Monday, Aug 24, 2015

We're doomed!

Reuters: Great fall of China sinks world stocks, dollar tumbles

I smell poo in the air!

Posted by brickormortis @ 12:04 PM (7916 views)
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25 Comments

1. icarus said...

The central bank of China has been printing money to fund and rollover loans for investors to buy stocks - QE in essence. Other desperation measures include ordering state pension funds and Chinas Sovereign Wealth Fund to buy shares. People have been encouraged to to use real estate (equity release) to borrow money to buy shares, companies have been encouraged to buy back their shares and State-owned enterprises have been ordered to buy the shares of their subsidiaries. Chinas central bank provides special loans to stock brokerage companies to buy shares. Fees for trading stocks have also been reduced to encourage stock buying. Shorting has also been prohibited or discouraged.

These measures were designed to offset the effects of margin buying, which is behind the collapse. Margin buying has more than quintupled in the last year. This is people borrowing on the collateral of shares they own in order to buy more shares This is Ponzi gone mad - it works only when the Chinese stock markets are rising. Any falls trigger margin calls, in which borrowers have to put up real money, which they can obtain only by selling shares into a falling market.

What's more, the vast majority of shares are owned by what Americans call 'mom and pop', or retail, investors - the ones most subject to swings of greed and fear, and fear is definitely waxing right now.

The majority of stocks in China are 'frozen' - no buying or selling. So the % falls reported are based on possibly only the 40% of shares that are actually trading. Will people buy shares which could be frozen again, and what will happen to the frozen shares if/when they trade again?

Measures to encourage buying and discourage selling are temporary at best and will exacerbate the problem even if they temporarily suspend it, since the problem was too much buying in the first place

In the face of all this policy action vainly trying to swim against the tide we can discount sentiments from 'chief investment officers' like "Volatility will persist until we see better data there or strong policy action through forceful monetary easing"

Monday, August 24, 2015 02:22PM Report Comment
 

2. hpwatcher said...

Expect massive dumping of London property.

Monday, August 24, 2015 03:22PM Report Comment
 

3. cyril said...

This might boost the housing market - less chance of interest rate rises I would have thought. Everything seems to boost the housing market.

Monday, August 24, 2015 07:13PM Report Comment
 

4. khards said...

Oh well, it started in China this time. I look forward to the queues outside haliwide and 0% rates in the last leg

Monday, August 24, 2015 07:55PM Report Comment
 

5. libertas said...

Now do you believe me rates are going down? Talk already about QE5 in USA plus deflation there. $30 oil will certainly cause it here. This could result in the shift in capital necessary to take UK property way above its 2008 peak and finally drive some of the house building the country needs, so all you sitting on the sidelines waiting for a fall, God help you.

Of course, there could be a liquidity drought leading to temporary falls, but I think that would only occur if BOE and FED raise rates into this weakness.

Furthermore, this signals a shift of capital from China back to USA, UK and Europe, although instability in Europe will send more than normal to the former two, whilst deflation is imported also. Recent falls in markets here are probably foreign investors funding margin calls, so could be temporary.

If China thinks that its policies will work, they are wrong. Markets do not rise when everybody is buying. Indeed, a balance of long positions leads to selling, as people exit positions. No, a market like this starts to rise once a consensus arrives on the short position, and then people buy to exist their short positions. Thus, manipulating the market at this stage could have the opposite effect.

Tuesday, August 25, 2015 06:19AM Report Comment
 

6. mister ed said...

@5
"could result... could be... although... probably... could have..."

In other words, you don't have a clue what's going to happen.

Still, there's nothing like hedging your bets. :-)

Tuesday, August 25, 2015 08:49AM Report Comment
 

7. hpwatcher said...

It doesn't look that possible, but I would still not be surprised it we saw a 0.25% rise. A token gesture is still possible.

Tuesday, August 25, 2015 08:49AM Report Comment
 

8. phils said...

FTSE will recover to a degree as there is computer software set to buy when it drops below milestones such as the 6000 mark.

Tuesday, August 25, 2015 09:39AM Report Comment
 

9. reticent said...

@2 seems like the dominant effect to me but I take Cyril's point.

We could see people moving out of shares and into property. We could see Chinese people looking to offshore more money and a lot of that could flow into London property.

I don't think so though. I think the recent CGT changes and the illiquidity of the Chinese will stem the flow into UK property. Recent articles suggest they already have. Local people will be put off by the BTL changes.

@5

"Markets do not rise when everybody is buying..."



@7

You've changed your tune. At this point, I'd be amazed, but I suppose it's not entirely unlikely.

To my mind, a perfect storm is brewing in terms of HPC. It depends how the Chinese react. A big sell-off coinciding with a lot of new builds coming online in London over the next 3 years means a ton of chains being started in London at a time when BTL is likely to be cooling off. That leaves no one to complete the chains except FTBs.

I've often said the next HPC might happen without a huge impact on the wider economy. A sell-off by foreigners would see HPs fall, sterling fall, an improved trade deficit etc. Obviously, there will also be capital flight from the productive economy and that includes construction. But the effects on GDP would surely be outweighed by the longterm benefits of rebalancing, assuming we don't end up with another banking crisis.

At the very least, it seems like a more optimistic thing to look out for than the debtsplosion/financial armageddon people keep predicting here.

But the threat of Brexit, the risk of a sterling crisis etc. still all loom large.

But I don't really get the risk of Chinese contagion. China is suffering the delayed effects of the rest of the world's slowdown, which they put off with stimulus. The end-user demand is surely still all in the West and that is still down on 2008. Stocks will be hit as they were trading on hopes of an explosion in Chinese consumption. GDP will suffer due to the resulting fall in investment. But are government spending, consumption or net exports in the UK somehow dependent on a robust Chinese stockmarket? I'm no expert, but I don't think so. China was buying tons of raw materials. We don't sell a lot of those and their prices crashed over a year ago anyway.

Tuesday, August 25, 2015 11:27AM Report Comment
 

10. mister ed said...

@9

I like the fact you didn't even bother to comment on the "Markets do not rise when everybody is buying..." statement.

Classic Libbyballs.

What more needs to be said?

Tuesday, August 25, 2015 12:03PM Report Comment
 

11. icarus said...

There is an element of Chinese contagion in western stock markets but the biggest connection is that both sets of markets are vulnerable because they are both supported by unsustainable debt. There is little difference between the use of margin debt for the purchase of shares in China and the use of debt for stock buybacks and boosting dividends in the US and, increasingly, elsewhere in western stock markets. US companies have boosted their per-share earnings by borrowing (issuing bonds/debt) to repurchase shares (reduce the number outstanding and thereby increase share value). Companies increase buybacks when profits are temporarily up but this market support quickly dries up when profits falter. This leveraging has been done at market valuations that are near the highest levels in history* at the very time when credit spreads in corporate debt are widening considerably (i.e. the cost of corporate borrowing is rising).

* This is explained at http://www.hussmanfunds.com/wmc/wmc150817.htm

Shareholders are becoming heavily leveraged without realising it. According to Bloomberg US corporations have issued $9.3 trillion worth of bonds since 2009, mainly to support buybacks, share valuations and dividends ($7 trillion on share buybacks since 2004 according to a NYT report).

In the past few years investors have counted on the Fed to intervene when stock markets fall but nowadays they aren't so sure - there's a growing recognition of what's been said here many times, that ZIRP/QE has done little apart from inflate assets while government and corporate debt have ballooned. It's coming to the point at which debt servicing, shrinking revenues, too much leverage and higher corporate borrowing costs will no longer make stock buybacks a sensible option - and that spells real trouble for shares. And the credit markets (a good leading indicator) are already flashing red - with investors exiting bond funds in a big way.

Again it's the small investors who lose out. They bought the bonds, loaned money to CEOs and big shareholders, who split the cash among themselves and ran - windfall profits that will never be repaid. 'Liquidity issues' in corporate bond markets are caused by this theft.

Tuesday, August 25, 2015 03:10PM Report Comment
 

12. khards said...

IMO this is the small one.
I have a feeling the markets would have recovered and exceed all time peaks by November.
That's the setup for the big one.

Tuesday, August 25, 2015 07:11PM Report Comment
 

13. hpwatcher said...

@7

You've changed your tune. At this point, I'd be amazed, but I suppose it's not entirely unlikely.


Not really. A token rise of 0.25 *may* happen, but rates won't be going back to anything like normality, under the current monetary system...too much public/private debt. I see currency crisis before interest rates need to rise in any meaningful way.

Wednesday, August 26, 2015 09:22AM Report Comment
 

14. reticent said...

@13

http://www.housepricecrash.co.uk/newsblog/2015/08/blog-solid-recovery-means-interest-rates-will-rise-125217.php

This is a conversation we had just over a week ago...

You: I do *LOVE* all the propaganda coming out of Threadneedle Street. [...] Sterling is quite strong - with inflation at 0% - so why raise interest rates on the basis of some prediction that might never happen. Added to the mix that the [non-existent] wage growth and rising unemployment.........just talk and nothing else.

Me: [...] They do obviously, honestly intend to raise rates at some point.

You: After 7 years, you would expect so, but I'm still not convinced.

Me: Are you seriously contending that the MPC has some clandestine plan to keep rates low forever and keep the charade of imminent rate rises going indefinitely?

You: I'm not sure the MPC can increase interest rates. Their hands are pretty much tied. As much as I disagree with it, I think this charade can go on a lot longer.

And now...

"It doesn't look that possible, but I would still not be surprised it we saw a 0.25% rise. A token gesture is still possible."

"A token rise of 0.25 *may* happen, but rates won't be going back to anything like normality, under the current monetary system...too much public/private debt. I see currency crisis before interest rates need to rise in any meaningful way."


The BoE has made it clear that they want to raise rates sooner rather than later because they want to raise them very slowly. They've told people not to expect rates of 5% for at least 3 years (or was that 3% in 5 years, I forget...). They also say they are going to raise rates within the next few months (late 2015/early 2016).

In 10 short days, you've gone from decrying everything they say as propaganda, to predicting that they will do exactly what they claim they intend to...

The only thing that seems to have changed since then is that the markets have given them a pretty good excuse not to follow through on raising rates for the time being.

Wednesday, August 26, 2015 10:58AM Report Comment
 

15. hpwatcher said...

@14 - so what? When new information comes to light, I will modify my views.


The only thing that seems to have changed since then is that the markets have given them a pretty good excuse not to follow through on raising rates for the time being.

It all depends upon the forces behind the scenes. In the last few days, I've heard about something pretty big going on that might force the hand of the FED into a *small* token rate rise. BUT I still maintain, interest rates won't rise in any way that will actually make a significant difference.

Wednesday, August 26, 2015 01:47PM Report Comment
 

16. britishblue said...

Icarus@1. Excellent post. I think the point about Mom and Pop investors in China is crucial. The other point is that a lot of these people have never experienced the swing side of capitalism that what goes up may well come down hard as well which they are seeing in both stocks and property. The speculative fever is going to be crushed for a generation. Any mom and pop that has bought for less than 3000 will be looking to get out. In late 2013 the index was only 2000, so the rise to over 5000 had nothing at all to do with value and all to do with a bubble and a lot of this bubble was create by getting the mom and pops in the market. In fact given the slow down in the economy chinese companies should be worth less than they were in late 2013.

London property is an international market. It is no longer a local market. So events abroad are all connected. There are those that believe whatever the scenario the only way is up. I tend to think we may be running out of ups and the downs will be coming into play.

The only thig that connects the London market to the wider UK market is sentiment. If London crashes then sentiment will hange over the UK.

Wednesday, August 26, 2015 09:47PM Report Comment
 

17. britishblue said...

Icarus@1. Excellent post. I think the point about Mom and Pop investors in China is crucial. The other point is that a lot of these people have never experienced the swing side of capitalism that what goes up may well come down hard as well which they are seeing in both stocks and property. The speculative fever is going to be crushed for a generation. Any mom and pop that has bought for less than 3000 will be looking to get out. In late 2013 the index was only 2000, so the rise to over 5000 had nothing at all to do with value and all to do with a bubble and a lot of this bubble was create by getting the mom and pops in the market. In fact given the slow down in the economy chinese companies should be worth less than they were in late 2013.

London property is an international market. It is no longer a local market. So events abroad are all connected. There are those that believe whatever the scenario the only way is up. I tend to think we may be running out of ups and the downs will be coming into play.

The only thig that connects the London market to the wider UK market is sentiment. If London crashes then sentiment will hange over the UK.

Wednesday, August 26, 2015 09:47PM Report Comment
 

18. Techieman said...

Nice to see hpw hasnt changed.

I do recall him saying IRs would not go up... forever. To be fair ir was a pretty good call (in marked contrast to his calls on the yellow stuff).

Thursday, August 27, 2015 07:13AM Report Comment
 

19. reticent said...

@15

Fair enough. Care to share your new information?

Thinking about your cryptic comment has given me an idea though. Supposedly, the Chinese are running out of foreign currency reserves. My understanding was that they held most of their foreign currency in dollars, as US treasuries, as a result of pegging to the dollar for so many years in which they held down the Yuan. They announced a change to peg that was against a basket of currencies from a few years ago and I just read they abandoned the peg some months ago, but apparently they've burned through a lot of FCR since then.

If the world's biggest buyer of US bonds (excepting Pimco) is having to sell them off, surely the Fed will have to put rates up to keep flogging their debt?

Thursday, August 27, 2015 11:10AM Report Comment
 

20. reticent said...

Having just googled it, it seems there's a lot of noise about this.

If you google "china dumping us treasuries", you get loads of zero hedge links, but change dumping to selling and it returns news from more reputable outlets.

Here's a good summary:

http://www.bloomberg.com/news/articles/2015-08-27/china-said-to-sell-treasuries-as-dollars-needed-for-yuan-support

Thursday, August 27, 2015 12:18PM Report Comment
 

21. hpwatcher said...

Having just googled it, it seems there's a lot of noise about this.
If you google "china dumping us treasuries", you get loads of zero hedge links, but change dumping to selling and it returns news from more reputable outlets.
Here's a good summary:
http://www.bloomberg.com/news/articles/2015-08-27/china-said-to-sell-treasuries-as-dollars-needed-for-yuan-support


That's another good one - although I'm not sure exactly what is going on as proxies are being used heavily on all sides.

Thursday, August 27, 2015 12:56PM Report Comment
 

22. hpwatcher said...

All the indications are that there may be QE and rate happening at the same time. Sounds stupid?

The thinking is to target different sections i.e. QE at the long end and interest rate rises at the short end - of treasuries. Also whispers of applying different financial tools to target core reserves as opposed to excess reserves.

Getting desperate?

Friday, August 28, 2015 07:15AM Report Comment
 

23. reticent said...

@hpw

FWIW, today's economist said the Fed would be unwise to go ahead with the rate rise that the markets were expecting in early september.

The QE/raise combo actually sounds fairly sensible in that it's a rate rise with a baked-in indication not to raise rates too quickly. But you would think the Fed would want to avoid QE however, given how much obstruction there was to them tapering last time.

Are you talking about US treasuries or gilts? Where are you reading this?

Also, you never told me what the information on the ground was that led you to think they would go for a token raise...

Friday, August 28, 2015 09:23AM Report Comment
 

24. reticent said...

@mister ed

Sorry I forgot to reply. Actually, I put a joke in angled brackets and the site obviously read them as html tags and omitted them.

In truth, the post is funnier as it is, as my joke was not the greatest.

Sometimes, it's best just to let the nuggets of wisdom echo around the thread so the rest of us mortals can take the time to digest them fully.

Friday, August 28, 2015 10:51AM Report Comment
 

25. hpwatcher said...

Are you talking about US treasuries or gilts? Where are you reading this?

I think I said treasuries in my earlier comment.

But you would think the Fed would want to avoid QE however, given how much obstruction there was to them tapering last time.

Might not have any choice. We'll see. I'd be hurt by rising interest rates, so I most certainly don't want to see that.

Also, you never told me what the information on the ground was that led you to think they would go for a token raise...

Conversations I referenced in my earlier post i.e. a combination of QE and rising interest rates.

Friday, August 28, 2015 02:42PM Report Comment
 

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