They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants.
Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors.
That’s what gave the product its Ponzi characteristic.
The total amount invested in WMPs is now in the trillions of dollars used to finance thousands of projects sponsored by hundreds of major developers. Chinese investors are all-in with WMPs.
Now the entire edifice is collapsing as I predicted it would.
The largest property developer in China, Evergrande, is quickly headed for bankruptcy. That’s a multibillion-dollar fiasco on its own. Evergrande losses will arise in WMPs, corporate debt, unpaid contractor bills, equity markets and unfinished housing projects.”
The interesting thing about these WMP’s is that they’re structured similarly to CDO’s (collateralized debt obligations) that caused the 2008 financial crisis. Only these WMP’s seem like Bernie Madoff on steroids. This is where the Evergrande collapse in China can be like a slow-motion train wreck. While this giant Ponzi scheme unwinds, it will spill over into other markets and then other countries affecting everything as the last financial crisis did.
There comes a point in every financial crisis where there are a few who see it coming and get out early and then a breaking point when everyone wants out. It’s the same dynamic as a packed theater of people watching a movie and eating their popcorn. One person gets up and runs out the door. Then 2 more people, then 5 people. Then 10 people all at once. At some point everyone panics and heads for the exit even if they have no idea why the others have fled for the doors. Its better to be the first few out of the exit before it’s impossible to leave because everyone else is crowding the doors all at once.