20 Sept 2021
Evergrande
Well, there is rarely just a single company that has found a way to inflate assets and lighten liabilities. The big question on everyone’s lips is whether is it the new Lehman or just a freak outlier. (Or, if it is the new Lehman Brothers, but this time the People’s Bank of China has learned from US history and is going to bail it out and maket all its creditors whole regardless.)
I have no idea, but I’m pretty sure there are plenty of skeletons in the Evergrande cupboard. I somehow doubt if anyone does a Red Roulette and lifts the curtain on the event. Maybe I’m wrong, but with so much money at stake, it’d be amazing if corruption was entirely absent, not least of public officials whose job it is to dole out permits for redevelopment.
Of course, if Evergrande drags down the Chines economy, it’s going to drag down Australian stocks in general and miners in particular. It’s going to drag down commodities too, notwithstanding shortages of nat gas in Europe. It will be ‘interesting’ to see how this plays out.
MMT
This brief produced for the Richmond Fed is a pretty clear and even-handed account of MMT. As you will be aware, I think that MMT is coming soon to a government near you, wherever you live (apart from the Eurozone, of course). As it neatly summarizes the MMT policy prescription: the central bank and the finance ministry swap places. The central bank prints money to finance government spending, while the finance ministry stands at the ready to drain liquidity as soon as inflation looks as though it may be about to get started. Jay Powell hands the punch-bowl over to Janet Yellen.
The brief is a bit caution, saying that it’s only since the 1980s that MMT has provided a good description of the world as we have observed it, and that historically there are plenty of examples of monetary financing of government spending going horribly wrong. Well, the 1980s were a long time ago, and it sounds to me as though it’s worth a go. And it seems like Eliz. Warren, AOC, Bernie and some people in the UK Labour Party agree.
To tolerate high levels of inequality, deteriorating public services, decaying 1970’s infrastructure just because things went horribly wrong in Germany in the 1920s seems perverse.
Maybe this time really is different. For a start, the world is on floating exchange rates. Three decades of QE ∞ in Japan have proved that the inflation dragon is not just snoozing, it’s as dead as 8-track tape machines. Let’s give MMT a chance!
I should mention that I was alerted to the Richmond Fed brief by listening to an interesting conversation between Kevin Muir and Dario Perkins in this week’s Market Huddle.
Imagine Whirled Peas
“Joby Aviation, which plans to begin an electric air taxi service in 2024, is worth more than Lufthansa, EasyJet or JetBlue. Does that seem right? In this market, why not? Heck, earlier this year, Tesla was worth more than the next nine car manufacturers combined, though now only the next six. Beyond Meat, made with pea protein, is worth more than the entire market for peas eaten globally—like the bumper sticker says: Imagine whirled peas. Do fundamentals even matter? I can go on. Used-car sales platform Carvana is worth more than Volvo, Honda, Ford or Hyundai. Airbnb is worth more than Marriott and Hilton combined. Crypto-exchange Coinbase is worth more than the Nasdaq. I live at the intersection of innovation and disruption, but when companies are worth more than any possible reality, watch out.” -Andy Kessler, The Stock Market Fails A Breathalyzer
This is an amazing quote, and article. It articulates, brilliantly, how level ten crazy the current market is, how fundamentals are so hated that they are not so much unimportant as they are actively harmful to the price of the stock. A company that redeems debt rather than equity, that makes profits, both net and operational, that pays dividends and has been trading for decades, well, that’s a “value trap” stock that is only going lower in today’s market.
The original article, from the WSJ (paywalled).
The Crescat August Letter is out
Here is it. Unsurprisingly, it’s bullish commodities, especially precious metals. Maybe it is time for the yellow metal (gold) to have its day in the sun, along side the yellow ore (uranium).
The letter points out that filtering out the noise surrounding the posturing of the odd Democrat member, the Biden administration is hell-bent on fixing the atmosphere, inequality, the US dependence on Chinese manufacturing capacity and the US’s crumbling infrastructure. It’s hard to believe that he will not get a majority of elected members to support all of these separately, even if fixing all four in one go might be a (wobbly) bridge too far.
Kuppy Speaks
Kuppy is the Rod Liddle of financial markets. He is in a perpetual state of outrage. But that doesn’t mean that he is not right (any more than Rod’s intemperate rants mean that he is wrong). Today’s post argues that finally the Fed liquidity is going to reach as far as commodities and labour. This is now a heterodox view. The dollar is strong, bond yields are low, inflation is transitory. Any day now, markets will start to function normally, the high prices in commodity markets will prove, once again, the best antidote to high prices in commodity markets, and the SPX will resume it’s march upwards. That’s the mainstream view. The idea that this time it might be different is unthinkable. But sometimes unthinkable things happen. I’m keeping an open mind.
Wrap
(Written at about 15:00 UTC)
Everything is down, except:
- then Yen,
- gold and silver,
- US Treasuries
They dollar is pretty flat, on a trade-weighted index. Bonds are pretty flat. Equities, globally, have been hit, as have commodities.
The driver is Evergrande, presumably. Things are complicated by China markets being shut today and tomorrow (Tuesday).
Yes, this is a risk off day, and possibly one of many.
Image of the day
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