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
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Very wise. If the system is at risk, they will stop at nothing to keep it propped up.
I am re-reading Michael Lewis’ The Big Short, about the subprime crisis. All were in denial right up to the very end. “It is hard to get a man to understand when his salary depends on his not understanding” – Sinclair Lewis.
I note that short interest ratios on SPY (35%), IYT (53%) and TLT (53%) are elevated. I expect a short squeeze on the equity side. Downside volume is very light today.
Yeah, without FX, I would have lost quite a bit of money overall in my portfolio.
The one thing I hate about bears is how they always say there’s no way to control things. Well as usual, the question is: short term/long term? In the short term as we have seen, Central Banks have PERFECT control. This is the true lesson i.e. everything has a timeliness aspect.
These days, the only way to win is not to play.
“the only way to win is not to play”.
Petuinia, those are words of wisdom. What you don’t bet can’t be taken from you.
No such thing as not playing unless you live in a cave. Holding cash, eg, exposes one to inflation. But now, yes. Too much crazy.
As John Lennon sang: “I’m just sitting here watching the wheels go round and round. I really love to watch the roll.” Or something close to that. When I don’t understand something, or how it works, I stay away from it. I watch from a distance. The problem here is that I don’t know how big the blast zone is going to be when it goes off. Or, is there any place safe? Or, are we all toast already and just not know it yet?
My wife and I were wondering how much in play world leader insiders have in the market (by proxy) as they whipsaw events back and forth in the Greek debacle? I could see Tsiprias and other Euro leaders playing events and selling on cue.
Shorts now, anyone? “I bought the dip and shorted just before we do the Grexit”, whispered the German bankster. How many times have we seen the , “this is the absolute last and final…”, only to see a rally and a correction. Taxpayers are on the hood for all Greek debt as they played this out these past few years, and now why wouldn’t the players try and enrich themselves? After all, Goldman Sachs was in on it from the beginning….with Greece, as they cooked the books.
Goldman will profit very nicely on the privatization of state assets. The employees get the layoffs after private equity takes over.
“the government [put pressure on] 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.” Unfortunately, compared, say, to Americans who have to put up 50% margin on stock buys, according to a report on the Chinese U.S. language TC station WCE TV, the margin requirement there was under 15%. That means, regardless of government pressure, millions were faced with margin calls forcing them to liquidate in a falling market, and ordering a trading halt does not help them; nor has there been anything to suggest these people were magically given interest-free loans to keep them afloat. Furthermore, selling a stock short is no more subversive than acting on an unfavorable opinion about a stock (as opposed to genuinely subversive naked short selling). If the government had seen nothing wrong with the practice July 1, it is hypocritical to be condemning it July 10.
Would someone please blow this thing up to smithereens. I am on sanity island and we are ready for the fireworks to start for real.
Fundamentals for individual stocks matter only when a lousy earnings report or seriously negative news about a company is released. Even when a stock does get hammered, it’s usually temporary. In many cases, especially with Wall Street’s darlings, the stock is frequently pumped right back up in a matter of a few trading days.
In other words, fundamentals don’t matter 99% of the time. Just look at AMZN or TSLA – two companies that will never make money even if h*ll does freeze over.
That’s why I don’t short any of these overvalued assets either.
Chairman Mao is grinning from his mausoleum. The Little Red Book is still the fallback position. “Power flows from the barrel of a gun.”
Gravity exists and will enforce itself regardless if you believe in it or not
Before 2008 i would’ve been inclined to agree with that sentiment, but seeing all the fantastical feats of financial levitation that have been perpetuated ever since TARP it really does appear as if gravity has been permanently cancelled.
Markets can simply never again be allowed to follow previous laws physics. These are redundant. They have been rewritten as the credit alchemists have mastered the art of willing infinite ‘money’ into existence.
It’s a closed loop. A big club – and we aint in it!
“A big club – and we aint in it!”
Very wise words from a very wise man – George Carlin, may he rest in peace.
It seems my beginning of the year prediction that stock market will flatline around August and then inch (but not surge) forward only following “extraordinary” monetary policies is coming true.
The Chinese stock market is dead and gone for the immediate future. And I say this as a China bull since 2005: I liquidated all my Shanghai Composite positions less than a week before it started sliding dowward and I am not coming back until the dust has settled. And this may take quite a while given Beijing has decided to intervene while at the same time ignoring her own massive industrial overcapacity issue.
As I never tire of saying, the small retail investors who propelled the Shenzen Small Caps and the Shanghai Composite to its pre June 12 heights were lured into the stock market by the promise of getting rich, not of holding stocks.
They expected (and many still expect) to sell those stocks at a huge profit so they can buy a new car or apartment. For them stocks are just a means to an end not the “brave new world” of Western and Japanese economies.
The small investors have been literally fleeced so far and, if rumors about the clampdown on sellers are true, they aren’t going to benefit from the dead cat bounce any time soon.
Regarding the rest… financial markets are still massively overvalued in spite of crummy if not downright worrying fundamentals.
Rio Tinto was AU $62 a year ago, before iron ore prices, RIO’s main breadwinner, jumped off the cliff. It’s now AU $51, and climbing back, probably on promises the Chinese miracle is alive and well, never mind all those unsold cars that will soon turn into scrap metal. That is really all you need to know.
I am really struggling to find value at the moment: there are a few stocks that I am presently considering but these will just be side shows, more because I believe in those companies than in zombie stock markets or a “recovery” that has been going on for almost six years. So far the bulk is still in cash, insurance and fixed income.
Great article! Bang on. The only difference between the Chinese communists/’capitalists” and the US crony capitalists/socialists is that the US PRETENDS to have a free market. China is in effect being more honest. Not so with the US and others. Up is good—-down is forbidden by the FED.
This is a perverse market because it is based only on how well further austerity measures will benefit the .01%.
In the case of the latest developments in Greece the markets jump up because a segment of the .01% will benefit from Greece’s pain.
In the case of the US health care drug industry’s recent obscene drug pricing, again the markets jump up because another segment of the .01% will benefit from the financial pain of the sick.
Bad news is always good news for some part of the .01%, and the masters of market pricing bring the public around to their point of view by levitating the indexes.
The vast majority of companies in the indexes are growing only by financial engineering and the imposition of austerity on others. Austerity is not applied only in Europe. It is also imposed on some groups in the US too, .e.g.: students, low wage workers, and those who were denied single payer health insurance.
In the manipulated fake bull market, short it what all movements are.
As a directional Agnostic: I deem.
ALL shorts, should be very short, in planned duration.
As you are bucking the house odds, and the dealer with a stacked deck.
It that way, they can still be profitable.
The bond market vigilantes are saddliing up.