Why are global markets spooked with what is happening in the Chinese real estate company Evergrande?
Basically we are witnessing a possible event like what the United States witnessed back in 2008-2009 with the Lehman and the Bear Stearns situation and the banking system. Evergrande owes a huge amount of debt and it is having difficulty in repaying it. So they are staying with the default that could drag down the Chinese banking system. Now the real question is will this happen? My guess is it probably would not because if a capitalist country like the United States managed to save the banking industry, the economy and the global economy as well, there is no doubt in my mind that the Chinese government, which is a controlled country, will step in and they probably either would be nationalised or subsidised.
But the fear factor is going to be worse than the event itself and I think that is what we are experiencing today. The markets are down across the globe and so this fear factor is going to be nerve wrecking for investors. At this point, investors should be very cautious.
Tell us the other factors that are seeing the US markets in the red today. The FOMC meeting is also bothering investors as is the number of cases of the Delta variant of Covid?
I am not too sure that the FOMC is really bothering investors because to begin with, we are certainly not going to change monetary policy anytime soon. Yes, the talk about tapering would amplify and eventually perhaps in October-November, a date will be given when tapering will begin. So despite media headlines suggesting that as a fear factor, it is not really one. If the Fed were to announce tapering, that will be a good thing. Maybe investors are more spooked over the possibility of inflation being long lasting and transitory as the Fed suggests.
I do not think that investors are really that worried about the FOMC meeting or its statement. They are worried about inflation, they are worried about what is going to happen and the potential problems in China. The chaos in Washington is another factor. So, there are factors out there that are going to be a problem in the short term for the market and this lingering factor over China is probably the biggest fear factor the market is encountering.
