Muddy Waters Warns on Chinese Stocks: “Largest Pump-and-Dump in History”

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Chinese stocks have been performing the most astonishing miracles on a daily basis. On Monday, the Shanghai stock index soared another 4.7%, now up 77% over the last six months and 140% over the last 12 months, interrupted only the occasional air pocket and deep and nerve-wracking but temporary plunge.

And this, just when China’s economy is slowing sharply, when overcapacity has become a nationally recognized problem, when growth in car sales, another miracle, is grinding down, and when everyone, from the National government on down, is working furiously to sweep non-performing loans under the rug and out of sight. No one wants to see them. They’re too big and too ugly to behold.

But nothing is going to stop this daily stream of stock-market miracles. Even in the US, not a day goes by when we aren’t exhorted by one of the gurus to finally jump on the bandwagon and buy Chinese stocks. The whole world is caught up in the miracle.

Suddenly, amidst all the hype, there is an unruly voice whose pronouncements on Chinese companies had epic impacts in the past: short-seller Muddy Waters Research, as always talking its book, but dude, it’s about time.

This is how Muddy Waters explains its name:

The Chinese have an old proverb, “浑水摸鱼” (muddy waters make it easy to catch fish). In other words, opacity creates opportunities to make money. This way of thinking has unfortunately become endemic in global capital markets.

So Carson Block of Muddy Waters told CNBC that Chinese stocks are soaring in part because liquidity is “being crammed into the system,” and in part because the Government of Mainland China has been pushing the meme that “buying stocks is patriotic.” So losing money is impossible, it seems. This has led to the “largest pump-and-dump in history,” as Block put it, with the share prices being manipulated up by insiders – in many cases by 500% in the past year.

Here are the mechanics of the greatest pump-and-dump in history with a strong warning to keep clear:

Hard-landing gurus have been predicting an imminent end of the China bubble for years. A “hard landing” would be the optimistic scenario. But to their greatest frustration, there was no hard landing, or a soft landing, or any landing for that matter. China just kept on flying. But now it’s running out of air. Read…  China Momentum Indicator Plunges to “Hard Landing” Level

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  9 comments for “Muddy Waters Warns on Chinese Stocks: “Largest Pump-and-Dump in History”

  1. jc
    Jun 1, 2015 at 7:22 pm

    Interesting insight!

  2. Aaron
    Jun 2, 2015 at 4:17 am

    Interesting indeed. Question is, when the pop happens can it be contained, or will the real economy end up devastated with potential knock-on global effects?

    I suppose we’ll find out soon enough.

  3. NY Geezer
    Jun 2, 2015 at 8:24 am

    I listened, and I think Carson Block failed to mention the imminent potential effect of a change in the MSCI emerging market index that will increase the percentage of Chinese stocks in the index from the current 3% to a number closer to China’s 15% share of the world economy, thereby forcing index fund purchases of Chinese stocks.

    Of course when one argues his book I expect him to present only one side of the issue.

  4. michael
    Jun 2, 2015 at 3:16 pm

    There is not much difference between the US or the Chinese stock market. Lemmings being led to the cliff.

    • Yancey Ward
      Jun 2, 2015 at 8:49 pm

      It is worse than you write. They aren’t being led to the cliff- the cliff is being sold to them.

  5. KFritz
    Jun 3, 2015 at 12:45 am

    “The Gypsy Woman told my mother
    Before I was born….”
    Oops. Wrong Muddy Waters. But seriously…

    There is something historically a bit different about the upcoming Chinese economic-social-financial tumult. The Chinese state is an odd hybrid/admixture of ‘socialist’ ideology, Fascist paradigm, and cowboy capitalism, with the state as sole or majority stakeholder in many of the soon-to-deflate enterprises. The leaders of the state have absolute control of the coercive mechanisms of power, but they also have (or ought to have–there’s a key question) a cadre of expert servants with a sophisticated knowledge of 20th century-developed techniques of propaganda cum social engineering cum psychology.

    Does anyone think, has anyone thought about, whether the Communist hierarchy can, with its control of coercive and manipulative institutions, manipulate its populace to ameloriate the worst aspects of the downturn, manipulate its populace to accept the situation, and thus keep the lid on the likely-to-happen social and political unrest and violence? Can this be accomplished without wholesale, indiscriminate violence that a Stalinist, non-hybid strongman dictatorship would utitilize?

    • KFritz
      Jun 3, 2015 at 12:48 am

      Oops. the first “ameliorate” was intended to be actual social welfare to ease actual suffering.

  6. Julian the Apostate
    Jun 4, 2015 at 6:50 am

    The Chicoms have a big pile of GOLD. Historically they only care about the Party. Lest we forget, STALIN DIED IN HIS BED OF NATURAL CAUSES. The Chinese people know their position, and it ain’t good. The Cultural Revolution is within living memory. It is the middle class in the West that will be caught flat footed, as the German middle class was in Germany in 1923.

  7. Mike Earussi
    Jun 6, 2015 at 8:09 am

    The same thing happened here in the 1920’s U.S. stock market boom when the entire world was investing in it driving it to new, then unheard of, heights. So when it finally collapsed it took the whole world’s economic system with it. The question remains then when the Chinese bubble finally starts to collapse will it have the same world wide effect?

    But the really scary concept is how far (i.e. how much money) will the Chinese government allow it to fall before pumping even more money into it to try to prevent it’s eventual collapse, thereby making the bubble even bigger? And with the Japan and European central banks willingness to pump seemingly unlimited liquidity into their respective systems this bubble could eventually become humongous before it finally (and inevitably) blows up. And we don’t have an FDR (or a world war–hopefully) this time to bail us out, so this next depression could last for decades. So as someone once said, “Fasten your seat belts, it’s going to be a bumpy ride.”

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