Sunday, August 30, 2015

Red China, A Panic That Could Bring The House Down

The Chinese appear to have lost control of their stock market. In reality, the stock market is a psychological theater with no rhyme or reason. A bad day in one market can induce a world panic. Value is determined by the potential buyer’s willingness to agree on price. Is google worth 630 dollars a share? It is, if you can sell it to someone else for even more. A lot of the rest of the world is living on margin. And in our country, every rest home retiree is in the stock market—the bond market won’t pay the rent.

Our bond market is living on borrowed time. Risk is not factored into the market. Triple D bonds are not like a bra size, bigger is better. Buyers should be demanding 25% interest, not fighting each other for 7.25%. And in the past when things got really bad, the Federal Reserve would drop interest rates a quarter point time after time. Guess what, they are as low as they can go. You have to laugh when they talk about raising the interest rate one quarter point. This is not going to send people to the banks to open up savings accounts.

In times of panic, the stock market can have moments where there are no bids to buy a stock (called air pockets) and a stock can take a very large quick drop. Like 50 to 60 dollars.

And then there is the phrase, “Stocks always come back.” If you retired in 1929, were you around in 1954 when they came back? The real truth is; the stock market is an allusion of wealth without having to work for it.

Mark Faber is expecting a black swan event in world markets. I think we are fast approaching it. The bond market marches to a different drummer. It is manipulated by the Federal Reserve guarantees. The weird thing is, the Federal Reserve can buy all the bonds it desires and keep interest rates low. All it does is force investors into different investment vehicles. Real estate, oil drilling in the Midwest, and stocks have replaced bonds for interest’s rate returns.

So we have the Chinese market swirling out of control. Nobody ever claimed that a Socialist Republic had any entrepreneurial financial acumen; that would run contrary to the fabric of the socialist doctrine. They played our game using our rules and it had a good run. Now it has turned sour, like the tulip bubble, of several centuries ago. Financial meltdowns don’t destroy buildings, they destroy fortunes. One minute you are rich and the next minute you are poor. It is invisible in its speed and reach. This is what we are fast approaching. Oil goes from $110 a barrel to $40, an unexpected event. What happens if real interest rates jump to 8 percent? Of course it is not supposed to happen, but oil was never expected to hit $40. We can project what will happen in the future; the only trouble is that common sense, is not what markets run on.

China right now is like a bunch of school kids walking by a graveyard late at night. One loud noise and they’ll run like the devil is chasing them.


Jim in San Marcos said...

Hi Paul Taylor

Thank you for your compliment. I deleted it before someone accused me of writing it myself.

Contrary to your assertions my literary style and grammar could panic a busload of English teachers.

Joseph Oppenheim said...

Under the radar is North Korea beginning talks with South Korea. Also, most underestimate the economic potential of the Iran deal.

dearieme said...

Happily the economist whose writings I follow in the Tel (Roger Bootle) tells me not to worry about China. He has other worries, no doubt, but thinks that the collapse of commodity prices, especially oil, will do most of the developed world a good turn. In his article he gives a particularly terse and clear account of the causes of the great credit crisis of 2008. Recommended.

Jim in San Marcos said...

Hi Joseph

Not sure about N Korea. Their leader executed his own uncle using starving dogs and last week executed his vice president with an anti aircraft gun for disagreeing with him.

I do agree that most underestimate the economic potential of Iran. With the sanctions lifted, they can build all sorts of military weapons (to be sold for religious jihads). It would bring the country to full employment--kind of like Germany before WWII.

Jim in San Marcos said...

Hi dearieme

Thank you for the link. I tend to disagree with the author.

We are not really getting much economic information out of China. We are getting information from suppliers of raw materials.

China is a socialist economy run by bureaucrats. They have no idea about surplus inventories or their projected implications as far as corporate survival.

Their stock market and real estate boom are based upon the financial incompetency of the people in charge. Get rich and move to the USA.

The government obviously knows what is happening, but has no real tools to influence the final outcome.

The party line is that free enterprise robs the poor and makes a few people rich. Free enterprise is bad, let's get rid of it. Lesson learned, new approach to follow.

I would expect China to go on the gold standard. Figure it out, if they did, at current prices, how many people would own gold? Or put another way, have enough saved up to buy an ounce and leave it untouched. Not many. In the US when we were on the gold standard, people might have an ounce in their grasp at pay day and then it was gone. So the amount needed to back a currency is not as large as you may think. And after it catches on, they can always change their mind and roll the presses. The neat thing, it won't cost them a dime to give it a try.