I have spent my career in the financial markets, with an approach focused on risk analysis and trading that is honored through Credit Prism. I believe that the credit markets are the most important, the most informed and unfortunately the most misunderstood of the various risky asset silos.
Credit analysts are naturally pessimistic. They always ask, “How much can I lose?” Unlike equity analysts, who believe that trees grow on the moon and that growth can be accelerated forever. Credit analysts prefer mathematics, negative sensitivity analysis, claim assurance priorities, and can calculate the speed of a bond’s price – on the fly – from changes in credit spreads.
I also like statistics in thematic analysis. Mathematics is a basic level of language, yet many investors are illiterate in this capacity. While this leads to the opportunity for extraordinary capital structure arbitrage for credit-centric hedge funds (my previous life) who trade credit against the equity and equity derivatives of a given company, it is often used by retail stockholders who use cannon fodder.
This is life. Play stupid games, win stupid prizes. If the unsuspecting investor does not understand the credit and the bond / value but still invests in the equity of an equivalent company (subordinate claim), he / she is exposing himself to the potential world of injury.
While denying this claim, I would like to focus on the current Evergrand situation in China and what it means for risky resources worldwide. I will examine the potential impact of the transition to China’s internal credit market, the transition of risky assets around the world, as well as some potential macroeconomic concerns. I also conclude that the impact of credit transition is growing for sovereign credit, and BTC is the perfect insurance against rising fiat credit standards.
Do not overthink this. BTC is sovereign credit insurance (long volatility) No. Opponent’s risk.
Possible default size
In the context of the recent meaningful global default, Evergrande debt is not an issue. Evergrand has a total liability of 300 300 billion, of which 200 200 billion is pre-payment for housing for Chinese citizens. The balance of exposure is debt, both coastal banks and public debt, as well as offshore debt to international investors. Compare this to Lehman Brothers’ default $ 600 billion on-balance-sheet exposure, as well as multiples of off-balance-sheet derivatives and credit default swaps (CDS). Goldman recently calculated potential off-balance sheet liabilities for $ 155 billion (one trillion yuan) of Evergrand in “shadow-banking” exposure. This is worrying because it is like a Lehman moment but again, it is not catastrophic in the global context.
Lehman’s risk of infection was easy to understand, as the whole system was on the brink of an opponent whose insurance contract (CDS contract) could not be claimed. Remember, the rumor was that if AIG was allowed to fail, Goldman would also fail because it bought so much insurance from AIG to cover its exposure (both client exposure and policy exposure).
Another global default whose macro effect was the restructuring of Greece in 2012. It was over 200 200 billion, and when trade claims and other non-performing liabilities were considered, the overall restructuring was smaller than Lehman’s, but still as large as the two Evergrands (before adjusting for economic growth).
Therefore, since the size of a default goes up, I think it should basically be in the Chinese high-yield (HY) market and other related credit markets. Total global debt is $ 400 trillion. I know I’m old enough to remember that debt 100 billion in public debt defaults was significant (such as the “LDC debt crisis in 1988”, for example) but with all the increase in debt, the inevitable global debt spirals, and the liquidity that central banks market Coming, I believe the risk of infection is low. Not zero, but certainly nothing like the Lehman moment. Shadow banking concerns should be with banks in China and Asian credit exposure, so see Bank Certificates for names like Standard Chartered and HSBC for indications of its spread.
Chinese HY and IG market response
Just looking at the Chinese HY market one can feel the pain felt in the price action of the bond. It would be more accurately defined as the Chinese “double debt index”, since the market is largely made up of property developers and among those developers, the Evergrand index weighs about 15%. The yield on the index is 14% (about 4% compared to the US HY index).
However, there are some meaningful considerations, including some bond mathematics. First, the US HY market is much more diverse, much more diverse and experienced players by industry, and there is a truly poor debt group of buyers who live under the HY market. If a credit crunch or distress arises, U.S. distressed buyers come forward to fill the buyer’s void from the persistent “ongoing concern” HY buyers. The Chinese HY market is smaller, much less diverse, and much less experienced in terms of education history.
Bond math consideration is also important. When less than 50 cents of debt is transacted in dollars (25 cents of debt in Evergrand in dollars), the yield-to-maturity (YTM) calculation makes no sense and compares to garbage. Debt is no longer trading at a maturity value (100 cents per dollar) but at a recovery price. In other words, in the case of a debt business in Evergrand with a 25% claim, buyers are calculating returns on the rate of recovery rather than the rate of return on cash flow internal rate (IRR) or YTM with 100% capital payment. . Thus, 14% of the Chinese HY market is looking at YTM and sending faulty comparisons.
In contrast, the investment-grade (IG) corporate debt market in China holds quite well. Credit spreads have actually shrunk, reflecting any contagious concerns. One could argue that the IG market sees systematic risks as declining. I will not draw immediate conclusions, but suffice it to say that the IG market will expand meaningfully if there is a real systemic concern.
Risk of long-term infection
The risks of actual infection in China can be more psychological. Confidence in land as a storehouse of value can be affected. Real estate has always been a significant investment in a portfolio of Chinese, and more than one million Chinese customers could lose a large portion of their prepayment. The trickle-down effects include a slow domestic economy (land sales amount%% of GDP) and declining consumer confidence. Lower consumer costs will have a natural effect.
The five-year China CDS also had a default insurance spread. In the eyes of the default insurance market, China default risk now reflects more BBB-rated credit than single S&P ratings. This is important, as the world’s second largest economy is leaning towards a junk-rated credit. Another rating downgrade (in the eyes of the market, BB) and it is now an HY or subscriber. That’s great!
Finally, it will be very interesting how China deals with domestic claims against international donors. I know how a capitalist court will deal with this situation. There is such a precedent in the West and it gives a well-worn roadmap to debt-ridden investors. The CCP is a different animal and its “noise” is a priority-claim model that legislation in the West can significantly increase its orrowing costs when international investors decide to avoid Chinese exposure.
Also, think about China banning bitcoin mining and how it actually is a gift to the West True Global capital flows. These two events could lay the groundwork for further centralization (and control / misuse of capital) by the CCP, the decentralized model adopted by freedom-loving Western countries. Markets are usually smart in the long run. In my opinion, of course there will be long-term consequences.
How does Bitcoin fit?
I have long argued that Bitcoin should be considered the default protection in Fiat currency baskets. If the second largest economy trades as a junk or consumer in the eyes of the market, the value of insurance offered by Bitcoin should increase as other, less important countries, and credits are also dragged into a vicious circle of increasing sovereign credit quality.
This is a very big issue in my mind. Mentioned in my paper (published by Bitcoin Magazine In April and attached here), the underlying value of BTC based on CDS of a basket of sovereign credit was over $ 150,000 per currency Previously The recent expansion of CDS. Since the internal value of BTC increases when the spread widens Internal The value is now Increased.
Some readers will say, “Well foss, there is no water in your thesis then. BTC is acting as a risky asset.
In response to which I say, “The wheel of training is still on in the BTC market. The market does not understand that BTC is a Long Instability The position when you have short credit, you are long volatility. And a small credit position in a basket of BTC sovereigns.
Proceed accordingly. In my 32 years of risk management I have seen BTC is the best asymmetric investment opportunity (and hedge). Fiat is the register.
“But Foss, they can print money to pay n print!”
This is true, but in a debt spiral, debt never matures, it needs to roll over. And when an auction fails and the debt does not roll, the declining tide will show who is swimming naked.
All fixed-income investors own BTC as an insurance against the inevitable fiat mismanagement (bonds are just a fiat contract), as well as declining sovereign credit quality.
This is a guest post from Greg Foss. The views expressed do not fully reflect their own and BTC Inc.’s Bitcoin Magazine.