7T CNY -> 109B USD (@ 6.40 CNY/USD)
Holding debt in another nation's currency involves risks but it is also the case that bond issuers can mitigate that risk with financial tools at the time of borrowing. It is doubly true that the CNY has and still is trading within a narrow band over the life of these debts, currency risks are not a factor in this story in any way.
On the contrary, the worst advice comes from people who have no accountability or reputation to worry about.
Quote: <<July 17, 2007—In a letter sent to investors, Bear Stearns Asset Management reported that its Bear Stearns High-Grade Structured Credit Fund had lost more than 90% of its value, while the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund had lost virtually all of its investor capital. The larger Structured Credit Fund had around $1 billion, while the Enhanced Leveraged Fund, which was less than a year old, had nearly $600 million in investor capital.>>
After the incident, Bear took the bad assets onto their own balance sheet. Shortly thereafter, creditors starting asking hard questions: "What other crap is on your bloated balance sheet?"
That said, the PRC gov't might allow Evergrande to default on their offshore/external/USD debt, but provide a bailout onshore. That seems realistic. During the 2008 GFC, Deutsche had an enormous footprint in the United States (via commercial and investment banking). They got almost nothing from US Fed/Treasury during bailouts. Same for UBS. Why not? They were not American corporations.
I kinda get the impression that they want capital for manufacturing rather than property speculation.
Given how important house prices/construction is for their economy and growth, it's gonna be really interesting to see what they do (will they accept negative GDP growth to increase "common prosperity").
The blow up probably could have been less severe if they smoothed the landing.
My intuition (and the presumption in the U.S.) is that a market position allows a business to dispose of inventory in normal commercial channels more profitably than auctioning it at wholesale in a Chapter 7-style liquidation. Hence first-day motions in U.S. bankruptcy courts.
(Disclaimer: I worked on the Lehman Brothers bankruptcy but did not represent any U.S. or U.K. subsidiaries.)
Lyn Alden's site is a wealth of knowledge but I don't subscribe to any newsletters.
Well, they're expected to do that to maintain their stature as the "lighthouses" of the financial system
> Thomas Mazarakis, who heads Goldman’s fundamental strategies group, told select clients in an email that his unit often provided investment ideas that the firm had already traded on and the firm sometimes took the opposite approach, betting against particular instruments recommended by the group, the Times said.
> “We may trade, and may have existing positions, based on trading ideas before we have discussed those trading ideas with you,” the paper quoted Mazarakis as writing in the email. [1]
Would seem a good way to monetize your audience is to (a) get paid to (b) take positions and then (c) control the narrative around your positions - both publicly and to paying customers to gin the position up.
[1] https://www.reuters.com/article/us-goldmansachs-trades/goldm...
For all I know you are right about Alden's ethics, but the EMH is not baked into the definition of fraud.
In fact, many investors do offer public trading advice: it's common among short sellers to both short their targets and publish analyses explaining why they think their target is overvalued. This is controversial, but if it is clear to receivers of the advice that the advice comes from a short-seller whose positions are known, then I do not regard it as particularly unethical.
I've been reading everything I could on economy and finance in my early twenties and Lyn Alden blog is the only thing I needed then and wasn't available. She is pure gold — I know no one that is able to explain complex topics in this context with such clarity.
Hmmm , depends on what these "tips" entail right? What if another website offers long term hold advice via a newsletter and charges you for it? As a matter of fact, I do subscribe to one in India (no , I am not going to publicise it. DM me if you want to know) where the holding periods are anywhere between 2yrs to 5 yrs. There are disclosures that say whether the stock analyst holds the stock/bond etc.
Also, while the dynamic you describe is real (1) the mechanics are not similar to an equity short squeeze , not a good analogy and (2) unlikely this type of pressure comes from China. They need to hold/buy treasuries to manage their currency (ie keep it weak). If they don’t, their export competitiveness suffers which is last thing that gov will allow. They have other ways of managing the situation.
“everyone knew that Inflation would be above expectations” you should think about this more.
Regardless, why does any of this make the feds clowns?
So, we'll see.
I'll save you the time. There are no examples.
Every currency crisis has debt denominated in a foreign currency. - Germany in the 1930 (WW1 reparations were gold marks) - Argetina (foreign borrow and currency peg to USD). - Thailand. - Turkey (now, borrowed in Euro).
https://en.wikipedia.org/wiki/War_reparations "Germany agreed to pay reparations of 132 billion gold marks"
https://www.federalreservehistory.org/essays/asian-financial... "Heavy foreign borrowing, "
https://economics.rabobank.com/publications/2013/august/the-... "Argentina’s hard currency peg to the US Dollar, pro-cyclical fiscal policies and extensive foreign borrowing"
If you're going claim a coming currency crisis, test that assumption against the historical record at your earliest convenience.
But yes, it has happened. Russia 1998 is the most well-known example. Everyone believed that because Russia could issue GKOs in RUB, they wouldn't blow up like Asia...they did. This also happened, to a large extent, in Mexico in 1994 (Mexico actually issued tesobonos, they were domestic currency denominated but shifted the currency risk to taxpayers, they were quite a security).
The reason why is fairly simple: it doesn't matter if the debt is denominated in domestic or not, because people buy the bonds and then hedge their currency exposure which leads (eventually) to the domestic banking system having the same synthetic position as if your debt was denominated in a foreign currency.
The slight issue with historical examples is that the situation is correlated to high levels of financial globalization, which largely didn't happen until the 90s. But because something has never happened, doesn't mean it is impossible.
The point is confused though. The causes of currency crises are changes in capital flows. That is really just saying: the reason why currencies fall is because people sell. They don't really need some "explanation", they definitely contra-indicate with stuff like domestic currency debt...but there is no universal theory possible beyond: people sold the currency (and so currency crises have happened with capital outflows for some exogenous reason, war, etc.).
Russia wouldn't have had a currency collapse if they had a floating currency to begin with;
> After reviewing the three generations of currency crisis models, we conclude that four key ingredients can trigger a crisis: a fixed exchange rate, fiscal deficits and debt, the conduct of monetary policy, and expectations of impending default.
https://files.stlouisfed.org/files/htdocs/publications/revie...
And that occurred after the currency crisis had started (the debt swap into Eurobonds was because of the GKOs). I am not sure what the US has to do with it. I am not sure what "Soviet-era debt" has to do with it (that debt was very soft, was rolled over multiple times in the early 90s, and wasn't related to Russia's problems). I am not sure what the IMF has to do with it (the IMF came in after it started...that is why the IMF came in).
Yes, it would have...that is self-evident. The reason the peg collapsed was because the free market/floating rate was lower. The only purpose of the peg is to stop the currency going down (again, this is a weird, self-evident proof...saying that the currency wouldn't have collapsed if they had a floating rate makes no sense, it would have collapsed faster).
A large portion of their foreign denominated debt was from the Soviet era -- just a few years prior to 1998 they committed to repaying nearly $100 billion of that old debt. Russia was accepted into the "Paris Club" based on a valuation of their sovereign assets -- 1/4 of which were loans due to them from the Soviet era from Cuba/Vietnam and other satellite countries that had no capability to repay those loans. So the Soviet Era debt was a big portion of their liability and made up a substantial portion of their assets.
None of these things are remotely similar to the US situation of almost universally US debt denominated in USD. So I think GP is spot on when they say there's 0 chance of a currency crisis.
> The entire world (including the US federal government) has taken a short position on the US dollar
I read this as a prediction of some type of crisis.
Anyway, wrt the US Federal Government, having government debt is not that same as having a short position. For one, the US Fed govt's revenue (i.e. tax collection) is denominated in the same USD as the debt. So if USD goes up, tax collection go up.
"GP = grand parent, i.e. the post that the post-your're-replying-to was replying to"
I think your parent was suggesting that the behavior of the entire world is effectively a short-dollar position - whether they intended it to be or not.
Currencies going up usually leads to a reduction of exports which subsequently leads to an economic downturn, which leads to less taxes.
Apart from that, mass sell offs of government debt leads to increasing interest rates. You can buy that off with quantitative easing but probably that has limits too.
I don't know much about "technical" forex trading, but I can say that USD/CNY didn't really change today, neither did USD/CAD, or USD/GBP. Everything is around where it's been over the past few weeks. Are you saying the real exchange rates will significantly change soon?
People will only notice when China decides its FX is running low
Although I'd assume, maybe it helps with traffic? Presumably people would be more interested in reading a previous financial post, if they didn't know it was 2 years old.
The US Government sells treasuries and bonds to raise dollars. These have to be approved by congress, which is why every so often you'll hear about government shutdowns, because, yes, if for whatever reason, the US Congress doesn't pass a debt ceiling lift, the US Treasury will not have enough money to run things anymore.
Then there's the Federal Reserve, which loans dollars to banks to create liquidity and velocity in the monetary system depending on certain conditions (Primarily inflation and unemployment I believe).
(Presumably there's a fair amount more to it than that as well).
So an increase in borrowing from various parties pushes the interest rate higher (the banks would want to charge as high an interest as possible, but no higher than what would make the client move to a different bank for the loan).
The central bank could potentially alleviate and increase borrowing without interest rate hikes by allowing the banks themselves to obtain funds from CB at a lower interest (than another bank), and the competition between banks would push the interest rate back down.
If OP is right I don’t see the federal reserve acting to bail out China.
They might happen to do QE for another reason but not to help out other countries with their problems.
It has to stop somewhere. Doesn’t it? (Genuine question!)
If we get massive deflation from a “dollar short squeeze” (which I don’t actually think is likely but it’s what OP was suggesting) that means we need more inflation, which printing money would produce.
My understanding is that "printing money" with a jobs program would be more effective at stimulating spending that, say, "printing money" with cheap interest rates (which might just mostly ultimately go into people's bank accounts as they sell assets to people borrowing the cheap money).
The US has printed 20% of all dollars ever existed since 2020. Check the exchange rates with any other currency, EUR, British sterling, Chinese RMB. Did it become cheaper? Of course not.
We will always buy USD, because it has as a collateral 8billion lives.
Against everything else than other unlimited supply currencies, fiat money has fallen dramatically. It's a simple fact, not an endorsement of anything.
Everyone knows the basic mechanics of supply and demand on price, but somehow when it comes to fiat money, many manage to swap common sense with a number of convoluted theories.
Check the most widely accepted scarce commodity: gold. Gold/USD prices are now at the level they were in 2012.
Now if your argument is based on the USD price of Shiba Inu, well I have news for you.
Convenient straw man to try and classify anyone exposing the intentionality behind today's inflation levels as a crypto shill. Almost all assets have exploded in fiat values since the start of Covid printing, not just crypto. Supply chain issues didn't affect Rolex watches and metropolis housing markets, money printing, QE and low interest rates did.
https://www.investopedia.com/terms/p/petrodollars.asp
https://www.bloomberg.com/news/features/2016-05-30/the-untol...
If a country wanted to not buy dollars, here's how that would go.
No Dollars: "Hi, we'd like some oil."
Oil Producer: "Great, here's how much that contract is in dollars."
No Dollars: "How much would it be in my local currency?"
Oil Producer: "Well, you see, we don't really quote in other currencies..."
No Dollars: "Fine, I'll find someone who will."
Middle Person: "I heard you're looking to buy oil with Pentali Marcograms?"
No Dollars: "Sure am, what price will you give me?"
Middle Person: "10% over the exchange rate between Pentali Marcograms and US dollars. You know oil producers trade in dollars, right?"
You are off by three orders of magnitude, which is pretty amazing.
Forex markets have incredibly tight spreads measured in pips, say 1-4 pips, where 1 pip = 0.0001.
The reason why dollars are important is that people store the results of their oil sales in USD assets. What a good is purchased with means nothing. Where you store the proceeds of the sale is what counts.
This goes to that oh-so-tired phrase 'petrodollar', which many autodidacts misuse to signal a lack of understanding of both forex markets and oil economics. What "petrodollars" means is the dollar holdings that oil exporting states maintain. It does not refer to the currency oil is purchased in. It comes from eurodollar, which signifies dollar holdings in Europe, and not the purchasing of European goods with dollars.
Once we get that definition right, we understand it as a synecdoche for US hegemony in reserve currencies -- e.g. where foreign central banks store their wealth. The actual currency oil is priced in - or anything is priced in - means nothing. What is the point of saving a pip in the forex markets if you are going to be losing .1% in bid/ask spreads when you try to store your wealth in an illiquid bond market? No one -- absolutely no one - optimizes for reducing forex costs when deciding in which nation to park their wealth. They are much more concerned with questions like "Is it legal for me to purchase these bonds? will my wealth be confiscated in the future? What kind of fees do I pay when I buy these bonds?"
The reason the world wants to store their wealth as dollar assets is because the US has a reputation for openness to foreign investment, rule of law, political stability, upholding foreign investor rights, and amazingly deep capital markets that can absorb large foreign inflows with very low spreads. So the bid/ask spread when trying purchase a few billion worth of U.S. bonds is much more important to explaining US financial hegemony than what some random country demands as payment.
I think the no. 1 reason why people get this all wrong is they still want to think we live in a world of specie flows. But there are no bearer assets in international trade - you can't take it with you back home. Your foreign trade profits are going to be stored in some custodial account in some other country. So trusting that country is a big deal. People who think trade is conducted with gold nuggets don't see this custodial account problem, and that's why they don't understand why the U.S. is a global reserve currency. That's when all sorts of conspiracy theories about oil sales, or aircraft carriers, come into play as they try to understand the U.S. role using the ideas they are comfortable with.
And what currency a good is purchased in absolutely means something!
Your claim is that people store the proceeds of sales in dollars because of the trust factors, volume, and tight spreads. But I'd say that 2/3 of those (volume and tight spreads) are consequences of its utility and use as an international settling currency. Catch 22.
Yet are those things worth enough that international exporters would continue to trade in / hold in (effectively the same, if we collapse the goods trader and forex trader into a single entity) if the dollar ran 5% inflation and low central bank rates for years?
I suppose we'll see, but that's an atypical situation in the last 50 years of pure fiat international finance.
For some small country -- and it would need to be a small country, like Sierra Leone, that cannot access the Forex markets, then they need foreign reserves ahead of time. This is true. But if they don't want to hold their reserves as USD they can hold them in EUR or YEN if they like, and then when they need to buy oil, they sell the EUR for USD and buy oil with USD.
While the USD is the largest foreign reserve, it's like 60%, there is also EUR, British Pound, Yen, and some other currencies that are ubiquitous enough for Sierra Leone to hold. These can readily be sold on the spot for whatever a nation wants as payment.
https://www.federalreserve.gov/econres/notes/feds-notes/the-....
We may spend 10 times more than any other nation on our military … but due to bureaucracy and other inefficiencies our spending doesn’t quite get the same bang for its buck if you will.
[0] or 6.2 or whatever depending on what version you use.
Around 2017/18, the PBOC stopped doing this and allowed domestic banks to retain and invest the dollar earnings that exporters deposited. China's money supply is not directly related to the US money supply. China's capital account is still closed. All that has changed is that the onshore dollar market has increased (the PBOC retains a huge amount of control over lending decisions, Chinese state banks are not investing in US markets, it is being retained in China).
Watch the US bond market closely. Today saw a sharp selloff on the 10-year maturity, a favorite "asset" of foreign governments and companies. When those organizations get into trouble, they sell treasuries to raise cash. "Trouble" often comes in the form of dollar-denominated debt which must be serviced in dollars.
As the dollar rises, borrowers of dollar-denominated debt must raise more local currency to buy the dollars to service their loans. That puts further upward pressure on the dollar, distressing foreign usd-debtholders even more. It's called a "short squeeze":
https://www.lynalden.com/global-dollar-short-squeeze/
The entire world (including the US federal government) has taken a short position on the US dollar by assuming obligations requiring them to pay later in dollars. Ask any Ape on WallStreetBets what happens to shorts during a short squeeze, and you'll get the same answer: they get rekt.
The dollar spiked past a key technical level today.
https://www.tradingview.com/chart/?symbol=DXY
In 2020, a similar dynamic took hold, with stocks, bonds, and gold falling in price as the dollar surged. We may not be there yet, but the scramble for dollars in China (and possibly all of Asia) is just starting.