They’ve made history: China’s crazy stock market bubble, its implosion, and the government’s muscular gyrations to reverse that implosion.
Among the actions: the government ordered entities that it can lean on or that it owns to buy stocks, including their own stocks, and it forbade them to sell stocks. It threatened to hound people who were “illegally” selling or worse, short-selling stocks. It ordered the media not to criticize stocks or the markets…. And the central bank made potentially unlimited amounts of money available to support the buying.
Many of these shenanigans were highly publicized to maximize their effect. By so overtly manipulating an already highly manipulated market, the communist regime, in its infinite wisdom, converted it into a centrally-planned and rigged mockery of a manipulated market.
The results, after some market confusion, have now exploded on the scene over the last two trading days. A week ago, I ended my article on the government’s desperate emergency-meeting measures with this: “Watch the fireworks when this moolah ignites.”
It took a few days, but now the moolah has ignited. The bubble is being re-inflated by hook or crook. The regime has decided what the value of the market should be. And it’s forcing every entity it controls or can lean on to take it there. No one knows how long this can be maintained before something big breaks. No one knows what’s left over of the market or the financial system afterwards.
The same can be said about the US, Japan, Europe, and other economies where central bankers and governments, among others, have manipulated the markets for years.
Clearly, the Chinese government, after luring regular folks into the market on a highly leveraged basis, feared that these folks who have lost so much in such a short time would turn against it. And it panicked. No one knows what will come of its grand chaotic scheme, but we do know: short sellers – those intrepid souls that bet against the phenomenal bubble – got their shirts ripped off over the last two trading days.
The farmers and street vendors who’d jumped into the market this spring already had their shirts ripped off. They were too leveraged to survive the crash and were forced to sell. They lost their investments and won’t get them back. There is now a slang term for these stock-market newbies, Liz Carter reported: “new chives” or “new leeks” (新韭菜), because they’re “abundant” and “destined for chopping.”
Their savings have been transferred to other players who’re now able to ride the government-mandated stock-market rally, for as long as it endures.
Why did China do it? Because it can. It can order companies to buy stocks and order them not to sell stocks. It can order the media channels that want to stay in business not to criticize stocks or the government’s actions. Top players in the Chinese government can give top executives at Goldman Sachs – a relationship that is long and tight – to understand that if it doesn’t hype Chinese stocks, it might lose a lot of business in China.
So Goldman hyped Chinese stocks on Tuesday: they’d rally 27% over the next 12 months. They’re “not in a bubble yet,” it announced. Leveraged positions weren’t big enough yet. Valuations had room to balloon. “China’s government has a lot of tools to support the market,” it said.
When governments and central banks mess with the markets, it’s buy, buy, buy, no matter what. That’s what everyone has learned over the past seven years. Forget fundamentals. By now, they have zero relationship to the financial markets. When they try to reinsert themselves into the equation, governments and central banks redouble their efforts to excise them.
Central banks in the US, Japan, Europe, and elsewhere have enormous powers that they have used without batting an eye, rigging and manipulating markets, destroying livelihoods on one side and shifting enormous wealth to a small number of players on the other side. But all that pales compared to what China can do.
These manipulations have led to where nearly all assets are overpriced and larded with the kinds of “short-of-a-lifetime” opportunities that are immensely tempting.
I have been told by astute readers how they’re shorting stocks or bonds. They had solid reasons. They’d done the math, based on fundamentals. I admire that sort of thinking and courage. And their pain threshold. But my response has always been this: For me personally, shorting stocks or bonds is way too painful in this environment, no matter how seemingly obvious the trade.
The risk and reward relationship is out of kilt. I don’t have a megaphone big enough to influence the markets about my short, unlike David Einhorn’s Greenlight Capital or Muddy Waters, though their megaphones don’t always suffice either. But no big deal; they’re betting with other people’s money. I don’t have insider information. And already irrationally priced assets have no rational upper limit and can get a lot more irrational.
No matter how tempting the short might be, even if it’s the “short of a lifetime,” in this treacherous environment, it would be just me against the globe’s governments, central banks, the media they largely control, the markets that feed out of their hands, and the entire Wall Street hype machine. These things work – until they don’t. Then something big might break. Or it might come in incremental steps. But I’ll leave that fight to braver souls.
That said, financial contagion is spreading to the US. Read… U.S. Primary Bond Market Seized Up, Junk Bond Issuance Frozen, Chaos in China, Greece, Puerto Rico, Commodities Cited