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A Different Way To Think About The Evergrande Collapse by Simon Black

Evergrande has roughly $300 billion in liabilities. Even if that entire amount goes to zero, it’s a small fraction of the Chinese banking system’s $5+ trillion in capital. I’d be much more concerned about Evergrande’s impact on China’s notoriously overleveraged ‘shadow banking system’, and their high-risk ‘wealth management products’. But we’ll save that for another time. What I take away from the Evergrande collapse is the reminder about how seemingly innocuous events can have a major impact on global financial markets. Especially now. Stocks, bonds, real estate, and many commodities are at/near all-time highs, some with valuations that are completely absurd. Today, the Price/Earnings ratio for a typical S&P 500 company is nearly 50% higher than before the pandemic. Companies’ revenues and profits are essentially the same as they were in January 2020. Yet stock prices are substantially higher. The situation is so ridiculous that even an analyst who works at S&P wrote earlier this month: “This Market Is Nuts”.

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