Lehman Evergrande Goldman Risk Taking

Clifford Bennett, Chief Economist at ACY

10.11.2021 11:15 am

#stocks

You may remember I previously asked the question,

what if China's and the US property markets declined at the same time?

Lehman Evergrande Goldman,

now that would be a concern.

On 15 September, Reuters wrote a story in which Goldman Sachs was warning of Evergrande's debt woes and spillover effects. Today, the talk around town and on Bloomberg is that Goldman has been buying property junk bonds in China.

It sounds just a little bit like that movie, fictional of course, The Big Short, where an investment bank, it is implied, was telling the market and clients one thing, while simultaneously trading in the opposite direction. This is markets. We all change our mind on a whim, and what one section of a bank thinks, research, may be very different to what the trading room of that bank may be seeing.

Nevertheless, all this does have a ring of repetition to it. Add the context of slowing economies USA and China, a clearly excited property price environment in the USA, easy funding, that China's property market, let's face it, is already cracking, is just all a little compelling. Making it more difficult for investors to be happy campers at the moment.

Now we hear, Goldmans has been buying junk status property bonds in the China market. Did, the decline of Lehman, Greece, and many others not teach them that being too long junk bonds can be highly problematic. Even to the level of one's survivability. And it is truly colourful to add gloating in the public arena. We know junk bonds are unwise in the long term. We know China is slowing. We know the China property market is cracking. I have been saying for some time that the USA is amid its second great property bubble of the century.

Then is Goldman being clever and doing the opposite of what it did at the top of the market in the US, according to the fiction movie that is, off-loading junk property bonds then, by now buying property junk bonds at the bottom? Alternatively, is it messing up badly, trying to be too clever, assured it is too big to fail, taking a substantial risk and buying junk bonds that may well go to zero. In other words, getting it wrong this time?

It just seems all too entertaining a plot does it not.

Especially when the Federal Reserve just made a point of saying Evergrande is indeed a contagion risk to the USA, and in China local governments and authorities are scurrying over their accounts to check their own and their banks level of exposure.

Meanwhile, Goldman first told the world to worry, and then started buying.

My view remains as mentioned above, all the housing data in the US has turned south except for skyrocketing prices. It is a disconnect that could end in tears. In China, the economy is permanently re-setting to a lower growth path. The property super-cycle has come to an end and is returning a more normal western level growth path. Which is much lower than had been the case. Perhaps this is an aspect Goldman do not fully appreciate.

Previously, I have made the point that Evergrande's troubles grew out of extrapolating past property construction demand into the future. The worry is Goldmans may indeed be making the same mistake while thinking itself to be cleverly buying a temporary pandemic driven dip.

The train of effects that could lead from Evergrande to Wall Street, is not difficult to put together. Stay tuned.

Clifford Bennett