11 Nov 2021

The markets are starting to get pretty jumpy this morning. Yesterday I alluded to things not all being well at Evergrande. As the property company with the largest debt in the world with assets in a slowing economy it is not going to suddenly “be all right”. Yesterday a $148 million interest payment was due to international investors. I am getting conflicting reports in the media this morning saying that it has defaulted on this payment. I have a press release from DMSA (Deutsche MarketScreening Agency) stating that they are currently preparing bankruptcy proceedings against Evergrande Group.

Another Chinese developer listed on the Hong Kong Exchange, Fantasia, yesterday missed its interest payments on outstanding debt sending its share price down 50% at one stage and ending the day -36%.

What was very interesting with the news of the Evergrande default was the immediate selloff in Bitcoin. It was minding its own business sitting at all time highs and suddenly dropped ~9% before recovering a little. This is definitely something to keep an eye out for. We should keep in mind though markets breaking new ground after enjoying a massive run are prone to sharp pullbacks.

There is a new mania at the moment in EV cars with Rivian doing an IPO yesterday instantaneously making its CEO RJ Scaringe a billionaire. It only just delivered its first vehicles a few weeks ago. He is a big holder of options in the company. If the company hits its prospectus benchmarks he is on track to make $14 billion over the next 8yrs. I don’t think there is space for 2 Elon Musks and frankly I get nervous when IPO’s mint billionaires just like that. As a backdrop to that easy money we saw General Electric announce the splitting of a 129yr old company into 3. I guess this is all part of the ever changing cycle of life. However I am still a believer in attributing large valuations to companies that actually make money.

I want to address the issue of higher inflation as it is clearly being spruiked by all and sundry, me included, with the expectation from current surveys all pointing towards higher inflation.

China reported the highest producer price inflation in 26yrs with an annualised 13.5% increase. Consumer prices were a lot more modest at 1.5% annually. Against this backdrop and the high energy prices it is easy to see inflation becoming a major problem. However there is something taking place in the market that is causing me to question my inflation thesis, and would you believe it, I think the Fed may be correct that inflation is going to top out some time next year and not be the major issue that the bond market is thinking.

Take a look at the iron ore futures price action, over the last 6 months the price is down 57% trading currently at $87. This is despite the Chinese government placing output caps, essentially curbing supply. If supply is constrained and prices are dropping like a stone this has to mean that demand is pretty weak. If the Chinese property market is cooling along with its economy then we are going to experience some global weakness and I think the US and Global Stock markets that are at all time highs are likely to experience a selloff in the near term.

I hear market commentators and punters say that the markets are very frothy and likely to pullback but they also say they are not yet ready to go short. I say what the hell you waiting for, give it a go you quasi long only bull trader. All these guys talk about shorting but they never actually pull the trigger. As you can see in the table below there has been a lot of bull out there. 1995 is the only other time the markets have made more new All Time Highs.

Everyone hated the dollar and saw its mountain of debt and the increase of Bitcoin as the end of the road for the dollar. Well not so fast, the Greenback is making some steady progress.

Looking at the German 30yr Government Bond Yield it has just traded back down to 0%. I do not see any longterm inflation in the system if I look at German bonds. Wow this is confusing somebody is going to get this wrong big time.

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