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China, Evergrande and The Boom & Bust Cycles of Capitalism

The recent headlines in the markets are all about China's "Evergrande" which may require a name change before the dust finally settles. China's quasi capitalist front - the business class - which is under the umbrella of Communism is under fire on many fronts. Let's discuss the economic front first. Evergrande - you may not have heard of the company until now - is China's largest property developer and has been a company at the forefront of China's economic boom and phenomenal new city development and expansion. As can be the case in an economy that has been booming and expanding for decades, it is easy for companies to lose sight that "booms" always come to an end. The economic cycles in Capitalist societies are inevitable, in spite of trillions in government "funding" intervention in the last decade. China is not a capitalist society - at least not culturally - and the interesting juxta-positon between capitalism and communism under one roof is playing itself out now with "Communism" asserting itself in ways that those who have heavily invested in china are now discovering to their detriment.

Evergande's booming business was fuelled by increasing debt and leverage. As can happen, that debt to debt servicing ratio was not properly managed and the banks - yet again - failed in their fiscal due dilligence and evaluation of the company. The US equivalent often cited in the media is "Lehman Borthers". The bottom line is that "Evergrande" is teetering and on the cusp of failure, unable to service its debt with no immediate convincing plan to lower its $300 billion debt mountain. It missed it's interest payment to bond holders yesterday - thursday September 23rd - and now has a 30 day grace period to make good on this or officially be in default. The writing is on the wall. It has effectively lost the little negotiation power it may have had. It's unlikely - not impossible - that the company will survive in its current "Evergrande" form. Will the chinese state intervene? Given the millions of livelihoods at stake and economic repercussions for the region, there is a high likelihood the government will intervene in some way. In wake of China's clamping down on "businesses" that have grown too big and too powerful for the State's liking and its emphasis on the welfare of the people, we see a strong possibility that state financial aid will come, but with caveats or demands that the company be broken into several companies and assets sold off to pay down bondholder and retail buyer debt.

As we have already mentioned, we believe it is unlikely that "Evergrande" will survive in its current form.

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A Window into Institutional Adoption of Digital Currencies

Institutional adoption of digital currencies and payment methods is on the rise. We are seeing a tectonic shift in the payments landscape along with the rise of Bitcoin. However, behind Bitcoin, blockchain companies and projects are looking to reinvent the way individuals and entire industries transact across the entire global industrial landscape.

One of the the core concepts behind blockchain is "trustless" transactions which essentially means transactions between two parties that are controlled by a piece of computer code "A smart contract" that is programmed to embody the transactional details and execute automatically. Essentially any "exchange" of property or digital property can be programmed accordingly removing the need or reliance on centralized parties or intermediaries to broker an exchange for fees. The movement to decentralised finance for example aims to remove "banks" and "brokers" as intermediaries allowing what is known as "peer" to "peer" transactions. Individual A can buy a stock or any asset directly from Individual B in a secure and trustless manner or Individuals can send monies "peer to peer" directly to one another without a bank as an intermediary.

Every transaction on the blockchain is recorded in a tamper proof ledger. No one can go back in time and modify the ledger which makes blockchain one of the most secure and transparent technologies in history to date.

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The Import of Volume - Technical Indicator Series

Volume is a measure of how much stock or how many contracts (if options) or barrels (if oil) are traded in a given day, week, month or quarter. Changes in volume traded can signal a change in price trend and relative strength either up or down. A marked shift in average daily volume alongside an increasing or decreasing price trend is a signal that should be carefully assessed as part of any trading strategy whether short, mid or long term.

Some volume trends worth noting include:-

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The Case for Negative Interest Rates - Rationale, Risks and Origins

Why on earth would a bank charge negative interest rates? It's so " upside down" and counter-intutive we thought it would be a good idea to cover the topic in this weeks blog post.

During times of economic uncertainty central banks lacking in policy alternatives to stimulate the economy have turned to unconventional policies such as negative interest rates to stimulate the economy. The use of negative interest rates is a tool to counter potential deflationary spirals where - in times of economic uncertainty - there is less incentive on the part of businesses and consumers to spend and therefore less investment, growth, profits and a higher propensity for unemployment which in turn creates a negative feedback loop. By offering negative interest rates banks disincentivize individuals and businesses to hold cash at banks as it now costs depositors money to do so (which turns the traditional banking model on its head) and encourages businesses and individuals to borrow money by actually being paid to borrow by the banks.

Sweden was the first to experiment with negative rates in July 2009 when the Reiksbank cut interest rates to -.25%. The ECB (European Central Bank) did so in 2014 lowering its interest rate to -0.10%. Other European countries and Japan have done likewise with over $10 trillion in government debt carrying instrument with negative yields by 2017. The objective is to encourage banks to lend money rather than hold reserves at the central banks (where they are now charged for the privilege). Another objective is to use negative interest rates to devalue a currency and in essence make it more competitive, stimulating the economy through demands for export of goods and thereby encouraging business expansion.  This has been one of the objectives of the ECB.

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28 Trillion Reasons to be Vigilant

$28 Trillion - take a moment to reflect on this number - is the current total of the US National Debt. As of June 17th it is precisely $28,311,074,615,442.85. We titled this blog post "28 Trillion reasons to be vigilant" because this number is not going down, has not gone down in the last 15 years and is unlikely to go down. So, what does this mean for the USA and for you?

1.The cost of servicing the national debt as a percentage of US revenue is going up.

2.If interest rates rise significantly, even as high as 3-4%, how sustainable is servicing the national debt? The Fed has a significant incentive - 28 trillion incentives - to keep interest rates as close to zero for as long as possible without going into negative yield territory. This would very likely have been the case had COVID never happened. COVID however has provided the US a perfect storm to do keep interest rates at all time lows and inject $6 trillion and counting into the economy. This serves several national purposes: It provides massive liquidity to withstand the shock of COVID, it devalues the US dollar by doing so, which in turn dilutes the national debt value, it keeps interest payments on the national debt as low as possible and it allows for the most optimum conditions for the economy to return to pre-COVID employment numbers.

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Hawley Advisors
1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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