This is a rush transcript of the Trish Regan Show, Sept 27, 2021 and may be updated. Click here to play and follow along.
Everybody’s worried about China right now, everybody’s talking about China as though it could have another “Lehman Brothers” moment. I think it’s worth taking a moment to actually figure out what they’re talking about. It’s so important, as I always say, to be able to cut through the noise in this market, and this is one of those moments where you have a lot of noise. Hello, everyone. Welcome to the Trish Regan show. I am Trish.
And yes, everybody is obsessed with Evergrande. It’s the big Chinese conglomerate the developer that has basically had a hand in a real estate deal in nearly province all through China. They’ve been a big part of the expansion, the tremendous expansion that we’ve seen in China in recent years, a big part of that building process.
And now, you see they’re struggling, and they have debt payments that are due. And they’re not able to make the payments on the bonds–that’s really the heart of the issue. And so people are saying, “OK, well, if they’re not able to make these payments, will they be able to stay in business? And if they can’t stay in business, what does that do to the world economy? And in other words, is this China’s Lehman moment? And if so, what is the spillover effect to everyone else? And therefore, should I be dumping out of US equities because I’m worried that China is going to have a big effect on things?”
These are fair questions.
It’s an important moment in time to take a deep breath and think about what this company is, what this company represents, and how how affected American corporations and American stockholders.
First of all, you should know that there’s a lot of outstanding debt, right? This is a really, really big company. They’ve been building all over China. Like I said, they’ve basically had a hand in like some building in every single province all throughout the country. And we’re talking about a really big country. They have about $300 billion that they owe in debt. I mean, that’s a lot of money, right? That’s a lot of money. And so, if they default on all that debt, then, yes, it would be very concerning.
We saw on Thursday of last week that Evergreen did make a debt payment to some debt holders — but those those holders were in China, so for the international ones it was like, good luck.
If you’re a U.S. holder of ever grand debt, well, you know what? You probably shouldn’t have been buying debt in a Chinese company only because I look at it and say, “Why would I why would I buy in a company where I’m not going to be protected by US law? Thank you very much!” So there’s a little bit of buyer beware in this. Right?
And I realized that it was a very important company and a very big company. And everybody thought it was going to be fine. It may be fine for the Chinese. I mean, like I said, good luck if you’re an American! And I think you always need to think through all that as you invest. Think about: is the law on my side? If this if this company goes belly up, I mean, is the CCP really going to be looking out for Joe Shareholder in the USA?
I don’t think so.
But they are looking out for the Chinese, and they’re very concerned about making sure that this doesn’t actually have a contagion effect that’s going to affect negatively the Chinese economy. So you need to, again, cut through the noise and understand what’s real and what’s not. It’s very real. It’s very much a possibility. The international debt holders could get kind of wiped out. Equity holders certainly could get wiped out. But at the same time, at the same time, the Chinese government has an interest in protecting this company because it’s a big company, it’s an important company.
And you know what? A lot of people in China, they gave this company their life savings and said, “build me a house, build me an apartment.” And they put all that money into that real estate purchase. And if they put all that money down and the company doesn’t deliver and then those families are out. Well, you can imagine that a lot of families are going to be really angry and really upset and the country is dealing with enough. Right now, do they really need the headache of all these people saying, whoa, wait a second, not to mention the headache of what you would see ensue in the financial markets? Right.
As everybody starts saying, “whoa, you know, this is one big hot potato”. So I think the comparisons to Lehman are interesting and at least worth looking at. But you also have to simultaneously understand. The USA is not the CCP and the Communist Party of China has no interest in seeing this company go down in flames, not that the US did either. It’s just the US was willing to sit back and say, “OK, let’s see what happens.”
I don’t think a highly managed economy such as China’s is quite as willing to do that. And thus, I would say everybody needs to kind of take a deep breath, recognize this for what it is. Also recognize that you need to be careful about where you put your money and where you invest and, you know, I just keep going back to you want to make sure you understand everything, including the laws of the land of the companies in which you’re investing in. And so I wouldn’t have put money in this one to begin with. But for those that did understand that, you might not get what you thought out of the thing.
But I don’t think it’s going to be a disaster situation like 2008. I really don’t, because for what it’s worth, the CCP is there and they control so much of the banking system. They control everything. And I don’t like that either. But I’m only pointing out that in this particular case, it may not be quite as quite as awful as people think.
That said, there’s another kind of awfulness to this, and they run the risk that by propping a company like this and others up, they can find themselves pretty quickly in a situation such as we have seen take place in Japan, where you had so much government involvement and manipulation.
And, you know, after a while, these companies, they turn into like a bunch of guys, nothing against General Electric. I mean, while there was the the accounting issues that they had on the finance arm, which will save for another day, but the reality is the company gets too big, too big, and they didn’t really know what they were doing. And there wasn’t the same kind of pressure that they needed from. From, frankly, the free market and shareholders for a while until, of course, the market figured out what the heck was going on, which is, by the way, the saving grace in the market. Right. You want those checks and balances. You want investors to be able to say, “hang on.” But if you have the government, they’re effectively propping everything up, then investors don’t have the opportunity to do this. And so China runs into that could run into that issue, shall we say, in that you don’t have enough sort of raw capitalism at play. But I would just say everybody should to take this for what it’s worth.
Be very careful about where you investing in the world and recognize that China probably is seeing that it’s in its interest to not let this company go completely belly up. But I do have I do have concerns about overmanaging, shall we say, from the government, which is something that we’re seeing in China, we’ve seen in Japan. And I worry about happening here.
I mean, you see what the Federal Reserve kind of feeling like. I mean, that “too big to fail thing” is very much still in play right now. And, I think that there’s an effort to try and save our economy by any means necessary. So this is partly why you’re seeing the Federal Reserve say it’s so committed to money printing.
They’re very concerned, too, I think sort of needlessly so about the potential for default. I really don’t think that’s going to happen. I mean, if it does happen, then, well, the president is really going to have a whole bunch of stuff on his plate in terms of being just dumb while really bad, right? If we default on our debt, then, well, we really are no better than a banana republic!
So let’s let’s put that aside for a moment and hope that smarter heads prevail and that we’re not looking at any scenario quite like that. All that said, we do run the risk that there is too much interference, that you have government and lobbyists basically sort of involved too big a level. And so consequently, there’s not enough (sort of) power to the people, which means you don’t have enough power for capitalism to really function as it as it needs to. At its heart, capitalism is about freedom and in in its best sense, really employs sort of the best aspects of freedom. And I realize it’s not perfect. Don’t get me wrong, it’s absolutely not perfect. And there are things that we could and should and do try to do to massage this along the way.
But ultimately, you want to make sure that it’s freedom and free markets that are governing where we put our money and where we invest and where we put our capital, because that is the best predictor of a profitable, prosperous outcome in the future and unfortunately, in the environment such as the one we live in now.
And I think ESG is a great example of this. I mean, very noble ideas. You want to be environmentally, socially conscious when you invest. And there’s this theory that now a company has to — I mean, it’s kind of a mandate, right? All these all these mutual funds that are putting money to work, they’re like, OK, well, are you ESG approved? Are you ESG, are you environmentally socially conscious? Do you have this good governance? And so that is now taking priority over, say, the balance sheet? Well, that’s kind of a problem in that we’re losing our way.
And again,I don’t take issue with you know, what if you if you want to invest in wind and solar energy companies, by all means, and you think that that is the best, most prosperous way for the future, by all means, go ahead and do it. But what are we doing when we say, “OK, this is the only thing that we’re going to really allow people to invest in and we’re going to exclude the others?” Well, that’s a whole other ballgame.
And that’s when you get big government intervening with capitalism in a way that really restricts freedom and free enterprise and is somewhat somewhat akin to what we’re seeing in China. Like China, I promise, is probably not going to let this big company in this real estate company fail, much like the US right now doesn’t want these ESG companies to fail. And ultimately, unless we’re going to go down the path and I certainly would hope, for gosh sakes, that we don’t go down that path of becoming like China.
Ultimately, you run the risk that you’re creating a kind of bubble because you have to ask, is any of this real? Again, if you believe that solar energy is the way of the future and I do think it’s going to have a big part in our future, then yes, you want to be invested in those companies. But if you’re investing just because it seems like it’s politically correct, well, not then that’s a whole other problem. In other words, you want a marriage of actual fundamentals and then, hey, the political correctness, I get it right. You’re going to see a lot of companies try and put money into these things that could help a stock. But ultimately, you run the risk that if you’re not investing in something because it is the right thing for the economy at this time and has the best growth prospect, then that creates a whole other problem and a whole other kind of bubble.
And so I just want to flag this right now as we watch what’s unfolding right now in China, which gets me, by the way, to the Fed again in the Fed sort of interference in what we’re dealing with right now, because inflation just is a reality and it’s going to continue to be a reality in this environment. You can’t print this much money and not expect to have some kind of consequences associated with that. You look around right now, I worry about the economy because I don’t know how our economy is going to keep expanding when people don’t want to go to work. I mean, and that’s just the reality. They don’t want to go to work. They have learned in some ways to do perhaps more with less. They have learned that they can get certain handouts and benefits from the government. And there’s a whole sort of gig, underground economy going on where people can make money and maybe not have to pay tax on it. And I think that that’s becoming increasingly attractive, which puts us closer and closer to looking like Europe, I mean, that’s one of the problems, right?
Think about Greece where nobody was paying their taxes.
I mean, we and I know that Joe Biden wants to clean this up by hiring more IRS agents, but that’s not the answer.
I mean, for goodness sakes, he himself he himself was looking for aggressive means to try and avoid taxes, the five hundred thousand dollars he saved on employee payroll taxes because he put himself into an S corporation for all his speaking gigs and his book! I’m sorry. I mean, it’s an aggressive thing to do! And the House Ways and Means Committee is looking into it. And some people are saying, well, you know, maybe it’s too aggressive. We shall see.
But any way you slice it, it was a very aggressive tax move. And that is what happens right when you have so many onerous taxes.
So to me, the answer is, well, you just make it easy. You say, OK, well, let’s have a flat tax. Let’s be fair and let’s keep it let’s keep it low enough that people are incentivized to go to work and they don’t see that that tax call it 10 percent. Let’s just call it 10 percent. Could be less across the board. They don’t see that tax is an impediment.
But right now we have an economy that runs the risk of becoming quite broken because people aren’t interested in going to work right now. And you couple that with simultaneously the inflation that we’re seeing and you’ve got real problems and this is inflation. And I think that and I keep telling people about this, you know, you need to actually think through how you are going to manage your portfolio for the future, especially if you want to retire one day.
I mean, hey, I guess if you just work forever, then you can maybe keep up with inflation. But if you have a set amount of money that you want to live off of and you think, OK, whatever the number, let’s round numbers. Let’s just say you’re going to live off a thousand dollars a week. By the way, we have a great article on TrishIntel.com that forgive me, a thousand dollars a month. Great article. You can live in the lap of luxury in one country on twelve hundred US dollars a month. So it’s nice to know that your your dollar still goes somewhere. Again, that’s on my website, Trish Intel dot com. We take a look at a bunch of places around the world where you might be able to retire and live decently well.
But, if you want to stay in your same hometown, if you want to live in the US and you’re going to be living on a very fixed income, you’ve got to factor in inflation. And inflation is increasingly growing worse. It’s at five point three percent right now after having been at five point four percent for the last couple of months. But I expect it’s going to get worse only because I’m looking at consumer prices and I’m looking what forgive me, I’m looking at producer prices. And I know that that’s going to transition into consumer prices. So producer prices are quite high. You’re seeing those upwards of eight percent. They they have to either absorb those costs, which means lower profits. And probably less employees, etc., or or they then transferred those costs on to their customers and increasingly what we’re seeing is those costs are getting transferred onto customers. So you can expect, by the way, even if best case scenario, you’re looking at two percent inflation a year, that adds up over time.
So in the future, if you’re going to be on a fixed income, you want to make sure that you have hedged out inflation. I think the best way to do that, I mean, there’s several different ways. I like real estate. I like being in equities in general, but I really, really like gold. And if you listen to this show, you know, I like gold because I talk about it a lot. And I want to encourage you to look at it, too. [commercial]
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