The Tide Is Turning Australia |
Monday, 20 September 2021 — Albert Park | By Dan Denning | Editor, The Rum Rebellion |
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[7 min read] We interrupt Australia’s slow-motion descent into medical fascism to report on a big story from China. Greg Canavan reported on the looming collapse of property developer Evergrande last week. The company has US$300 billion in liabilities. On Thursday, it owes US$83.5 million in interest payments to bondholders on a five-year dollar bond with a yield of 8.25%, according to Bloomberg. It gets worse though. Evergrande owes US$669 million in coupon payments by the end of this year. US$615 million of those payments are in dollar-denominated bonds. This approaching day of reckoning is why ratings agency Fitch cut the company’s credit rating to junk last month. The Ponzi is up. For Australian investors, there are two key things to watch in China this week. The first is whether the reorganisation of the company is contained (no contagion). The second is a broader economic question for the Aussie resource industry: when your biggest customer is a serial misallocator of capital, what does that mean for commodity prices? Chinese junk bond yields spike We’ll find out the answer to the first question this week. Evergrande is trying to avoid a liquidity crisis that becomes a death spiral. If it has to pay off bondholders and other creditors with cash, it will run out of cash. That’s why, over the weekend, it began offering to pay off investors with discounted properties instead. It’s a bold strategy! And if you’re a creditor, you might rather have a vacant Chinese apartment that you can sell (hopefully) in five or 10 years than your cash back. It depends on how badly you need the cash now. Which is hopefully something you thought about before you were tempted by an 8.5% yield on an overleveraged Chinese property developer. But there is a hierarchy in a company’s capital structure of who gets paid first, especially in the event of a liquidation. Chinese financial regulators don’t want contagion. They can probably live with the highest junk bond yields in a decade — for now. What they can’t live with is an outright default on the company’s bonds that affects Chinese banks, Chinese investors, and Chinese home buyers. An interesting strategy would be to selectively default to non-Chinese investors and creditors. That’s good domestic politics. But it wouldn’t exactly inspire confidence that China is a safe and well-regulated market for international investors and capital flows. In the end, Evergrande may be ‘too big to fail’. It’s China’s second-largest property developer (by sales) and the world’s most heavily indebted property developer. Its bonds are distributed across indices all over Asia that track Chinese credit markets. It owns over 1,300 real estate projects in 280 Chinese cities and its property management arm is involved in another 2,800 projects across 310 cities, according to CNBC. Yet, even if Chinese authorities manage to contain the fallout, prevent default, and placate investors and homeowners, it’s already had an effect on commodity prices and on the share prices of Aussie iron ore miners. How can it fail now? China has been building ‘ghost cities’ for years; empty apartment buildings that its central planners and developers assure everyone will one day be occupied by fully-employed migrants from the countryside. But did you see last month when 15 high-rise apartment buildings (the Liyang Star City) were demolished in less than 45 seconds by 4.6 tonnes of explosives? You can watch it here. The development began construction in 2011. Then it ran out of money. The towers have been empty for eight years. Rainfall eventually damaged the integrity of the buildings’ foundations. In order to save Star City, it became necessary to destroy it. The phrase ‘misallocation’ of resources doesn’t do justice to this kind of material waste. State planning — the kind of which China’s communists are infamous for — means that economic choices are made by central planners rather than individuals. That’s the only way you can waste and malinvest on this scale — when the decisions are being made by others, with other people’s money. This matters to Australia’s future because China’s economy has been directed by the communists for the last four decades. To promote full employment — and keep people satisfied with the Chinese Communist Party — the real estate and construction industries were allowed to lever up and build out. It consumed resources and generated GDP growth. There was also a boom in housing and real estate prices — which appeared to make everyone wealthy as well. For years, many China watchers have been expecting the economy to shift from capital-intensive real estate and infrastructure growth to consumer spending — from spending decisions made by central planners to spending decisions made by individuals. We’re still waiting. And if Evergrande is bailed out, we could be waiting for a long time. Stay tuned to this space to see if there are, in fact, any signs of ‘contagion’. After giving us COVID-19 and turning the world upside down for the last 18 months, is China about to give us a financial flu too? Let’s hope not. Meanwhile, Little Xi (Dan Andrews) has told Victorians that the real vaccine passport next year will NOT be proof that you’ve been vaccinated but that you’ve received your booster shots. Dictator Dan continues to lead the way in the former free world with his backwards-thinking assault on individual liberty and privacy. He really is a menace to civil society. The idea that the government can dish out ‘freedoms’ as it likes, depending on your level of compliance with its mandates, is the exact opposite of the Anglo-American tradition. It’s nauseating to see the Aussie press slavishly report on ‘new freedoms’ that are coming (like having a picnic outdoors). Andrews — and a certain percentage of sycophantic followers in government, media, and elite society — are in the grip of a severe psychosis. They’ve effectively locked themselves in a mental bunker and driven themselves into a dangerous state of hysteria — a hysteria which, to them, justifies draconian and irrational limits on civil liberties. The good and bad news is that revolutions happen at the margin. They begin with a small cadre of dedicated true believers. These true believers use propaganda and mass media to amplify the impression that their beliefs are widely held and popular. They then demonise the opposition and demoralise the population with their relentless message of subservience. What’s bad about that is that it often works, mostly because the mass of people are too busy living their lives to take notice or take a stand. What’s good about it is that once you say no to the ‘big lie’ and simply refuse to comply, you find that many others (previously silent) stand with you. That’s how illusions and delusions collapse. In the end, Australians are too sensible to not see what’s happening. Vaccine mandates, vaccine passports, and a two-tier society of the ‘vaxxed’ and the ‘unvaxxed’ are a much greater risk to the country than the virus itself. The tide is turning Australia. That’s the good news. Until next week, Dan Denning, Editor, The Rum Rebellion PS: Attentive readers will note that the same kind of wasteful central planning that’s on display in China (and failing so miserably with destroyed buildings) is at the heart of the Andrews government response to a virus. It’s a combination of hubris and ignorance that government planners can contain a force of nature and redirect the direction of society. The virus has become endemic — not something that can be fully eliminated but which we will have to live with forever. In the end, it will destroy the pretensions of tinpot dictators like Dan Andrews. The Bonner-Denning Letter is co-authored by Port Phillip Publishing founder Dan Denning and legendary investment writer and publisher Bill Bonner. It connects the dots between markets, politics, and history as one of the only macroeconomic, ‘top-down’ newsletters in Australia. For a big picture perspective on the past, the present, and your investment future, click here for details on how to subscribe. Career Elite, Old-Fashioned Crime |
| By Bill Bonner | Editor, The Rum Rebellion |
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We are back in the US. It is hot and humid here in B’more. We’ve scarcely set foot in the city the last two years, but not much has changed. Elizabeth was mugged on the street last week. She was taking a photo when a man grabbed her phone and ran off with it. But she didn’t give up! Instead, she gave chase…yelling… Someone called the police… The chase went on…but the man got away. She then went back to the house and called up the ‘Find my iPhone’ app. It showed the phone near where the perp had given her the slip. Returning to the scene…she saw the miscreant wandering around. She gave chase again, keeping her distance…shouting…and making a scene. Again, she lost him, but later found her phone in the bushes. ‘It was just an old phone…’ we began a question. ‘Wouldn’t it be better just to let it go? He could have turned around and shot you.’ ‘Well, it was the principle of the thing,’ she answered. Advertisement: Bill Bonner’s shocking admission to our subscribers ‘Now even the investment newsletter industry has fallen for the go-go, buy-the-dip, prices-only-go-up bubble credo. ‘Like other parts of the financial industry, it tells customers what they want to hear. But at least it is independent of Wall Street…with no incentive to sell customers overpriced securities.’ That hurts to hear. Especially from the Godfather of Financial Newsletters himself. It’s like the Pope announcing he’s not so sure about the whole ‘objective existence of God’ thing! But all is not lost. According to Bill, there is one ‘ELEGANT IDEA’ left that can save you from pandemic-deranged politicians, misguided do-gooders and delusional central bankers. To find more, click here… |
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Privileged elite The nice thing about being mugged on the streets of Baltimore is that the principle is clear. No hidden agendas. No chicanery or disguised villainy. It was an honest, in-your-face robbery. And while we admire Elizabeth’s courage and scrappiness, we also have a sly respect for the creep who stole the phone. His life could have been so much simpler…so much easier…so much nicer. All he had to do was join the privileged elite. How? First, you borrow money to go to college. Then, you put on a suit…and get a job in Washington. Or maybe even get yourself elected to Congress. Not too smart? Don’t worry about it; you’ll fit right in with the other morons. And don’t turn your nose up at the private sector. Every company welcomes a willing and able employee. You might even work your way up to be CEO, earning 278 times more than the typical employee… Crypto boomers Don’t want to go to college? Don’t want a job? No problem. Just follow the example of Michael Anderson, a self-described ‘crypto boomer,’ profiled by The Wall Street Journal last week in its ‘Bitcoin to Bucks’ article. The young man made a fortune — in cryptocurrencies. Or you could follow the example of Tom Osman, an NFT millionaire. The New York Post reports: ‘On Monday night, an anonymous buyer purchased a computer-based illustration ofa rock with 400 ethererum (ETH), a cryptocurrency with the current equivalent value of over $1.3 million. ‘The geologic doodle, supplied from the free clipart website goodfreephotos.com, is one of a series of 100 such images of the same stone, each a slightly different shade, and attached to its own non fungible token (NFT). The project has existed since 2017 without much attention, Vice’s Motherboard reported — that is, until NFT sales broke through the mainstream last year. ‘UK crypto-trader Tom Osman came forward as the seller of EtherRock #42, which he purchased just a few weeks prior at only 1.7 ETH, or about $4,800 at the time. “I think this might be the best investment of my life so far,” he said of the transaction.’ Or maybe you could have gotten a degree in ‘race relations’ and scored a job as a diversity officer, helping a big corporation blackwash its workforce… Or how about this: start a hedge fund? You raise money from friends and family. You ‘invest’ it in the highest-flying, fastest-moving tech companies on the market. If they go up, you become rich and famous. If they go down, well…it wasn’t your money. Alternative path There are so many well-trodden paths to success in a late, degenerate, capitalist system. And the ‘not-your-money’ mantra is the secret to them all. But who chases the suits through the streets? Who calls the police on them? Still, against the advice of his family (we presume) and all the counsellors, prison psychiatrists, and parole officers he ever met, the mugger chose a career of simple, old-fashioned crime. And now, the poor man lives on the gritty streets of a gritty city, in the final days of a hot summer. He is neither enjoying a late-season holiday…nor Facebooking his friends…nor adding millions to his wealth. He is just trying to get enough cash for his next drug fix…and maybe a little more for a hamburger. Better idea How much better it would have been to have studied the latest claptrap theories and fantasies of modern economics. Then, he could have gone to work for the Federal Reserve. Instead of sleeping in doorways and flophouses, he could have a nice house in Bethesda…and spend his days in a climate-controlled, panelled, cushy office…with wall-to-wall carpeting and a cappuccino machine down the hall. He could collect a handsome paycheque…while also watching his portfolio of stocks and bonds go up…and up…and up. And if they should ever begin to go down (markets normally go up AND down)…he could simply announce another stimulus plan! Stay tuned… Regards, Bill Bonner, For The Rum Rebellion |