16 Dec 2021 What’s Your Gray Rhino?
A few months ago, a 25-year-old Chinese company called Evergrande was all anyone could talk about, and not for any good reason. In fact, the question most commonly posed in regard to Evergrande was, “Is this China’s ‘Lehman moment’?” a reference to the now-defunct bank whose 2008 bankruptcy is largely credited with kicking off the financial crisis.
In short, Evergrande is a massive Chinese real estate company. Their total holdings are equivalent to 700 One World Trade Centers, according to the Wall Street Journal. Equally massive is their debt-load, as much as $89,000,000,000. Recently, they started missing interest payments, hence the attention.
The story of Evergrande is fascinating and will certainly spin off a book or two. Its founder was born very poor in an impoverished town and over time built an impressive and influential real estate company selling homes and apartments, mostly to Chinese citizens who are now at risk of losing their entire investment. Not satisfied with just being a real estate company, they ventured into healthcare, electric vehicles, and bottled water. They even own a soccer team. It sounds a bit like the Chinese version of WeWork, though on a much bigger scale.
Most of us are familiar with the term “Black Swan event.” Popularized by Nassim Taleb in his book, “The Black Swan: The Impact of the Highly Improbable” a Black Swan event is characterized by three attributes: it’s an outlier, its impact is extreme, and, despite being an outlier, we come up with ways to explain why it happened and why we should have seen it coming. The Financial Crisis is the perfect example: We hadn’t seen an event like it before, the impact was off the charts, and, in retrospect, many of us feel we should have seen it coming. The Pandemic is another such event.
While most of us hadn’t heard of Evergrande until this summer, it’s gradual collapse (unless the Chinese government steps in to rescue it, of course) is by no means a Black Swan event. Not even close. Rather, Evergrande is something equally dangerous but altogether different: A Gray Rhino.
A recent Wall Street Journal podcast (which inspired today’s Brief) defines a Gray Rhino as “a big, obvious risk lumbering straight towards you,” which describes Evergrande perfectly. You don’t accrue $89B of debt–some with rates in the double-digits–overnight or without some idea of the risk. Evergrande and their creditors saw this coming a long time ago, it was lumbering straight towards them. We can’t say they didn’t take action, it’s that they took the wrong kind of action: trying to pay off creditors with unfinished apartments and layering on more, higher-interest rate debt to satisfy older claims. Rather than stepping out of the way, they backpedaled, trying to buy themselves more time before coming face-to-face with the sharp tip of the rhino’s horn.
The parallel to our lives is easy to see. We all have a Gray Rhino. A big risk, real or imagined, that we see off in the distance, kicking up dust and heading our way. It could be debt, our career, spending, retirement, health, saving, parents, kids. A big, obvious risk lumbering straight towards us. And the choice we are faced with is: do we backpedal or step out of the way?
Our desire at Beacon Wealthcare is to create a place you are comfortable talking about your Gray Rhino, because we believe that’s how you step out of the way, let the risk run past, and continue down the path towards the things you value. Because meeting the rhino isn’t the only cost. Another cost is the constant worry, the distraction, the burden that carrying the risk can take on you and those around you. By talking about your fears and concerns, you might find you’re better equipped than you think to handle them, that you’re able to easily step out of the way. Or you might discover a new path. It might not be one you anticipated traveling down, it may have more curves and bends to it, but if it gets you to the same destination, what’s the problem?
We’re nearing the end of 2021 and the start of 2022, so I’m obligated to say something like “Be sure to start 2022 off on the right financial foot!” (In fact, I might have said those exact words in my email last week. Yikes.) Yet, there is something to a new year, a fresh start. It won’t necessarily get rid of your Gray Rhino, but it can offer the perfect time to face down your risk and chart a path forward. To schedule a time to chat with one of us, click here.
In closing, we are taking the next two weeks off from writing so this will be our last Brief for 2021. All of us at Beacon Wealthcare hope you have a Merry Christmas, Happy Holidays and a Happy New Year!