Month: September 2021

By Garfield Reynolds, Bloomberg Markets Live commentator

Investors want to move past the turmoil caused by China’s crackdowns. But doing so risks overlooking the profound shift as Xi Jinping’s government makes a decisive turn away from free markets, radically altering the dynamics in the coming decade, particularly for equities.

I warned before that China would be a big source of disruptions for investors this year, and that has certainly been the case. There are likely some fund managers left bruised after regulatory storms helped wipe out their investments in particular sectors or companies — New Oriental Education is now a $3 billion company instead of a $33 billion one, for example.

However, focusing on particular pain points obscures the real dangers because it makes it all too easy for investors to shrug and move on to trying to find winners and losers.

China’s market capitalization just reached a record high above $12 trillion. So what, if the Shanghai Composite and the CSI 300 indexes are still well below their February price peaks? Value has not so much been destroyed as shifted, would be one view. So go out and chase it even if that means poring over all manner of old Communist Party speeches or seeking out new corners of the internet where prophets can offer a guide to where profits can be made.

The problems with that sort of approach are two-fold. First, it downplays the constant refrains that put profits at odds with the needs of Chinese society — or as Li Guangman Ice Point Commentary put it — “a transformation from capital-centered to people-centered.” Clearly, China’s authorities will pay no mind to any losses inflicted on investors, especially foreign ones.

Secondly, this “profound revolution” signals China’s move to play an ever-greater part in the global economy could reverse. That’s an even greater danger for the more gradual increase in its financial markets role, which had been built around expectations a state still run by the Communist Party would move relentlessly to integrate with the reigning capitalist consensus.

The evaporation of those assumptions creates a far more volatile outlook for economies and markets. There are already signs that China’s economic rebound is wilting because of both the crackdowns and the virus.

Rewarding innovative companies by suddenly telling them they are too profitable, or that they have been running their businesses all wrong, won’t result in a stronger economy. Propagating opinion pieces that inveigh against “sissy stars” and the worshipers of the West could also limit creativity and crimp growth.

It is also possible China’s economy ends up stronger than ever, or that its share and bond markets scale ever greater heights. Governments all around the globe are playing a larger role in economies and markets, and a hefty dose of authoritarianism would be one way to accelerate efforts to reduce carbon emissions, for example.

Investors may be setting themselves up for more pain if they switch to traditional dip-buying mode for Chinese assets in particular and EM equities in general. More broadly, expect slower global growth, a much rougher ride for risk assets, and increased volatility that will hurt many passive-investment ETF strategies.

When even George Soros cautions that China is about to face a major financial crisis, writing in an FT op-ed that China‘s property boom is coming to an end, and that Evergrande – the largest real estate company which it over $300 billion in debt has been quietly dubbed China’s Lehman – “is over-indebted and in danger of default. This could cause a crash.”

But it’s not just Soros – overnight, the company itself, whose plight we have chronicled for the past 12 months while others have only recently woken up to its threat – warned that it risks defaulting on borrowings if its all-out effort to raise cash falls short, rattling bond investors in the world’s most indebted developer.

“The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,” the Shenzhen-based company said in an earnings statement on Tuesday. “Shareholders and potential investors are advised to exercise caution when dealing in the securities of the group.”

As previously reported, the cash-crunched company said it was exploring the sale of interests in its listed electric vehicle and property services units, as well as other assets, and seeking to bring in new investors and renew borrowings. But sharp discounts to swiftly offload apartments at a loss – the developer plans to sell its Hong Kong office tower HQ to Yuexiu Property Co. for just HK$10.5 billion ($1.3 billion), a third less than the HK$15.6 billion it sought – cut into margins, helping push net income down 29% to 10.5 billion yuan ($1.6 billion) in the first half of the year, in line with an earlier profit warning.

With Beijing refusing to come to the company’s assistance (unlike the recent bailout of bad debt giant Huarong which two weeks ago finally got a state rescue after months of speculation as to its fate) Evergrande’s bonds sank toward fresh lows as investor confidence in its ability to repay debts has continued to erode.

“Evergrande’s gross margin could compress further on the potential fire sale of its properties,” said Bloomberg Intelligence analyst Lisa Zhou. The gauge of profitability is the lowest among major developers tracked by BI due to aggressive promotions and price cuts, Zhou wrote in a note.

And in another blow to the imploding real-estate conglomerate, even long-term allies are signaling they’ve had enough. Chan Hoi-wan, chief executive officer of Chinese Estates Holdings Ltd. and wife of Hong Kong billionaire Joseph Lau, made her first sale of Evergrande shares, cutting her holdings to 8.96% from 9.01%, a filing showed.

Evergrande’s 8.75% note due 2025 fell 1.5 cents on the dollar to 33.7 cents, according to Bloomberg-compiled data. Its shares earlier closed 0.7% lower in Hong Kong trading, taking this year’s decline to 71%.

Adding to the confusion, company executives refrained from commenting on the results (perhaps in response to the recent urging from Beijing that the company should keep its mouth shut), leaving investors and analysts to parse through the statement for guidance on its financial health.

Revenue recognized from projects delivered plunged 17% to 222 billion yuan, the lowest for the same period in four years. Gross margin almost halved to 12.9% from six months earlier, the lowest since at least 2008.

More troubling is that Evergrande said some property development payables were overdue – i.e., in technical default – leading to the suspension of work on some projects, but it added that the company is negotiating with suppliers and construction contractors to resume the work.  “The group will do its utmost to continue its operations and endeavor to deliver properties to customers as scheduled,” it said.
For more details on the earnings, click here.

Additionally, while the company’s borrowing fell, total liabilities that include bills owing to suppliers edged up to 1.97 trillion yuan, near a record high. Evergrande’s debt shrank to 572 billion yuan, the lowest in five years, according to Bloomberg calculations. That’s down 20% from 717 billion yuan at the end of last year and 15% from 674 billion yuan in March. But in what appears to just be a case of reshuffling liabilities, trade and other payables climbed 15% from six months earlier to a record 951.1 billion yuan.

Separately, the company still falls short on two of China’s so-called three red lines – metrics imposed by regulators on developers as part of a crackdown on leverage in the industry. It has pledged to meet all three by December 2022. One measure — the ratio of cash to short-term borrowings, a gauge of liquidity — worsened in the period to 36% from 47% at the end of last year, as its cash and equivalents plunged to the lowest in six years, Bloomberg calculations based on the results show.

With banks, suppliers and homebuyers exposed to the real estate giant, any collapse could roil China’s economy, raising questions over whether it might receive state support. Regulators urged Evergrande to resolve its debt woes in a rare public rebuke earlier this month. The problem – as is becoming obvious – is that Evergrande will not be able to resolve its “debt woes” without a bankruptcy or state bailout.

But will Beijing bail out the company if it realizes that there are no more options?

Addressing this question, UBS analyst Kamil Amin wrotes last week that “increased defaults coupled with above-average spread volatility in the Asia credit market throughout this year had led us to believe that the notion of “too big to fail” was diminishing. Instead, the Huarong rescue package illustrates to us that the notion does in fact still hold but be likely limited to higher quality SOE names, where spillover risks are much more profound.”

Does Amin expect to see the same level for state support for Evergrande? “We are not yet convinced. Firstly, the issuer is a POE not an SOE and secondly, we expect the Chinese authorities to continue reigning in on excess leverage in the property sector and let defaults/restructurings drift higher. This view is consistent with the price action we have seen (Figure 2), with other higher quality SOE names across the financial sector having tightened post the Huarong news (China IG: -5bp), while China HY and Evergrande spreads have continued to trade >1150/5000bp.”

Judging by the continued selling of both Evergrande bonds and stocks, consensus agrees. Yet when faced with the task of cleaning up after what would be a huge shock to the system – and at $300 billion, Evergrande is orders of magnitude bigger than Lehman ever was – will China blink, or will Soros be right?

Via South Front (emphasis ours),

The Taliban have vowed to reduce Afghanistan’s opium trade, according to a report by the WSJ.

This is incredibly suspect, as the movement’s primary bankrolling comes from poppy growing and opium production.

The Islamic group’s spokesman Zabihullah Mujahid vowed to crack down on the production of narcotics, saying “nobody can be involved” in the heroin trade.

Taliban leaders have been telling farmers in the southern province of Kandahar to stop cultivating opium poppies, according to the WSJ report.

Farmers are unhappy but have no choice but to comply should the Taliban begin to enforce the ban, the outlet cites a Kandahar grower as saying.

“We can’t oppose the Taliban’s decision. They are the government,” said the farmer.

He added that the Taliban has assured people that they would have an “alternative crop,” such as saffron, to grow.

Saffron, however, is not nearly as lucrative as producing as producing narcotics.

The ban on a crop that has traditionally been a crucial part of the local economy has resulted in prices of raw opium skyrocketing across the country.

Local farmers in poppy-growing regions like Kandahar, Uruzgan, and Helman provinces said raw opium prices have tripled, from about $70 to about $200 per kilogram. In the northern city of Mazar-e-Sharif, the price of opium has doubled, according to locals.

The poppy-planting season is due start in about a month.

“If the Taliban prohibit the cultivation of poppy, people will die from starvation, especially when international aid stops. We still hope they will let us grow poppies. Nothing can compensate for the income we get from growing poppies,” a poppy farmer in the Chora district of Uruzgan was quoted as saying.

Afghanistan is the world’s leading producer of opium, with its share in the global market standing at over 80%.

Poppy cultivation offers the rural population in the war-torn country a much-needed lifeline. In 2017, annual opium production was valued at $1.4 billion, or 7.4 percent of Afghanistan’s gross domestic product, according to the UN.

The Taliban have used taxes on the drug business to bankroll they endeavors for a while. After seizing the country’s capital Kabul, the issue of the narcotics trade surfaced amid the Taliban’s new plans for governance.

“We are assuring our countrymen and women and the international community, we will not have any narcotics produced. From now on, nobody’s going to get involved (in the heroin trade), nobody can be involved in drug smuggling,” Taliban Spokesman Zabihullah Mujahid told reporters in Kabul at an August 18^th press conference.

Before 2001, when the US invaded, Taliban had banned opium production. Production was down by 90%.

The Taliban eventually ceased to mete out punishment for cultivating drugs, cracking down only on use of drugs.

After 2001, during the two decades of deployment of Western forces in the country, the US spent some $9 billion in a crackdown on the drug trade. US efforts included paying farmers to destroy their poppies, funding Afghan eradication teams, and urging people to grow saffron, pistachios, or pomegranates instead.

This, however, pushed many of the local population to join the Taliban’s ranks.

The ban on the opium growing is a risky move, as the country is in an economic crisis, and a precarious one at that.

The US froze Afghanistan’s central bank assets and foreign aid, as well as the local currency – the afghani is reeling, on the brink of collapse.

Stopping the drug production and trade could be used as a bargaining chip to receive funds, and have resources released to be used by the Taliban government.

Authored by Dave DeCamp via AntiWar.com,

Israeli Defense Minister Benny Gantz said the US and Israel are working to develop a “Plan B” for if the indirect negotiations to revive the Iran nuclear deal fail. According to The Times of Israel, Gantz warned if Iran acquires nuclear weapons, it would trigger an “international arms race,” a comment that ignores the fact that Israel already has a nuclear arsenal and is the only nuclear-armed country in the Middle East.

“The United States and Israel share intelligence information, and the cooperation with the United States in this field is only getting stronger. We are working with them in order to establish a Plan B and to demonstrate that if there is no deal, other activities will begin, as President Biden said,” Gantz said.

During a meeting with Israeli Prime Minister Naftali Bennett on Friday, President Biden said if diplomacy with Iran fails, he was ready to “turn to other options.” Iran took Biden’s comment as an illegal threat.

Bennett presented Presented Biden with an Iran strategy described as a “death by a thousand cuts.” Ahead of the meeting, Bennett told The New York Times that he would continue Israel’s covert attacks against Iran, which the US tacitly endorses by never condemning them.

The constant threats from Israel are part of the country’s strategy to sabotage a US return to the JCPOA. When the JCPOA talks began in April, Israel carried out an attack on Iran’s Natanz nuclear facility. The attack led Tehran to increase some uranium enrichment to 60 percent, which is still lower than the 90 percent needed for weapons grade.

Israel uses Iran’s increase in enrichment as evidence Tehran is racing to develop a bomb when that is not the case. If Israel’s real concern was uranium enrichment, it would favor a JCPOA revival since the agreement restricts Iran’s enrichment levels to 3.67 percent.

NEW: Bennett went to Washington to recast his relationship with the Dems. But behind the smiles, #Israel‘s aim is to ensure the failure of the #Iran nuclear deal and to keep Joe Biden in check on Iran, Iraq, Syria, @DanielLarison writes in @TheCradleMedia https://t.co/rjnQYEgPoj

— Sharmine Narwani (@snarwani) August 31, 2021

The JCPOA talks have been on hold since June 20th. Iran’s new President Ebrahim Raisi has signaled that he is ready to return to the negotiating table, but it’s not clear when the talks might resume.

China is pledging support to the Taliban government now in charge of Afghanistan for reconstruction of the country, but is continuing to add insult to injury in the wake of the disastrous US evacuation and pullout from Kabul of the last two weeks.

“China has pledged to help reconstruction efforts in Afghanistan after American troops have completely withdrawn, but demands that Washington also pay its share,” The South China Morning Post writes in a Tuesday report. China’s foreign ministry went so far as to demand that Washington “reflect on its failure” after closing down its longest running war in history.

Foreign Ministry spokesman Wang Wenbin issued scathing criticism during a press briefing Tuesday, saying the United States’ starting the war in Afghanistan in the first place is ultimately “the reason for public livelihood and economic difficulty in the nation.”

“The US has to take up responsibility and cannot just leave the chaos behind,” Wang emphasized. “The US has to work with the international community to provide economic and humanitarian assistance to Afghanistan, maintain the normal operations of the government, maintain social stability, stop the currency depreciation and inflation, and let Afghanistan go on the path of peace,” he said.

Alternately he touted China’s reconstruction efforts as part of a new ‘peaceful start’ for Afghanistan: “China will support the peaceful reconstruction of Afghanistan on the basis of respecting the wishes and demands of Afghanistan.” 

The stinging rebuke was laced with repeat comments on Washington’s need to ‘learn its lesson’ in the failure of the Afghan war:

The US had to learn that military intervention would only lead to failure and that China supported the building up of an inclusive government in Afghanistan that cut off ties with terrorist forces, he added.

Meanwhile, China is already flexing its diplomatic muscles at the United Nations, given that on Monday the UN Security Council passed a resolution demanding the Taliban ensure safe passage for people wanting the leave Afghanistan, while at the same time allowing humanitarian groups to provide aid inside the country.

Monday’s UN Security Council vote which saw China and Russia abstain…

Crucially China and Russia were the only countries that abstained, given that “the resolution failed to address terrorist organizations such as Islamic State and the East Turkestan Islamic Movement (ETIM), which Beijing has blamed for attacks in Xinjiang.”

The clear message was that the ‘hypocritical’ US cares neither about counter-terrorism nor humanitarian aid and thus backed the resolution merely as a face-saving ploy on the global stage – from Beijing’s perspective at least.

Diplomatic jockeying over ‘humanitarian motives’ and counter-terror concerns aside, as we and others have been highlighting lately, the Taliban now controls colossal untapped mineral deposits, in particular what’s likely the world’s largest lithium deposits. This fact alone likely explains China’s suddenly becoming “friendly” to the Taliban regime over the past weeks.

With the retail daytrading army abandoning meme stonks – as small, retail trades of 1-10 options now accounting for just 18.3% of total volumes, the lowest since April-2020…

… and turning their attention to NFTs, where volumes have gone absolutely batshit insane in the month of August surpassing the initial peak craze from March by orders of magnitude…

… and where Elon Musk’s favorite market manipulation joke of a cryptocurrency, Dogecoin, still has a whopping $36 billion market cap, it was only a matter of time before someone read what we wrote back in March..

Since NFTs are potentially the biggest securitization scheme in history (every asset is eligible, that’s $500 trillion), how long until Goldman launches Collateralized NFT Obligations

— zerohedge (@zerohedge) March 6, 2021

… and put all of the above together, with the following result: you, too, can now own a piece of the original Doge meme – that sold as a non-fungible token for 1,696.9 ethers, or about $4 million in June…

… by purchasing a fractional ownership of the NFT in the form of $DOG tokens that will be available for sale on Wednesday.

In other words, while until now only the securitization itself (i.e., the NFT) was sold and/or resold, starting tomorrow the enterprising owner, PleasrDAO, of the original infamous Shiba Inu image that graces every digital “joke” Dogecoin token, will sell fractional ownership shares to it in the form of sub-tokens which anyone can buy starting tomorrow.

Given the memetic characteristics –  a securitization of a securitization of a joke of a token – sub-$1 price and vocal fan base, Bloomberg believes that the opportunity is likely to attract the attention of retail investors.

As Bloomberg explains, the process will work with Fractional.art first “fractionalizing” the NFT before it goes to a “batch auction” sale on Miso – a decentralized-finance protocol – which will then distribute fractional NFT $DOG tokens (not to be confused with actual $DOGE tokens, or Dogecoins) to participants. After that, the a decentralized Sushiswap exchange will allow the tokens to be bought and sold separate from $DOGE, or Dogecoin.

Naturally, PleasrDAO – a collective of DeFi leaders, early NFT collectors and digital artists – will retain majority ownership so it can cash out at some astronomical price if enough idiots launder money bid up the value of the NFT to some ridiculous number.

“Doge is unquestionably the king of all memes, and PleasrDAO could not be more excited to invite anyone in the world to own a piece of something so integral to the cultural history of the internet,” said Jamis Johnson, chief pleasing officer of PleasrDAO, in an email.

“The future is bright for communities built around the shared possession of an idea and we believe fractionalized Doge, the Mona Lisa of the internet, will be a shining example of this odd new world we live in.”

Think of it as hypercubic financial engineering for the Gen-z-eration.

Which means that the question now is this – can we reach the patently absurd state where given enough demand for $DOG, the fractional ownership token of the Doge meme, the value of the NFT that is at the heart of the original Dogecoin meme “joke” token (which even according to its creators should be worthless but clearly isn’t) is higher than the market cap of all Dogecoins in circulation?

With said market cap still topping $36 billion, the insanity in the market would have to be especially acute for this to happen, but with those idiots in the Marriner Eccles building still injecting $120BN per month and then soaking them right back in via their Reverse Repo facility, that probably means that within a week of tomorrow, that’s precisely what will happen.

With the retail daytrading army abandoning meme stonks – as small, retail trades of 1-10 options now accounting for just 18.3% of total volumes, the lowest since April-2020…

… and turning their attention to NFTs, where volumes have gone absolutely batshit insane in the month of August surpassing the initial peak craze from March by orders of magnitude…

… and where Elon Musk’s favorite market manipulation joke of a cryptocurrency, Dogecoin, still has a whopping $36 billion market cap, it was only a matter of time before someone read what we wrote back in March..

Since NFTs are potentially the biggest securitization scheme in history (every asset is eligible, that’s $500 trillion), how long until Goldman launches Collateralized NFT Obligations

— zerohedge (@zerohedge) March 6, 2021

… and put all of the above together, with the following result: you, too, can now own a piece of the original Doge meme – that sold as a non-fungible token for 1,696.9 ethers, or about $4 million in June…

… by purchasing a fractional ownership of the NFT in the form of $DOG tokens that will be available for sale on Wednesday.

In other words, while until now only the securitization itself (i.e., the NFT) was sold and/or resold, starting tomorrow the enterprising owner, PleasrDAO, of the original infamous Shiba Inu image that graces every digital “joke” Dogecoin token, will sell fractional ownership shares to it in the form of sub-tokens which anyone can buy starting tomorrow.

Given the memetic characteristics –  a securitization of a securitization of a joke of a token – sub-$1 price and vocal fan base, Bloomberg believes that the opportunity is likely to attract the attention of retail investors.

As Bloomberg explains, the process will work with Fractional.art first “fractionalizing” the NFT before it goes to a “batch auction” sale on Miso – a decentralized-finance protocol – which will then distribute fractional NFT $DOG tokens (not to be confused with actual $DOGE tokens, or Dogecoins) to participants. After that, the a decentralized Sushiswap exchange will allow the tokens to be bought and sold separate from $DOGE, or Dogecoin.

Naturally, PleasrDAO – a collective of DeFi leaders, early NFT collectors and digital artists – will retain majority ownership so it can cash out at some astronomical price if enough idiots launder money bid up the value of the NFT to some ridiculous number.

“Doge is unquestionably the king of all memes, and PleasrDAO could not be more excited to invite anyone in the world to own a piece of something so integral to the cultural history of the internet,” said Jamis Johnson, chief pleasing officer of PleasrDAO, in an email.

“The future is bright for communities built around the shared possession of an idea and we believe fractionalized Doge, the Mona Lisa of the internet, will be a shining example of this odd new world we live in.”

Think of it as hypercubic financial engineering for the Gen-z-eration.

Which means that the question now is this – can we reach the patently absurd state where given enough demand for $DOG, the fractional ownership token of the Doge meme, the value of the NFT that is at the heart of the original Dogecoin meme “joke” token (which even according to its creators should be worthless but clearly isn’t) is higher than the market cap of all Dogecoins in circulation?

With said market cap still topping $36 billion, the insanity in the market would have to be especially acute for this to happen, but with those idiots in the Marriner Eccles building still injecting $120BN per month and then soaking them right back in via their Reverse Repo facility, that probably means that within a week of tomorrow, that’s precisely what will happen.