Is This It? Do You Stay or Go?

The most known of knowns in financial markets is the China Evergrande Group debt crisis.

Here’s a quick update courtesy of CNBC:

Evergrande, the world’s most indebted property developer, is crumbling under the weight of more than $300 billion of debt and warned more than once it could default. Banks have reportedly declined to extend new loans to buyers of uncompleted Evergrande residential projects, while ratings agencies have repeatedly downgraded the firm, citing its liquidity crunch.

The financial position of the other Chinese property developers also took a hit following rules outlined by the Chinese government to rein in borrowing costs of the real estate firms. The measures included placing a cap on debt in relation to a company’s cash flows, assets and capital levels.

Will it or won’t it be allowed to fail? Will this be the modern-day Lehman Brothers moment?

Markets are pondering these questions. Answers range from a definite no to a possible maybe to an improbable and inconceivable yes.

The ongoing debate over Evergrande’s fate has seen some froth blown off the top of global markets in the past few days.

Is this an overdue breather in an otherwise surging market OR is this it…the BIG one?

Stay or go?

Firstly, Evergrande is nothing more than a symptom from a very sick and debt-addicted system.

Somewhere, somehow, and in some way, the central banker quacks in charge of this debt-funded growth experiment were always going to create a corporate Frankenstein…or two or three…oh what the heck, heaps of ‘em.

There are a multitude of Evergrandes in the system…they just haven’t made the headlines…yet!

To see the picture a little more clearly, we need to take a few steps back.

This is a massive bubble.

Now, I know this is hardly new news. The fact it has not yet burst, AND if it does start to hiss, the Fed has the air compressor on standby means the vast majority really don’t see any cause for alarm.

In recent weeks, I’ve been writing a series in The Gowdie Letter titled ‘Multiplying Risks Add Up to Wealth Subtraction’.

To quote from Part One of the series:

Multiple risks are hiding in plain sight within the system. The Fed is not going to warn us about these. Their head-in-the-sand attitude amounts to wilful negligence.

We know from the dotcom and US housing experiences the Fed’s bubble warning system is seriously flawed.

“What bubble? Nothing to see here.” And when it all does goes pear-shaped, “No one saw that coming.”

Therefore, it’s incumbent upon each individual to conduct his or her own market intelligence.

The obvious risk, as stated by quite succinctly by Jeremy Grantham in a recent UK MoneyWeek podcast, is “…the US is a candidate for the highest-price [share] market in its history.”

Grantham, aged 82, is a 50-year veteran of the investment business.

His excellent track record in identifying market bubbles (Japan, dotcom, US housing) has justifiably earned him legend status and in the process, made him a multi-billionaire.

While others rejoice in Wall Street’s record run, Grantham warns of danger ahead.

We know history does not repeat, but it does rhyme.

Evergrande is a sideshow. The real story, I think, started on Wall Street several months ago.

In his podcast interview, Grantham shared this insight with listeners (emphasis added):

The history books are pretty clear, there doesn’t have to be a pin. No one can tell you what the pin was in 1929. We’re not even certain in 2000. It’s more like air leaking out of a balloon. You get to a point of maximum confidence, of maximum leverage, maximum debt, and then the air begins to leak. 

…before the great bubbles ended in 1929, 1972, and in 2000 in the US, the three great events of the 20th century, there was a very strange period in which, on the upside, the super-risk, super-speculative stocks started to underperform.

When it comes to super risk and super-speculative stocks, you need look no further than ARK Invest.

To quote from The Gowdie Letter:

ARK’s flagship fund is the ARK Innovation ETF (NYSEARCA:ARKK).

According to Seeking Alpha:

“ARKK invests in high-growth, high momentum stocks with a focus on innovation/disruption. The fund trades for a full 125x the estimated 2022 earnings of its components.”

In short, ARKK has punted heavily on the tech and crypto sector. And, up until earlier this year, the bet paid off…big time.

The exponential rise of ARKK’s share price peaked in February 2021…since then it has started to underperform the broader market.

Ark Price Index

Source: Yahoo! Finance

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Someone who is NOT buying what ARKK’s selling is, Michael Burry…another bubble spotter who was made famous in The Big Short (emphasis added).

As reported by Seeking Alpha on 19 August 2021 (emphasis added):

“Burry, who famously bet against the housing market before the 2008 financial crisis, has placed large bets against Tesla, Treasuries, and Cathie Wood’s ARK Innovation Fund.”

Is ARKK the slow leak Grantham refers to?

Burry obviously thinks the leak is going to turn into a torrent…which, ironically, will sink the ARK.

What most people don’t realise is that BEFORE the headline of ‘CRASH ON WALL STREET’ becomes mainstream news, the smart money is quietly taking money off the table.

They know the jig is close to up.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

From The Gowdie Letter:

A brief look at past collapses

When did the Dow crash in 1929? 29 October.

But did you know the Dow actually peaked on 3 September at 381.17 points?

In the eight-week period between the peak and the infamous Black Monday meltdown, the air was slowly coming out of the market.

What about in 1987, when did the Dow collapse? 19 October.

However, the Dow peaked at 2722 points on 24 August 1987 (one week shy of September). The intervening eight-week period is when money was slowly being taken off the table.

Dow Jones

Source: Wikipedia

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Which brings us to the dotcom boom.

The S&P 500 Index reached an intraday high on 24 March 2000.

However, as the following chart shows, by 28 August 2000, the S&P recovered to within a whisker of its 24 March high.

In September 2000, the S&P began a descent lasting 24 months that took the index down 45%.

S&P began a descent lasting 24 months

Source: Yahoo! Finance

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Last, but by no means the least, is the 2008/09 GFC.

The catalyst for the greatest credit crisis since 1930 was the collapse of Lehman Brothers on 15 September 2008. On that day, the S&P opened at 1,250 points.

However, the S&P actually peaked almost 12-months earlier on 9 October 2007…at 1,565 points.

S&P actually peaked almost 12-months earlier on 9 October 2007

Source: Yahoo! Finance

[Click to open in a new window]

The failure of Lehman Brothers was the gunshot that ricocheted around the world. 

However, the starting gun on the S&P’s peak-to-trough 57% fall, was fired in silence in October 2007.

Each one of these historic collapses had two distinct patterns.

  1. Markets peaking well before the attention-grabbing headline crash.
  2. September and October feature prominently.

Given the US share market is “the highest priced in history” and we’ve entered the season when historic collapses traditionally occur, being on high alert to the mounting risks within the system is not only timely, but crucial to our financial well-being.

Look what’s been happening with the FANG+ stocks compared to the S&P 500 since February:

FANG+ stocks compared to the S&P 500

Source: Yahoo! Finance

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The air has been slowly leaking from this bubble for several months.

Whether Evergrande is the pin or not is really neither here nor there.

One way or another, this bubble is going to burst…and when it does, it’ll be ugly, ugly, ugly.

Which brings me to the question of: Will Xi Jinping throw Evergrande a rescue line or not?

Western thinking — shaped by our central bankers acting like helicopter parents anytime our markets fall and scrape their knees — says of course he’ll catch Evergrande if it falls.

But what if, in this new world of Quad alliances, Xi decides to take a bullet in his own foot to put two in ours?

What if he lets Evergrande fail and takes away the one weapon Western central bankers have…almost absolute public confidence in the Fed’s ability to save falling markets from any lasting harm?

An economic war would do far more immediate harm to the US and its allies than any — as yet to be built — nuclear subs.

Was it Confucius who said there is more than one way to skin a cat? Maybe not. But you get the picture.

Stay or go?

One way or another, the ‘everything bubble’ is going to deflate and, along with it, will go many a retirement dream.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion