Dear Bears,
The fun in China continues post Evergrande as " Banks in Asia are getting caught in the latest flare-ups in China’s real estate crisis, as more than $1 billion in property-backed loans is at risk of default unless extension or refinancing deals can be reached.".
It came out Friday that GAW Capital Partners risks a default on a $260M Shanghai property loan; they missed a payment and technically creditors can call the loan. GAW received an extension of this loan already on November 2024 and now is trying for another. The purchase for this property was originally $421M (3 billion yuan). They have another $110M loan that matures November 24th too.
Isn't it interesting that just a few weeks before this GAW decided to wind down business in the West to focus on Asia? Things that make you go hmmmm.
Just in April GAW was raising $2B for its Gateway Real Estate Fund which aimed to invested in private equity and credit deals and now is at risk of default and closing operations in the west?
Our friends Blackstone are also in the mix here too, of course. Bloomberg reported on October 27th, 2025 that in 2014 Blackstone invested $90M into a retail space and today the value is less than half of that and $BX is trying to renegotiate terms. The article stated "that’s eroding the collateral value behind many bank loans, which could lead to margin calls, refinancing challenges and in more severe cases distressed asset disposals.". They have taken multiple hits trying to sell property they are underwater on here.
What I find also interesting is in May it was reported that banks were trying to pare exposure while private credit funds, like GAW, were trying to get in by launching new funds. Now here we are in November and GAW is at risk of default.
Meanwhile Chinese GDP is on track to continue to slow and possibly head below the government goal of 5%.
Current growth is likely fueled by the stimulus that China's PBOC has been pumping since things began to hit in 2021 with Evergrande and never really recovered. Continued property troubles will not ease the situation. China has continued to fight off deflation and even with a recent small boost it is not enough to reverse any trends. Bloomberg analysts also showed that some 70 everyday products and services dropped more sharply than the headline CPI.
China's factory output and retail sales grew at their weakest pace in over a year as tariff war impacts demand:
As this drags on it will continue to pull valuations down and impact loans. Headline figures are likely being propped up by the government/PBOC but lower demand will continue to press cash flows making refinancing a challenge over there.
Shanghai containerized freight index paints a picture of lower spot rates as demand is likely being constrained. SCFI now sitting at 1451.38 and down from 2024 highs.
Pivoting to the U.S., former fed member & Vice Chair, Lael Brainard, came out and stated a few days ago she would support a EFFR cut as the U.S. economy is seeing cracks under the hood and it's all being masked by AI.
What cracks? For starters construction employment continues the YoY decline which has usually been a good signal that a recession is in the works:
Currently the All Employee, Construction chart from FRED shows YoY change is now at 0.7 and starting to touch towards going negative.
According to RESI "for the first time in modern housing market history, U.S. single-family new construction, in aggregate, is no longer selling at a premium to existing homes. According to the ResiClub New Home Premium Index, the median sales price of new single-family homes in August 2025 was -0.2% lower than the median sales price of existing single-family homes—an all-time low".
Manufacturing PMI shows contraction in October at 48.7%, which follows two months expansion but itself was preceded by 26 straight months of contraction - stated in the October PMI report "economic activity in the manufacturing sector contracted in October for the eighth consecutive month, following a two-month expansion preceded by 26 straight months of contraction, say the nation's supply executives in the latest ISM® Manufacturing PMI® Report":
Then we have places like $MCD, $CMG, $SBUX, and other food places stating they are losing low income consumers as they can't afford current food options. A study titled " The State Of The Nations Housing" by Harvard University stated "for the third consecutive year, the number of cost-burdened renters reached another record high in 2023 at 22.6 million renters (50 percent). This includes more than 12.1 million (27 percent) who are severely burdened, spending more than half of their income on housing and utilities.". Folks now are being forced to choose between luxuries and simply staying in their residence. I suspect this is likely why we see the current administration now walking back tariffs on beef, coffee, and some other food items as of Friday November 14th, 2025.
CASS Freight Index on shipments and expenditures is trending into recession territory as well:
There was an August 2025 article written by Michael C. Randle in the Southern Business & Development that stated "Based on raw but triple-checked data, this is the worst six-month period in the South’s modern economic development history regarding job- and investment-generating deals announced publicly by a corporation. By rule, if the deal is not publicly announced by a member of the company making the investment, it is not a deal to SB&D. It’s a dog.
These numbers are also worse than any recession I have covered since 1983. So, in short, the worst we have ever seen, even if technically the U.S. is not in recession.
And if deals are cratering like this in the South, the most desired economic development region in North America, then they are much worse in the Midwest, West and the Northeast. SB&D does not cover economic development in those U.S. regions. ".
Like I wrote in post 262 "2024-2025 business chapter 11 filings are highest since 2014 and this is in a world of LME's. Chapter 7 filings are on par now with 2020. AMZN cutting 14K, UPS cutting 48K, Paramount with 2K, TGT with 1.8K, Nestle with 16K, Lufthansa with 4K, GM with 1.2K." and now Verizon with largest cut in their history with 15K or 15% of the workforce. Then a silicon chip software designer Synopsys is laying off 2K in Bay Area.
Liquidity wise, the U.S. has the over night reverse repo sitting now at $1.559B as it has been drained from the $2T highs and this at the same time bank reserves themselves are starting to trend down - now below $3T:
We have markets making new highs all the while the above are taking place. We now also have QT ending December 1st, 2025 and Reuters reported that " New York Federal Reserve President John Williams reiterated on Wednesday the time is getting closer when the U.S. central bank will have to restart bond purchases as part of a technical effort to maintain control over short-term interest rates". I don't expect a quick pivot into QE but I think the fed will be forced into more action than they anticipate in coming quarters.
Why? The problem for the fed is there is no telling how deep leverage goes. I mentioned before about KKR but if we take them as only one example KKR owns about 25% of Marshall Wace and Marshall Wace gave $1B to Northridge. Now that's a few links in a chain that if anyone breaks it impacts the rest. Throw in we have so much growth in private credit that even banks are feeling they're missing out. PwC stated banks risk missing $70B in annualized lending revenue and with the amount of refinancing coming due they will want a piece without the restrictions they face. Then you have consumers racking up revolving credit and even leveraging BNPL programs to keep current lifestyles floating.
Leverage is just flowing everywhere and with weaker growth this leverage becomes much harder to control. Cash flows get squeezed, covenants should get tighter, and dogcrap is asked to pay dogcrap prices.
And that brings us to equities. Shiller P/E touching 40 and currently sitting at 39.72 while FINRA margin use made new highs in October at $1,183,654M all while the S&P 500 does the same (using SPY):
I bring back up this paper titled " IN SEARCH OF THE ORIGINS OF FINANCIAL FLUCTUATIONS: THE INELASTIC MARKETS HYPOTHESIS" where the authors found both "theoretically and empirically" that money flows have a great impact on price and risk premia. They found that $1 invested increased value by $5. Now with leverage use this high it isn't hard to imagine a scenario where a domino falls, maybe starting in China, maybe in the U.S., maybe elsewhere, and the need to cover creates a rather large snowball effect as flows move the other way.
With Lael Brainard stating cracks are starting to form under the hood of an economy increasingly defined by an AI-fueled divide, perhaps this is the entire point Dr. Burry is making with the depreciation posts. If the superficial market is driven on AI, as even Brainard states, and if the earnings are indeed overstated then perhaps valuations are too (they are). We're living on the greater fool theory to keep it going.
I mean here we have a report that data centers in Nvidia's hometown are sitting empty as they can't get power and even Satya Nadella is saying $MSFT is sitting on inventory they can't deploy because of power and yet the spend into AI just keeps increasing. Satya stated "The biggest issue we are now having is not a compute glut, but it’s power – it’s sort of the ability to get the builds done fast enough close to power. So, if you can’t do that, you may actually have a bunch of chips sitting in inventory that I can’t plug in. In fact, that is my problem today. It’s not a supply issue of chips; it’s actually the fact that I don’t have warm shells to plug into.".
How can $MSFT, $GOOG, $ORCL, $META, and others all be increasing useful life for depreciation at a time where some are also saying power is limiting the ability to even get going? Berstein Research notes that GPU's makeup 39% of this data center CAPEX race:
This excerpt from a book I read makes more sense, "If earnings otherwise are small this year, managers might lengthen the life of the equipment and increase the estimate of the salvage value. In this manner, depreciation expense is lowered and net income is increased. Alternatively, if earnings are healthy during this fiscal period, managers could decrease the life of the asset and reduce the salvage value. Depreciation is enlarged, but this protects the firm against the proverbial rainy day". We have large CAPEX spending into items that will likely be outdated quickly and the solution isn't one they can easily solve because the limitation is access to power supply. Money spent today to buy these things and no way to grow revenues off it, so may as well extend the life and keep the party going. Needed when so many insiders benefit from that party going too via SBC.
Meanwhile $BABA is stating they have developed a system that reduces the need for $NVDA chips by 82%. The U.S. is in an arms race and sitting on GPU's it can't leverage due to power constraints and competition is stating they've developed more cost effective ways to navigate the entire situation.
$CRWV has seen ~4% dilution since their first 10-Q released 5/15/2025. They are contractually obligated to buy only NVDA GPU's by their customers. Profit margin of -8% in Q3 but if you add back taxes, depreciation, interest expense (24% of revenue BTW), stock-based compensation, and even acquisition costs, then adjusted EBITDA is a beautiful 61%! It's bleeding cash but if you add back everything it takes to run the business, boy, the potential is huge!
18% of total liabilities come from current + LT deferred revenue and the company has at times granted payment terms of up to 360 days! SBC has increased by 1,917% since 2024 and currently is 31.6% of CFO.
$CRWV changed their useful life in 2023 which gave them a boost to earnings going from five years to six and bumped earnings $0.10 in that time. Now the problem is if they need to drop the useful life and/or salvage value then recovery value is smaller and then we head towards asset write-offs and impairments which mean their intended cash flow stream is shorter and results in impacts to cash flow assumptions and really valuations.
Oh, and calling back to ENRON days, $CRWV has a special purpose vehicle (SPV) with OpenAI where the SPV will that will hold the infrastructure and the SPV will also incur the debt to finance this! Meet the new boss, same as the old boss.
Once the exuberance wears off I think this changes the picture on valuation quickly. If $1 creates $5 of value what happens to the picture in reverse? Do we see -5:-1? Or do we see -10:-1? With leverage use this high forced selling is a real problem - more so as retail has binged on options trading at historic levels. It was just in October of this year that 108M contracts traded in a day making it the second time in history to top 100M.
It doesn't take much for the top of that K to unwind as paper profits need to be locked in and the greater fool is made aware. Pension funds, 401K, insurance...everyone has all their chips on the table.
I am not calling for a top or anything of the sort. Markets can remain irrational for a long time, especially as leverage use is in play globally. What I see is a series of large risks brewing in the market with many being intertwined. I do think we see the recession we have been funding off since 2022 in 2026. Between tariffs, tight monetary policy (which operates on a 18-24 month lag), China, and clear signs of accounting games, I believe the party will wind down. Equities usually are last to wake up and more so when we enter the "new era" speak as we are in now.
At this stage though I think to what Harry Schultz wrote in that preservation of capital should be an investors #1 goal then followed by increasing said capital. As Harry also wrote in the book "Bear Market Investment Strategies" where he stated "if you get greedy and reach for the precise top, you'll regret it, nine times out of ten". So, not a call to buy, sell, or do anything but highlight the risks I see forming in the market. My only conviction investment right now is long-dated $TLT as I explained elsewhere. I wouldn't risk puts or shorts so better to preserve capital until a clear sign forms there. I have $HAL in my portfolio which saw some nice bumps since I added 10/15 and even my $VET is finally moving. I cut my entire position on $FF on the lows it just hit. Otherwise almost a full position in $TLT and then the rest is now sitting cash.
"There were always ample warnings, there were always subtle signs
And you would have seen it comin' but we gave you too much time" - Coma by Guns N' Roses
Look forward to the discussion and any strategies anyone is taking.
Happy investing,
-Sean |
