08 January, 2016
The world got back to work this week, after the Christmas / New Year holiday season — but it’s a fair bet that it wishes it hadn’t bothered. The year opened with a global rout on the financial markets, with hardly a securities market on earth saved from serious declines.
The markets, as usual, made the headlines, but the two mega-developments driving the markets down are far more important than the umpteen billions that were ‘wiped off’ the value of stock markets (funny that the headlines never report about umpteen billion being added to the value of stock markets, on days and weeks of sharp rises).
The first and more important of these developments was in China. It was the renewed crash in the Chinese stock market that triggered the mayhem across the globe, from dawn in the Far East on Monday, at least through High Noon in New York on Thursday. But this dramatic crash seems to have been, in large part, a panicked response to new rules imposed by the Chinese authorities on the manipulated and still ridiculously overvalued operation called the Shanghai Stock Exchange.
It will be recalled that it was the supposedly wise and powerful Chinese government that deliberately lit the torch under the Chinese equity market in mid-2014, sending the main Shanghai index from 2,000 to over 5,000 in under a year (speculative markets, such as Shenzhen, did far better…). When — surprise, surprise — the manic bubble burst and the market collapsed, the same wise and powerful government turned somersaults in its efforts to stop the rot. Trading was halted on most shares, selling short was outlawed, selling at all was ‘discouraged’, state firms and funds were ordered to buy and, eventually, the market stabilized.
The myth of Chinese wisdom
The new regulations that took effect January 1 said that if the main market index fell by 7% during a trading day, the entire market would shut down for the rest of the day. Bolstered by this display of wisdom and omnipotence by their leaders, Chinese traders wasted no time in putting the new rules to the test on the first trading day of the year. Lo and behold, the market slumped by 7% — and shut down. The next day, government efforts stemmed the slump and Wednesday saw some recovery — but Thursday was a repeat of Monday, with a further 7% slide triggering the close of trading for the day. That evening, the wise mandarins in Beijing abolished the new rule…
This sad tale is evidence enough that the myth, firmly believed and desperately clung to by many investment gurus in America (and elsewhere), that the Chinese government knows what it’s doing and can see far ahead, is not only baseless, but utter balderdash. However, the real problem for China and the world — and the real reason why the economic outlook is so bleak — is that the Chinese Communist Party not only doesn’t understand anything about markets, it has also manipulated and warped the entire Chinese economy. Mal-investment on a scale unprecedented in human history has done enormous physical damage to the country and its people, but what’s worse is that it has created a financial wreck that dwarfs the debt problems of America and Europe combined.
The economic disaster in China has been building up for several years and became fully apparent during 2015. Now it is busting out and threatening to engulf the world in a deflationary depression. The Chinese currency is rapidly losing value — foreign analysts are debating whether this is a deliberate policy of the wise men from Beijing or whether they have lost control on this front, too — and that has destabilized the Far Eastern economies which are now all, to a greater or lesser extent, satellites of the Chinese sun.
The devaluation is being driven by a huge outflow of yuan seeking a home overseas. Even Israeli media commentators have finally figured out that the reason Chinese money is pouring into Israel is not because insurance and other companies here are so inherently enticing, but because Israel is (also) somewhere other than China and the shekel is something other than the yuan.
The Federal Reserve vs reality
Meanwhile, back in the good ole’ USA, the data published this week have confirmed the trend plainly visible in December and ever earlier — the American economy is heading into recession, if it isn’t there already. This is very shocking, since the Federal Reserve finally took the plunge and raised interest rates in mid-December, claiming that the American economy was at last lifting off and the recovery from the previous crash was, finally, self-sustaining. Raising interest rates when the economy is recession-bound is unthinkable, therefore in a conflict between what the Fed and what the actual data say, true believers must follow the words of the Fed — which, after all, knows better and runs the world.
The first week of 2016 has therefore been as traumatic for American true believers as for their Chinese counterparts. It now seems that the Fed does not know better and, even worse, it does not run the world. Even the alternative view, that the Chinese know better and run the world, has gone up in smoke. Nice work for a single week. Stay tuned for more.