Oh, do you smell that? That's the smell of burning equities. The S P 500 has had its most intense bludgeon from highs since May, breaking well below our red directional Sma line: The Dow, the Nasdaq, The Roski's Pain. All around, Quite simply, the S P 500 hit five percent down from highs, and by definition, another few days of trading like this and we're going to be in correction mode. Famed economists are already calling for this to be a never-ending spiral of death that will make you sell your house, your wife, and your kids.

Others are saying this is just a temporary dip and not to fret. And so quite simply, we need to discuss the root cause of the sell-off as well as what you need to do. And the only thing that I ask in return for all of this is that you hit that ravishing like button. And also don't forget to subscribe either.

Okay, so quite simply, the biggest emerging threat right now is this ever grand situation. You've probably heard and read articles about the situation and it might give you some 2008 housing crash vibes. You have one domino that falls and then everything else falls and it spreads around the world. And I know what you're thinking, Charlie, I just can't believe for a minute that something bad could start in China and then spread around the world and cause global economic catastrophe.

Never has that happened before. But anyways, if you're unfamiliar with the story, let's do a quick rundown. Evergrand is essentially a massive property developer who in 2018 was the largest, most valuable real estate company in the world, according to Reuters and Cnn. It directly employs 200 000 people and indirectly helps sustain more than 3.8 million jobs per year.

Because as a real estate development company, you need to hire out contractors. So if you're hiring out contractors, you're creating jobs via those contractors. They have more than 1300 projects in more than 280 cities across China. They have investments in everything from sporting centers, theme parks, electric vehicles, and more.

They are also working on the world's largest soccer stadium, which is planned to be shaped like a giant lotus flower. Now, if you look through the reported data, the investor presentations, the investor documents, you could pair it over time. It seems like this is a classic case of a company spreading itself too thin, spending money all over the place, exponentially scaling their debt, all while being met with a decline in their core business model. One huge example of a mishap and misdirection I'd argue is their venture into Evs.

In 2020. they created and then started pouring money into Heng Chi, which is their electric vehicle division, a company that is yet to deliver a single vehicle and faces steep competition and the increasingly saturated Ev market when they do. Instead of evergrown, focusing on their damn debt crisis that they've had for like five years, they've decided to go and increase their debt, invest in projects that quite simply have nothing to do with what they're good at, which is developing real estate properties, and now as a result, they don't even have the capital anymore to really maintain their core business. And now Evergrand is sitting on the edge and people aren't really sure what's going to happen.

It's trying desperately to offload its assets, selling at deep discounts, trying to pay even contractors that they've worked with, with distressed assets getting so desperate that there's now reports that Evergrande is asking their own workers to loan them cash or risk losing their bonuses. Total disaster and huge desperation all around here. But what are the numbers looking like? Well, apparently they owe 300 billion dollars to lenders. That's a pretty damn penny.

For context, Lehman Brothers owed a little bit more than twice that. And you consider the relative market size and the systematic risk that this poses. and this is a big stinking deal. They are trying to fix this problem by selling their properties at deep deep discounts, trying to give them to anybody that wants them.

However, they are having a very, very hard time even doing that. and as the clock ticks on, Evergrand is losing more and more of its ways to get itself out of this crisis. What if Ever Grand fails? Well, if Evergrand fails, they fail to pay their employees, suppliers, home buyers, investors. They fail to pay their massive massive debt load, which is the most important thing here in terms of systematic risk.

The domestic and international banks that loan them money and also have invested in the company they lose out on billions and billions of dollars. Many of these themselves will be pushed on the brink of collapse and will have to go into selling other asset classes in order to cover some of those losses, which could certainly cause a massive chain reaction. And if Everground is the most powerful real estate company on the market, it's likely true that the other ones are not in great shape either. It's also true that Evergrande itself is held by many American mutual funds, as are many of its lenders.

My thought process: Well, it's very, very likely that China bails them out. The risk of not bailing them out is too high and could severely threaten the economic growth ambitions of the Chinese. And quite simply, China is not a country that is worried about government interference. But the real question in my view, is what does it mean that the largest, most powerful Chinese real estate company is on the brink of collapse? Does that not suggest that there's likely a larger, systematic problem throughout much of the real estate market in China, if not the broader Chinese economy, You look at corporate debt since 2008.

Red symbolizing China light blue symbolizing the Us. Corporate debt as a percentage of Gdp has skyrocketed consistently since 2008, in China, hitting insane levels at 160, while U.s debt has been hovering in the 70s for the better part of the decade. Most recent numbers show China's domestic debt to Gdp ratios sitting at 163 percent and defaults of said debt have increasingly sped up after 2019.. So, my thought process is two part: number one.

It's likely that China's corporations are far too over leveraged to withstand a massive, massive collapse of a massive massive real estate developer like Evergrand. Which means that China would be very, very foolish not to step in because it could derail the entire economic stability of the rest of the economy. If China doesn't step in now, it's going to be a lot more difficult to solve the problem down the road if the situation gets even worse. But also number two, if they do step in to solve this problem, it may not be enough.

They may be able to step in and save Evergrand, only to find three more massive institutions on the brink of collapse. So my thought process is, hey, China steps in to save Evergrand. That causes markets to say okay, hey, we're back in safety territory. But then how long until we get another threat? I don't think this is going to be the last that we hear that a massive, massive Chinese company is on the brink of bankruptcy.

Question is how much China is willing to step in and save them, and what is the end result of that? China stepping in is almost certainly going to result in more and more regulation, systematic threats, and or failures isn't something that the Chinese Communist Party is going to want to deal with. So how crazy are the regulations going to get? And how does that affect the investing class? And the other thing to remember is proper context here. The market has barely taken a breath since last year's September cool off. Last year at the start of September, the market took a breath from its relentless coveted recovery bull trend and did not make a new high until early November.

and we haven't had a sizable breath since. Hard to argue that some level of sell-off this fall isn't natural here, especially considering all that the market has factored in, and how a lot of the economic picture is looking a lot shinier than most of Wall Street thought it had. You have supply chain concerns looking worse and worse, you have Gdp projections looking slower and slower, and at the same time you have stocks that have just come off a massive, massive, relentless bull trend. Take a second to look at the 10-year chart.

Here, you had what in overall context was a very, very unnatural run one that quite simply I think deserves to take a breath. And I've seen a lot of retail saying buy the dip, Buy the dip, Buy the dip. But really, buy the dip. What dip It barely dipped.

We are down basically to mid July valuations, and in mid July those valuations weren't that cheap either. and the projections for the fall and winter looked a lot hotter back then than they do. Now, if this does go on to rebound, there's not that much more money because it didn't dip much. Wait for a real dip before you start buying long-term positions.

Most stocks right now are not very far off from their highs. If you're trying to go discount shopping, you're not really getting that big of a discount because we haven't had much of a dip yet. One of the complaints that I've had all year is basically that almost every single mainstream big stock, including large mainstream tech, is trading very, very, very high up there. You're talking big tech.

the financial sector consumer, cyclical, you name it. With Big Tech, at least you're getting high growth rates underneath the surface with the actual company. But still, you can't argue that you're getting these really, really insane deals. And sure, Growth Tech has had some good deals, but Growth Tech's been subject to a lot of rolling inflation concerns and that's going to be present for a while.

so my thought process on what to do. Well, I would keep some cash on the sidelines, prepared for more and more dips. Whether this is a massive massive dip or it recovers tomorrow, it really doesn't matter. There's not that many good deals in the stock market right now, so you should be waiting for a Dip regardless of what the market's doing.

Of course I'm talking about long-term positions. Short-term trades are a completely different beast. But truth be told, when you consider China issues, supply chain concerns, fed tapering, which by the way, he's given a conference on Wednesday and you look at the stock market that hasn't taken a breath forever and you look at its long-term history where it always takes a breath and it's like, hey, it's very, very reasonable to expect that sometime probably in the fall you're gonna see a nice dip. What I would do is I would create a list of stocks that you have long term high conviction in ones that perhaps you wanted to buy for a while that are just trading too expensively for you to make sense of buying them, designate some capital for when they get down to a valuation price point that you want them to be at, and then when they get to that point, buy it.

but you want to have the list before. So that way you have a shopping list available for when they get to the prices that you want them to get at. So that way you're not just yellowing into any play that dips because oh, it dipped. Now in terms of long-held positions, what I would do is if you have a stock that's either at its price Target, above its price Target, or even slightly below its price Target, I would consider locking in some profits or at least setting a trailing stop loss.

Locking in profits, though, is probably one of the best because that way you have a lot of capital on the sidelines for if a massive dip does come. And just to be clear, I'm not advocating selling your long-term positions because we had a few market wide red days. If you have a high conviction play, the goal is to hold through flutter favor right? But what I am advocating is taking your profits on plays that have met your goals already and not being overly giddy with buying early dips because you want to conserve that capital for future discount opportunities. There's nothing worse than seeing a massive discount on something you wanted to buy and then not having the capital to buy it.

So my take is for long term positions, keep some capital on the sidelines. For short term positions, try to target a little bit more of those inverse funds, try to be a little bit more cautious with the short squeezed candidates, but also understand that there's still opportunity there. And also, look at the bigger picture here. we haven't had much of a sell-off at all, and in the long-term context, all we've had is massive, massive uptrend in the overall market.

So I'd say hey, it wouldn't be the worst thing in the world to see some massive massive dips that allow some really, really good recovery cycles. Anyways, folks that caps off this video. If you have any questions, feel free to reach out to us below or join us on Ziptrader Sorco. What are your thoughts on what's happening next in the market? let us know below and if you'd like to learn how to trade With our step-by-step lessons, our private chat, and of course our daily morning briefings, where are we brief on the latest catalyst each and every market open morning? Well, I'll go ahead and put a link to Zip Trader you below.

If you're wondering what broker to trade these stocks on and you'd like to earn two free stocks when you both sign up and deposit with our link below, we'll all put a link to Weeble below. They are a fantastic broker so if you are broke or curious, go ahead and check them out. Anyways, that caps off the video and I'll see you in the next one.