It's the crypto-world that I am worried about, that's where we might see real contagion from China.
There has been this ridiculous misperception that American banks stand to lose big if Evergrande, the gigantic Chinese property company, defaults on its $300 billion in debt.
That's preposterous, though, because we have never had the opportunity to invest in outfits like Evergrande. It used to be a real winner and the Chinese government isn't interested in making U.S. banks rich. It's interested in blocking U.S. banks because it can't control them.
You can't have a situation where our banks go down because of Evergrande if they didn't go up when the getting is good.
But there is one part of the U.S. economy that could be hurt by this and that's who hold crypto-coins. Now I know that many young people own crypto: we see that from the Coinbase (COIN) and Robinhood (HOOD) numbers.
I don't blame them. I am a believer in crypto and I have a position in Ethereum after doing quite well with Bitcoin.
However, I have no illusions about the linkage here. First, crypto mining is largely a Chinese business, and the Chinese are nuts for crypto. But the government hates that and could suspend the buying and selling of any sort of crypto in a heartbeat. Please remember that the PRC is a totalitarian dictatorship and a command economy: it can do whatever it wants.
Second, the biggest linchpin in all of crypto is stable coin. Consider stable coin the money fund of Crypto, where people keep their money before and after they trade the coins.
The largest stable coin is Tether. We do not know what Tether - a $60 billion fund - owns. At one point we thought they owned dollars and their funds were backed up with Treasurys. Subsequently, a lawsuit brought by New York State which led to the banning of Tether. We discovered that it has very little U.S. exposure and, instead, was backed up by commercial paper. We talked to SEC Chairman Gary Gensler last week about Tether and what they owned and he said he was concerned about Tether. He should be because what happens if they own the Chinese commercial paper that is connected in some way to Evergrande?
In 2008, a Lehman Brothers money fund collapsed and it was an accelerant to our vicious downturn. Could this happen again? Call me worried.
What should you do if you own crypto of any form? I think you should, if you have big gains, take some off the table.
Now I know that those younger people who own these devices are seeing more and more American firms accept them as currency. I think that's terrific and will eventually help them go mainstream. But right now owning crypto is what's called a "crowded" trade and I don't want you to lose money because of issues involving China and Evergrande.
But make no mistake about it, unlike our banks, you are at the most vulnerable area of the U.S. spectrum. If the Chinese communists looked with favor on crypto it would be something different. But they don't. I know the younger people never want to hear sell from me. But let's do this: if you have a big gain don't let it become a loss. Sell some, stay long the rest and then we will reconfigure if the PRC changes its mind and stops being the nemesis of Evergrande and all crypto currencies.
