The Crazy Card Worth Carrying
Rodney Johnson | November 14, 2019 | Shanghai Pudong Development Bank recently sold $7 billion in convertible bonds. As usual, the bank took orders for the bonds ahead of time, and then allocated the bonds among potential buyers. What made the sale notable is that investors put in orders for more than $1 trillion worth of bonds, or 140 times what Shanghai Pudong Bank offered for sale. That's crazy, but shines a light on what we all want: growth, with protection. The Chinese economy is slowing down, with GDP growth recently falling to the lowest rate in almost 30 years. The government worried that the financial crisis would derail the economic miracle, so it set about goosing demand by lending copious amounts of money. The results were predictable. Construction and infrastructure took off as developers and heavy industry used the cheap cash to build as fast as possible. Companies made tons of money… for a while. Now the government, worried about a debt bubble and what will happen when it bursts, wants to rein in the profligate borrowing and spending. Part of their plan is to adopt Western-style bankruptcies, allowing companies to fail instead of bailing them out as they have in the past. But when companies go under, they take investors with them, and that's a problem. The Chinese have gotten their first taste of losing money on bankrupt companies, and they don't like it. The experience has driven at least a portion of investors away from the equity markets, leaving them with few choices, like real estate and bonds. Property prices are already high, and developers in several major cities recently cut sales prices, leading to demonstrations by current owners who paid higher prices. That leaves bonds. The Possibility of Big Gains Local Chinese governments are notorious for working with shadow banks to issue debt used to finance big projects. The move keeps the municipalities within their official debt guidelines, but still gives them access to cash. These schemes can be just as risky as equity. Which leaves investors with large, well-known companies, and the new craze for convertible bonds. This year, Chinese companies have issued a record $40 billion in convertible debt, up more than 80% from last year. Just as in the U.S., convertible bonds in China carry a lower coupon than traditional debt, which makes them a lower burden for the issuer. They also offer the holder the right to convert to equity if the share price of the company rises to a certain level, giving the investors a way to participate if the equity rally continues. Until the shares convert, investors hold the bonds, which regulators favor in the event of a bankruptcy or some other problem. Chinese investors want the possibility of gains while getting at least some limited protection, which appears to be driving the incredible, and some would say crazy, demand for convertibles. But it's not all great news in the space. Like bond markets around the globe, many issues suffer with poor liquidity after the initial sale. Government bonds and those issued by large, well-known companies typically have respectable bid/ask spreads, but bonds issued by small or questionable firms can have a bid/ask spread you could drive a truck through. Gaming the System That's another risk that keeps investors in China and elsewhere focused on the biggest companies. As for being 140 times oversubscribed, that could be a function of the sheer number of people, and amount of money looking for a home, in the Middle Kingdom. It used to be worse. Before regulators cracked down on buyers bidding through multiple accounts, over-subscription numbers were much larger. China Citic Bank issued $6 billion in debt and received $33 trillion in orders, which is 150% the size of the U.S. economy. Most of that is gaming the system, putting in way more orders than can be filled, hoping for a bigger allotment. It's likely this is just the latest bubbling asset that will disappoint investors when the markets eventually roll over. While convertible bond buyers might get a little more protection than straight equity holders, it's unlikely they'll be happy when they receive pennies on the dollar after a long, tortured path through bankruptcy, and that's a feeling everyone understands. No one feels good about watching their investments take a nosedive, and we'd all like some protection against loss. With markets near record highs, GDP growth slowing, and an ugly election in front of us, now's a great time to protect some profits so you don't end up with the sinking feeling the Chinese investors, along with the rest of us, are trying to avoid. 
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He was even mocked on live TV for saying Hillary would lose. And now he's making another shocking Trump prediction... one that could hit America as early as the next few weeks. HINT: The "fake news" media will NOT cover this developing story. Click here to see it. | Trending Stories... I love to ask people who they think are the highest-earning ethnic or immigrant group. They almost always guess Japanese or Chinese… But those guesses are not even close. It's the Indians. Look at this chart of median household income… the average numbers would be even more skewed. The median U.S. household income is $63,179.... I peruse at least two newspapers, three blogs, and one financial news program before breakfast. Once I get the official workday underway, I dive deeper into research on the Fed, consumer spending, or whatever happens to be the topic du jour. Using my knowledge, I write mostly about economic trends and work to bring you... Wall Street continues to be convinced that the economy is edging back up again after a stall following the tax cut boost and near 3% GDP figures in 2018. I talked last Monday about how there were some key indicators like industrial production growth and construction spending that were not confirming such a resurgence… at... I've been harping on this megaphone pattern for quite a while now, but you've got to remember, there's a reason why these megaphones are so important for predictions: They tend to occur at the major tops before a fall. Think 1965, 1968, and again in 1972. Three tops to what's clearly now a megaphone. What... Last weekend McDonald's dismissed CEO Steve Easterbrook for having a consensual relationship with a subordinate. The relationship broke the rules, which Easterbrook admits. The company obviously fired him for cause. For his troubles, he walks out the door with $700,000 in severance, plus a potential $70 million in stock and options. It must be terrible... | 
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