Evergrande could be the domino that brings the house of cards down:

Evergrande.

It feels like the world isn’t paying enough attention to what’s going on.

It could be like Lehman Brothers in 2008.

The beginning of the next great financial crisis.

First of all, who is Evergrande?

Bloomberg does a great job of explaining it (here) but lemme do the abridged version.

Evergrande is one of the largest real estate developers in China that largely expanded by borrowing A LOT OF MONEY.

The world’s most indebted developer had a money crisis in 2020 and sent a letter to the provincial government in Guangdong, one of the largest provinces in China, warning officials that it may not be able to pay its debts.

Well turns out now it might default.

This could send a ripple effect across the world because it’s linked to so many banks.

It’s Asia’s biggest issuer of junk bonds, which are high-yield high-risk security issued by a company needed to raise capital quickly.

Now they’re saying they’re in a major debt crisis and have protestors showing up at their headquarters demanding to be paid back.

They’re default would have ripple effects across the global economy.

Everything is connected.

Think about this:

If they default, the Chinese stock market could tank.

If that tanks, many investors around the world who have flocked to China in the last decade would lose lots of money.

If they lose lots of money, especially the ones trading with margin debt, they may not be able to maintain their accounts.

If they can’t maintain their accounts, they start defaulting.

This creates a cascade and domino where little fish fall first before the big fish goes.

How big will this thing get?

I suspect bigger than any time in history.

Everyone around the world will know.

As Jeremy Grantham put in a most recent interview this is a bubble of ‘epic proportions’ that makes 1929’s stock market bubble look small.

This is a bubble across multiple asset classes.

Stock market? Bubble.

Bond market? Bubble.

Real Estate? Bubble.

Cryptocurrencies? Bubble.

There’s a great thread on Twitter explaining how this could collapse the crypto market.

Now what happens when you start seeing negative news stories, people defaulting and the market starting to crash?

People’s psychology comes into play. Loss Aversion – people hate to lose things more than they like to gain them.

Mass selling everywhere.

You know who wins in this situation?

Those who bought into the meme stocks because they’re going to get paid when the rest of the financial world blows up. It’s something the world has never seen before.

Was listening to a podcast interview today with Ben Mezrich, the author of a new book called the Antisocial network, which talks about the Gamestop debacle in January. He also wrote the Social Network, which became a great movie, and Bringing down the House, which turned into the movie 21.

As the interviewer was asking him questions, I couldn’t help but chuckle at how the world doesn’t know what’s coming.

Many people think it’s over.

That the meme stock thing was a small thing.

Even Jeremy Grantham referenced that as a crazy incident in the market, which it definitely was.

But does everyone really know who was on the other sides of those trades?

Some of the biggest hedge funds and market makers in the world.

What happens if they go under?

The banks go under.

If the banks go under, we have a crisis we haven’t seen since the 1930s.

All because of greed, excess leverage and speculation.

Bubbles bursting are healthy for an economy because it resets things.

The weak die and the strong survive.

The problem short-term is it creates massive social and civil conflict, especially in those places where it’s worst.

That’s the US right now.

The US stock market, crypto, the housing market and bond market feel like a powder keg waiting to blow up in the most spectacular fashion anyone has seen.

But we need it. We need a reset. We need wealth redistribution. Too bad this time it’ll be from the rich, institutions and endowments to the people in their basements playing video games who spend all their time online.

Follow your curiosities. Follow the things that make you tick. Ask questions and go search for the answers yourself. Understand how the world really works, not what your parents, friends, teachers or priests have told you it is.

Do your own work.

That’s how I was able to connect all these dots.

Could none of this happen? Absolutely.

I hope it doesn’t. I don’t want people to lose jobs, houses, healthcare and their livelihoods.

But we’re all pawns in a game.

We all have roles to play that we often have no control over.

We’re in circumstances we don’t control.

So control what you can control.

Let the rest go and enjoy the ride.

10-20 years from now this will just be another blip in history that only a few people keep studying.

Evergrande could be the domino that brings the whole house of cards down.

Time will tell.