Welcome back to the channel everyone today, i want to talk about how we're on the cusp of potentially the biggest market crash. There's ever been how it's not just evergrande, that's teetering on the edge of bankruptcy, but many other chinese property developers and banks as well. So stay tuned and let's make some money, but before i dive into the video, if you haven't already be sure to sign up with me using the special thomas, james, investing promotion, you don't just get a free stock worth up to 350 and a second free stock. With a guaranteed value of 50 on top of that, but you also get a third free stock on top of those with another guaranteed value of 30, linked in the description below, and i want to dive straight in with the key information.

So there's a bunch of key due diligence. That's been performed, most of it's been done by the last bear standing and also by this guy that i don't think i can pronounce any of those words. Obviously i'll link all of the due diligence and research that's been performed down in the description below the best source. I think is this from the last bear standing, which is his master thread that contains all of the due diligence he's done up to this point.

But let's dive right into it, evergrande why most analysis is dead in the water and how best to understand and navigate what's happening. Both the nihilists and alarmists are getting it wrong. Let's start by understanding this, what is happening is the result of a ccp initiated policy change to curb leverage. It started a while back and has seen other defaults, including soes, which is state-owned enterprises or chinese government entities.

What are the specific policy changes? Most importantly, it's the introduction of the three red lines. A year ago, the l over a ratio, which is the liabilities to asset ratio, has to be below 70 percent net leverage has to be below 100, and cash to short-term debt has to be over a ratio of one. So what was the point of the three red lines well, first and foremost, to forestall a systematic crisis that could have brought down the whole financial sector as in the entire financial sector worldwide. If left, unchecked real estate amounts to a significant chunk of china, gdp with strong linkages upstream and downstream and believe it or not, the sector was leveraged to the gills.

The three red lines are hardly draconic, yet all of the triple c, a large chunk of the b and a good third of the double b companies did not pass these ratios a year ago. Needless to say, it was really not too early, but there is more to it than just leverage one common practice of these construction companies. A game that evergrande excelled at was to bid land at prices significantly higher than the market. It didn't matter to them, because the risk got transferred to flat buyers and banks that financed the purchase.

Basically, evergrande and a bunch of other real estate developers in china didn't care what they were paying for their inventory and their land, because at the end of the day, they could just sell it off when they built the properties and it would be financed by the Bank, so they didn't really assume much risk anyway, and that model worked well for local governments, banks and households, because house prices were going up so much so that over the last 15 years a serious affordability crisis emerged in major cities and household debts sold way above Disposable income, so it wasn't hard to figure out the economic disaster in the making exponential price rises with explosive household and construction leverage. But that's not all there's another problem that escapes most chinese analysts as a result of years of seeking easy growth through construction and leverage. The misallocation of capital was won, capital starving, more innovative and high-tech sectors and two creating a headwind for a re-balancing towards a more consumption-driven growth. And that's why so many chinese investors were also coming over to the uk and to the us to invest in u.s and uk real estate because that's what they knew best, but so what kind of impact did this have on evergrande and their balance sheet? How is it that evergrande is going bankrupt and defaulting on its debt if they had massive massive values of assets and massive values of land? The mainstream focus is on evergrande, because it's the biggest domino to full and seen as a litmus test for state response.

Now that we have the playbook rapid deterioration, no white knight, no state intervention, we need to think forwards, not backwards, and by that it means the ccp aren't coming in to help every grande, because they were effectively the ones that put these ratios in place. In the first place, causing evergrande to go bankrupt, so they're not going to come to their rescue because they are trying to avoid an entire financial system collapse. Consider this question seriously: how is it that evergrande is insolvent? It's never reported a loss, even in the first half of 2021, it showed a profit of 14.5 billion renminbi. It has current assets in excess of its current liabilities in every single period.

It's a dumb question. That's actually illuminating! You will never make a loss if you never acknowledge the expense of malinvestment as in. If you never write anything off, if you don't expense your losses, they still show up as assets on your balance sheet, where in inventory, evergrande has 1.4 trillion renminbi or 221 billion us dollars as current inventory on its balance sheet. As of the 30th of june 2021, and has yet acknowledged, it's been unsuccessful at monetizing any assets, including its own headquarters, how embarrassing anything of value has already been sold or pledged away? Basically, evergrande has 221 billion dollars, sat on its balance sheet in current inventory, but says that they can't raise cash because they've already sold off anything of value.

Here's a graph that shows evergrande's current assets in blue versus current liabilities in orange. The yellow line shows a current liability ratio. If it's below one, then there shouldn't be any liquidity issues above one, the company needs to fund the shortfall and there could be liquidity issues. So, as you can see at the moment, the blue line is always larger than the orange line, meaning they've always got more assets than liabilities and their current ratio is always below one meaning.

They've got sufficient assets, but here's that same chart, but with the inventory value removed from the current assets earlier in its growth and china's urbanization, the company was growing and the shortfall could be filled with expanding credit. However, since 2016, growth has flatlined, as liabilities have piled up, basically their other assets being cash receivables and due income has fairly flatlined, while their liabilities have been mounting substantially. Inventory includes land banks, work in progress, construction and completed inventory in evergrande's case. The value of their inventory has been proven to be zero.

Recent reporting says land sale value is down 96 year-over-year in september, basically also meaning that chinese land is currently worthless. So also doesn't do well for their current asset position or their inventory position and that's how a company that's never reported. A loss can go insolvent or bankrupt by hiding 220 billion us dollars of losses in current assets. Okay, fine, but the global times tells us.

Evergrande is truly unique right. No other chinese real estate development company has that kind of worthless inventory right. Well, here's the same two charts for another major property developer, as reported its current assets have always exceeded its liabilities, but removing inventory is asset. Growth has stalled since 2016, while its liabilities exploded, that company was sunac stock, ticker, symbol, 1918.hk and since last week's warning, the stock is down 18 and has also been in a continual downtrend over the last six months.

And here is another very large chinese, real estate development company, again showing the same outweighing in current assets over current liabilities. Until you remove the inventory value, that company is country, garden, stock, ticker, symbol, 2007.hk country garden is the same size as evergrande, and their stock is down 16 over the last two trading sessions and therefore evergrande is not unique. Rather, it is typical and that's a much scarier thought. It'll only become harder for remaining developers to survive as the real estate market and land values go to zero and debt funding evaporates, and that is the main reason why the ccp can't rescue evergrande from bankruptcy, because they can't just continue propping up this worthless inventory.

With more and more and more funding, they can't just continue giving these real estate development companies more and more cash to continue bidding up the value of land way more than it really should be. The market's first mistake was counting on government support forever grande and underestimating the state of its finances. The mistake the market is now making is not repricing risk for similarly cash-strapped developers, who now also must contend with the contagion the opportunity to trade evergrande is done, but in his opinion a major opportunity is to play developers that are deemed as safe, and this is In a way exactly what happened in 2008, the triple c tranches of the bonds were the first to go, but then also the bees double b's and triple b's also fell shortly after and that's exactly what's happening in china at the moment. Yes, evergrande have now gone bankrupt, but soon some of the safer, safer real estate development companies are also going to go bankrupt as well, and the last bear standing also reckons that banks are where systematic risk lies.

The massive dollar bond funding was a critical funding avenue for the past several years and ultimately, those lenders will hold a bag. We saw over the last few days there's some major u.s institutions and banks holding large portions of evergrande bonds like vanguard, blackrock, hsbc and more. But i would also imagine there's also tons of us institutions that hold bonds in other, safe chinese, real estate development companies and the last bear standing says i don't trade credit. But if i did, i would try and find anyone willing enough to write a credit default.

Swap on a stable property development company like country garden and that's exactly what michael brewery did back in 2005 to 2008 as depicted by the 2015 film, the big shore. But surely this is capped at evergrande, sunak and country garden. Right well probably wrong there as well. Evergrande is the gorilla, but it's not unique, nor is it the first below is the debt and equity trading of large stressed developers in chronological order from when their debt began to fall.

The first domino was china fortune land development who had 61 billion dollars of liabilities and defaulted in january. We then have china, south city holdings, with 10 billion dollars of liabilities. Back in january 2021, their bonds were trading a hundred cents on a dollar now only 69 cents on the dollar. We then have yuzu with 21 billion dollars of liabilities, xe lang, wang with 31 billion dollars of liabilities, evergrande, obviously, with 304 billion dollars of liabilities.

The central china real estate with 23 billion dollars of liabilities, ryze sun with 36 billion sunshine city, with 7 billion fantasia, with 12 billion, and also gangs, al rnf, with 51 billion dollars of liabilities. What does this tell us? Firstly, evergrande is not unique; rather it's one of many. Secondly, collateral has been getting squeezed for months as defaults amount and thirdly, the most recent sell-offs have been getting more, abrupt and more violent. It's not coincidental.

It's a chain reaction. If a developer defaults lenders cut lending to its peers as lending dries, it makes those peers much more likely to fail as well. Each default also decreases the expected recovery, as fire sales crush the underlying market value of the properties in the land. Each of the names combined above total to half a trillion dollars in total liabilities, and it affects the entire ecosystem, as it also relates to payments to suppliers, employees remaining construction costs and more.

The key questions at this point are one which developers are next and two will this spill over into the banking sector, which he believes poses the largest systematic risk, and we know that chinese banks and u.s banks have massive loan exposure to these developers and their collateral Is withering contagion is the next step. Contagion is a disease that spreads it's a crowd. Panic of self-preservation creditors were forced to take losses on evergrande and for some it could be fatal if you're a lender to property developers. Your only concern is saving your own arse.

Maybe evergrande was in a worse position than others, but at this point, do you want to take that risk developments are in fire, sale, property sales and prices are down meaningfully beijing clampdown continues and developers lost access to new debt, which provides their liquidity new credit developers. Dried up months ago, existing bank debt may be able to be rolled simply because of bank accelerating on an insolvent company may spell its own demise. But if you own tradable debt - and you want out, you must move fast and accept deep discounts to move size. And this is how bond prices plummet.

One person takes a five percent haircut to get out of their position and by doing so forces a five percent haircut on the entire bond in the process where this gets really messy is when the contagion spreads from property developers to banks. If the concern moves from direct exposure, as in banks not wanting to lend to property developers, because the properties are worthless to concern of your counterparty's exposure as in banks, not wanting to lend to other banks because their collateral as in those properties, are worthless. And therefore, you know that that bank isn't going to get its money back and therefore you know that that bank could potentially also be insolvent then into bank lending stocks as well. And this is how it's going to impact on amc, because it's not just going to affect chinese real estate companies.

It's also going to affect chinese banks, but it's also going to spill over to u.s banks as well, because of the amount of exposure that u.s banks have on these chinese property companies and on chinese banks as well, and therefore u.s companies going to lose billions and Billions potentially trillions of dollars of their investments in these chinese property companies and these chinese banks, when they all start falling over like dominoes those massive massive losses in u.s, banks is going to cause them to start reshifting their portfolios and selling off tons of u.s equities. As well, obviously, that selling of tons and tons of us equities or potentially the exchanging of those equities with the dtcc is going to cause the u.s market crash and the way it's going to impact amc and the reason why it's going to be good for amc Is twofold one? Those institutions aren't going to be selling their long positions in amc, because amc has a negative beta when the rest of the market, crashes, amc, won't crash and amc will go up and those banks with over leveraged short positions in amc, aren't going to have enough margin. In their accounts, because the rest of their account is going to fall in value, therefore, they won't meet the margin requirements. Therefore, they're going to have to close their over leveraged short positions in amc and, obviously the closing of those short positions means buying.

Back of amc shares, meaning that amc is going to go straight to the moon. There's also a very, very interesting potential tinfoil hat theory that evergrande has been getting lots of its debt from tether, the cryptocurrency or the stable coin. But that's another video entirely that i'll make over the next few days, and it looks like some people out. There are already seeing this market crash on the horizon.

Kathy woods sold off another 31 million dollars worth of tesla on thursday, and the total is now 297 million dollars worth of tesla that she sold this month. Guys be sure to. Let me know down in the comments below what you think about this chinese property crisis. Impacting many many more companies other than ever grande and how it's going to spill over into chinese banks and also into u.s banks and institutions as well, and also, if you haven't already be sure, to sign up with moomoo using the special thomas james.

Investing promotion linked in the description below to get not only the two free stocks, but also a third free stock as well, and as always guys. If you enjoyed this video, be sure to check out some of my others. Alternatively, subscribe to the channel and in that notification bell, because that way you will be alerted when i upload a new video cheers.