Evergrande And "Water Cooler" Topics

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There are some things that I call “water cooler” topics in finance. They don’t have any bearing on what we are doing in the real world—people just like to argue about them. Which is why we’re going to talk about why you shouldn’t care about Evergrande.

Last week, I received message after message from my Daily Dirtnap readers asking me to talk about Evergrande and what was going on in China. They wanted to know, “Could it be the next Lehman?”

My answer was this: Did it have any impact whatsoever on our portfolio? Or US markets? No, it did not. It was hardly a blip on the radar. A couple days later, one of my readers tweeted me and said:

But if you somehow missed the panic, or just wanted to know how I reached my conclusion, let’s go back in time for a bit. Evergrande is a Chinese property developer best known for building ghost cities. Remember that? Even 60 Minutes did a piece on it.

It was malinvestment on a massive scale.

Photo: Evergrande ‘Splendor’ Kunming. “Just because you build it doesn’t mean they’ll come. Seven hundred million people in China live on less than $2 a day. They simply can’t afford these [apartments].”—60 Minutes.

At the time, we wondered at what would become of all this malinvestment. Now we know. Ten years later, it’s all playing out in real time. Evergrande is $88 billion in the hole. They win the award for “highest debt burden of any publicly traded real estate management company in existence.”

So, yes. People worried. If they default, could they cause the next 2008-style financial crisis? Maybe. That is, if they were allowed to default. But this is China.

On Sept. 20, 2021, I wrote to my readers and said: “Ultimately, the losses from Evergrande will be socialized. You won’t really see the effects of it because prices will not be permitted to fluctuate. The Evergrande bonds will simply be halted.”

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