China is the radioactive core of the entire global bubble.
By David Stockman, David Stockman’s Contra Corner:
Bubblevision’s Scott Wapner nearly split a neck vessel today denouncing the US stock market sell-off. It was completely unwarranted, he thundered, because China don’t have nothin’ to do with anything.
Why, insisted CNBC’s best dressed pom-pom boy, China’s stock market has never been correlated with its economy, and, anyhow, its economy doesn’t matter all that much to the S&P 500 because China accounts for only 14% of global GDP.
Besides that, China’s stock market is exactly like what Yogi Berra said about his favorite restaurant: It’s so crowded, nobody goes there anymore!
That is, according to the talking heads Chinese household’s don’t go to the bourses, either. Few of them own stock and equities account for only 20% of household wealth compared to upwards of 65% in the US.
So enough of the schwitzing about the red chip sideshow. Buy the dip!
Indeed, that’s exactly what the insentient robo-traders did at the close. After banging the 200DMA, they bid the S&P right back-up to Monday’s VWAP (volume weighted average price) in the final seconds, thereby filling-up their sell buckets to unload on tomorrow’s dip buyers. As Zero Hedge noted,
On the day, US equities staged their standard JPY ignited momo bounce off the 200DMA – running perfectly to VWAP in the S&P, before limping lower…and a mini algo meltup to VWAP at the close… all completely human!!
As for purportedly sentient humans, however, the better advice would be to flee the dip with all due haste. The truth is, China is not a sideshow; its the radioactive core of the entire global bubble.
The Wall Street shills and touts are so oblivious to this fundamental reality that they can not even see the obvious facts about China—to say nothing of the macro-quick sand upon which the entire global economy is poised.
The meme of the day—that China doesn’t have so many gamblers—is hilarious. From stem to stern, China’s version of red capitalism has evolved into the greatest gambling den in history. The whole thing is a giant punt—from 60 million empty high-rise apartments, to ghost cities and malls, to endless bridges, highways and airports to nowhere, to laying down more cement in three years than the US did during the entire 20th century.
But today’s Wall Street admonition to move along because there is nothing to see in the plunging red bourses really takes the cake. In fact, yesterday’s 8.5% plunge on the Shanghai market—mostly in the last hour and in the face of $1 trillion of state buying power and several thousand paddy wagons thrown at sellers, malicious or otherwise—is merely a foreshock; it’s a fateful warning about the global-scale financial temblors heading at the incorrigible army of dip buyers in New York, London and their farm teams elsewhere.
In the first place, upwards of 90 million households are in the Chinese stock market, most of them buried under margin debt. Among them, they hold exactly 258 million trading accounts and a significant fraction of these were opened in just the past year by Chinese pig farmers, bus drivers and banana vendors, among millions of quasi-literate others.
The country went nuts speculating in stocks just like it has in empty apartments, coal mines, expensive watches, Macau slot machines, fine wines, copper stockpiles, and almost anything else that can be bought and sold. So when the Beijing overlords go into full panic mode about the stock market plunge, they actually have a reason: There are more trading accounts in their red casinos than there are people in Japan, Korea, Thailand and Malaysia, combined!.
Do they fear the wrath of the tens of million of newly affluent Chinese that they have lured into the stock market? Yes they do, and for good reason. Namely, if the stock market comes crashing back to earth—–then what is at stake is not merely several trillion in paper wealth, but the essential credibility of the regime itself.
After all, even in China’s fevered gambling halls the people would surely notice the $7 trillion elephant missing from the room, and wonder about its implications for the rest of the Beijing Ponzi. That is to say, at its June 13 peak the Shanghai index was trading at 70X the reported LTM earnings of its constituent companies. Were these nosebleed valuations to be re-rated to a merely bubbly 30X, the Shanghai index would plunge back to its level of one year ago, vaporizing the aforementioned $7 trillion in the process.
The truth is, the Chinese stock market is not even worth 30X because the entire Ponzi is unraveling. The Chinese economy is bloated with monumental malinvestments and stupendous excesses—–the likes of which have never previously been visited upon a modern industrial economy.
Accordingly, while it is impossible to gauge the magnitude and timing of the hard landing now imminent, one thing is certain. Namely, the virtual impossibility that an economy flushed with a helter-skelter debt expansion from $2 trillion to $28 trillion in just 14 years—especially one that has no rule of contract law or even semblance of honest capital markets—can avoid a thundering deflationary collapse.
Stated differently, profits have already nearly vanished in upstream sectors like coal, steel, aluminum and cement; are now eroding in shipbuilding, construction equipment, solar equipment, and other capital goods; and will soon be falling in overbuilt consumer industries, especially, automobiles, as well. Like Japan in the mid-1990s, China is heading for an era of profitless deflation as its credit binge comes to an end.
In short, China’s companies are not worth last July’s stock market valuation, let alone their current perilous perch. And that’s where the skunk in the woodpile comes in. The Beijing suzerains have shot their wad. They cannot afford to pump more fiat credit into the stock market, meaning that the only remaining recourse is to arrest the sellers as enemies of the state.
Needless to say, red capitalism is not the same as Mao’s red socialism. The latter held that power comes from the barrel of a gun, and if push-came-to-shove, full jails and energetic firing squads could enforce the regime. Indeed, even after Mao foolishly denuded the countryside of insect-eating birds and farm implements during the Great Leap Forward, the regime handily survived 40 million deaths from the resulting famines.
But since the time of Mr. Deng, the power of the Chinese communist party has come from the end of a printing press, and for all practical purposes the People’s Printing Press is out of business. That because China is now imperiled by massive capital flight.
During the last five quarters its external accounts have hemorrhaged upwards of $800 billion of private capital outflows. That staggering figure represents the sum of its current account surpluses plus its drawdown of official reserve assets. Stated differently, had China’s $400 billion of current account surpluses been added to its reserves during that period, its reserve balance would total $4.5 trillion, not $3.7 trillion. The difference is a massive stampede of hot capital, as depicted in the chart below.
So here’s the thing. A regime that lives by the printing press is consigned to eventually dying by it. Accordingly, Beijing cannot open up the credit spigot again without further exacerbating its torrid capital flight.
So the only tool left to prop-up the red casinos is Beijing’s enormous fleet of paddy wagons. But with 258 million trading accounts in place, it is doubtful that even Beijing can arrest the sellers fast enough to forestall the stock market plunge still ahead.
As the communist oligarchs desperately hop from increasingly gimmicky stimulus ploys to the mailed fist of economic repression, one thing is quite predictable. Even its phony numbers machine will not much longer be able to hide the fact that the Chinese economy is grinding to a halt, and that the miracle of red capitalism was never remotely what Wall Street cracked it up to be.
Here’s the thing. Between the 2007 pre-crisis peak and 2014, the estimated world GDP expanded from $53 trillion to about $69 trillion. But fully 33% of that $17 trillion gain was directly accounted for by China; and far more than half of the total is actually attributable when the multiplier effect on resource suppliers like Australia, Brazil and Canada is accounted for, and when the pull effect on intermediate component suppliers like south Korea, Malaysia, Japan and Taiwan is added to the brew.
That’s not 14%. The collapse of red capitalism in China is exporting gale force deflation to the global economy, meaning that the already evident rollover of world trade is just beginning its descent.
So S&P profits are not immune, not by a longshot. One of these days, perhaps soon, even Scott Wapner will get the memo. By David Stockman, David Stockman’s Contra Corner:
Now these signs are getting even more worrisome, such as electricity consumption, whose growth rate has dropped to a 30-year low. Read… The Chilling Thing China’s Electricity Consumption Just Said about the Economy
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Great nations rise and fall. Great Depression and stock market crash/bank failures in US after the roaring 20’s. Japan’s one invincible stock and real estate market on parabolic runs crash in 1989.
Next up is China much akin to what happened in Japan where exports began to teeter out and misallocated capital to CAPEX boondoggles, stock and properties. And we have the once lauded amateur commie central planners trying to stem the stock market slide by locking up certain shares and shareholder from trading, force SOE (state owned enterprises)/brokerages to buy shares, etc. RE market may be next shoe to fall as 18% of flats in major cities and 38% in smaller cities are reported to be unoccupied reason being that flats in China come with bare walls (no room doors toilet, sink, light, flooring). Add to this Wall St’s wet dream of China soft landing.
Watch out what happens in Sept/Oct this year as China story may make Lehman/Bear Stearns a child’s play and alas there is no government owned AIG to pay haywired CDO/CDS claims.
Most new homes in China are sold as shells. The walls are plastered, there is rough electric and plumbing, that’s it. Figure on another 20% to finish it out. That’s how it is done there. Everybody knows that. There is a huge industry that does that design and finishing work. The main reason that so many homes are vacant is that people buy them for future use. When their son is about 30 they will finish the home for him and his bride, Also, homes are a better investment than the 1% you get at banks these days. The home ownership rate is about 130% in China because so many people have 2 or 3.
A finished unit doesn’t get a huge rent. In Qingdao, where I live, you can rent a nice 2 BR apartment furnished for $250 US dollars a month. There isn’t much incentive to be a landlord.
If you look at the Shanghai Composite over a long term, not the myopic closeups that serve panic-mongers, you will see that things dropped several times as far in 2007. This last week is a blip, not a crash. After 2007, China recovered nicely and their economy went on to shame the one in America. If the Shanghai Composite dropped to 2000 and took a year to reach 3000, things would be where they should be in a health, non-bubble market. Look at the chart:
This is an adjustment. The sky is not falling.
Looking at the chart you posted, it looks like an approximately 20% move down (from a peak of 4611 to 3663) … so its a 20% adjustment? Any concern that leverage and the magnitude of the move might become self-reinforcing?
I keep looking back at the huge move downward in 2007 that dwarfs this weeks activities. China recovered nicely, much to the chagrin of the Doom and Gloom crowd. I suspect that leverage was involved there also.
The drop in 2007 was 4.45 X as big as the one this week. China bounced back.
I don’t know. Looks like a head and shoulders top to me. If in fact it is, and the neckline is broken somewhere around 3100, the minimum downside measuring implication would be 32% lower at 2120. We should know pretty quickly. If support at the 200 day simple moving average fails to hold, things could get dicey pretty fast. Please see: http://schrts.co/CRGCJo
After 2007, China recovered nicely?
China went on a $500 billion expansion programme, which drove the boom in commodities. China has run out of steam, there will be no recovery this time under the current fiat currency system. China is doing all it can to rig it’s stock markets, it won’t be able to stop the great unravelling.
Look at commodity prices too, iron ore was at $180 a tonne in 2011, it’s about $48 a tonne now. China is actually now exporting iron ore. There is no demand from China, and the world can no longer rely on China to drive growth. We’re at the end of this great ponzi scheme of printing money.
Just a reminder that average GDP per capita in the other China, Taiwan, is about 300% that of the mainland. If the Chinese Nationalists had won the civil war instead of Mao’s Communists, China would have been the world’s largest economy decades ago.
Ahhh yes, and of course; when the theatre is ablaze, all those hapless patrons scrambling for the exits are to be considered culprits rather than victims of the mayhem and subjected to an onerous and confiscatory regiment of pat down scrutiny before they are actually granted egress.
Just another “poker” game. Make sure you have you poker face on.
Just another reason to cut any TV service unless its free.
Its funny how when you are young you thinks these are smart people. Then you grow up and realize the world is full of know it all head in the sand idiots.
ha yeah, to this day Axel Oxenstierna put it best when he said, “Do you not know, my son, with how little wisdom the world is governed?”
Truer words have not been said . I too believed Government leaders were wise people elected to office to do what is best for the country when I was young .Now I think they are a group of corrupt , lying self absorbed ass -clowns and psychopaths who could care less about the welfare of the country . My rule of thumb is this . Watch what has caught the imagination of the public and take the opposite action .If something has caught the eye of the Government watch what they do and double down going the other way .It is like free money .This is especially true if the Government is made up of left leaning politicians .They are without question the most idiotic f@cktards to walk on God’s green earth. But what I find especially amusing is how the vast majority of people when faced with a problem will run to these mental midgets demanding that they “fix it ” instead of relying on themselves,
I think GM Will get the Memo soon.
I do not know if correct but I read IIRC
40 % of GM’s 2014 net profit was generated by their owning Chinese Equities
And 17 % of GM’s motor vehicle sales were in China.
GM will be in for one big surprise – And I am sure other corporations may be too.
… Imagine if GM is not allowed to sell their Chinese equities without being subject to arrest ??????
. This GM in China story is a great story waiting to be told.
– Correction — I had a few minutes so I went back and took a look. It was worse then I remembered.
” This new situation is alarming for GM in China, the region accounted for 35% of its global sales in 2014.
” Also in 2014, the corporation earned 40% of its net income from investments made in Chinese equities. Alongside profits from equities, GM’s investments in China further added between 20% and 30% to the multinational’s operating cash flow last year, says a report by Barclays PLC (ADR) (BCS). ”
David S, your friendly ever dependable China hater, so myopic and not seeing that his coop is also burning.
The biggest bubble is the US Dollar, the one that enables our make believe world.
Here in the “developed” world “markets” it’s about time to demand action against “malicious buyers”. Jailing them would be a good start…
One more thing. “…the already evident rollover of world trade is just beginning its descent. So S&P profits are not immune…”
Actually, the S&P is as much a casino as are Chinese markets. There are few ‘stocks’ anymore but there are a hell of a lot of illiquid casino counters.
Ever wonder why there are no corrections anymore? Look at the breadth. Look at the volume. Stocks are now disproportionately owned by massive funds and institutions who have little need to ever sell, facing no interest rate pressure themselves. A tiny handful of shares are regularly swapped at slightly higher prices between these institutional holders. The little (retail) people are noticeably absent from western markets – not the case in China.
You can thank western CB manipulation and rigging of interest rates for that.
“Mao”, “Red” and “Great Leap Forward”, won’t be helpful to understand what happened in China but devalue the entire article. Curious about how to explain 2001 and 2008 of US from a “regime” point view? I definitely know US is not red. Could be blue or green?
Blood red would be appropriate.
Jesus, our middle class can’t even keep slave labor going, how pathetic.