I hope everyone had a great weekend and stayed cool in this heat! Wanted to give a big thank you to Dan Williams on his help getting this weekend reading together. He just finished up his internship at Novem and has been a great asset to the team!

By Stephen Mitchell

Evergrande & the Chinese Government’s “Three Red Lines” Policy

This is a follow-up from a previous weekend reading from the fall of 2021.

Mortgage boycotts are forcing China to relax its crackdown on indebted property developers like Evergrande

Indebted property developers like Evergrande have struggled to obtain cash due to Beijing’s crackdown on those type of companies.

This is due to what the Chinese government dubbed the “three red lines” policy in August 2020 to impose caps on amount of debt housing developers are allowed to take on, causing a ripple effect of mortgage boycotts and stalled housing builds:

  • Chinese homebuyers were paying mortgages on unbuilt houses, funding the construction of those homes.
  • Buyers became unwilling to continue paying during delays in construction.
  • Led to China’s banking regulators ordering banks to give more loans to housing developers to continue growth and finish unbuilt housing projects.

Demands to clean up balance sheets proved difficult for a company like Evergrande who built up over 300 billion in debt over years of iffy spending habits.

China is now showing that enforcing the three red lines policy might not be its top priority as they have extended more loans to developers with the goal of quieting the mortgage boycotts.

New policy – or adjusted three red lines policy that is – should provide some immediate relief by helping developers complete housing projects but could put more pressure on indebted housing firms.

  • Never a good sign to see a large world economy like China going through problems like this when previously they were surging – partly due to a boom in the real estate sector. Even if this new policy frees up property development and gets the economy going in the short term, is continuing to see the Chinese government prop up their economy really what we want? We will see but it’s hard to ignore the actions of an Evergrande allowing themselves to build up so much debt, without being able to finish developing property.

Fed Hike and Wage Growth Tracker

Wage Growth Tracker – Federal Reserve Bank of Atlanta (atlantafed.org)

The Atlanta Fed’s wage growth tracker measures the nominal wage growth of individuals using data from the Current Population Survey (CPS). The linked interactive chart allows for different data points to be looked at and compared when it comes to wages.

Due to the high inflation, wage growth has continued to pick up

  • Interestingly the bottom quartiles (lowest median wage earners) have benefitted the most in terms of percentage wage growth. With the first quartile growing at 7%, while the 4th quartile only grew at 3.7%.
    • Obviously 7% growth off NYS minimum wage of $13.20 in actual dollars is significantly different than the 3.7% from high end earners.
      • But it is still interesting to see some income inequality slowly resolving through market pressures
    • Ironically however to get inflation under control the Fed needs to kill this positive impact by raising rates to kill the job market and the associated wage inflation.
      • I don’t envy the position Powell and the Fed are in!

    The Fed has a dual mandate for full employment and price stability.

    • With the continued tight labor market and low unemployment, they can continue to focus solely on curbing inflation
    • Currently, the market is expecting a 75bps rate hike this week. But could potentially be 100bps if the Fed is confident enough that both the market and economy can sustain the aggressive hike.

Turning down $440 million?

On Monday, July 18th the MLB Home Run Derby took place with the young 23-year-old Washington Nationals star Juan Soto taking the crown. A week earlier, Soto had remarkably turned down the largest contract offer in MLB history: a 15-year, $440 million dollar extension to stay with the Nats. After making headlines by turning down that offer, ironically the number 440 came back to save him. In each round of the derby if a player hit two homers over 440 feet, they were awarded an extra 30 seconds of bonus time. In the finals, Soto edged out his opponent, 21-year-old Julio Rodriguez of the Mariners, by 1 homer. Soto earned his extra 30 seconds for the 440-foot home runs, Rodriguez did not. Funny how that worked out for him.

Side Note: Following the aforementioned 21-year-old Julio Rodriguez’ big showing during the All-Star Break, a report came out – albeit from a highly speculative sports reporting source – that the Mariners could and might offer him a 20-year $1 billion dollar contract into his age 41 season. Not even inflation can explain these ridiculous contract numbers!

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