mouthballsNever mind the facts, let them eat bollocks

Asian markets have just closed. The Shanghai Composite Index closed down 7.6% at 2,964.97, leaving it below the psychologically important 3,000 line. Elsewhere in China, the Shenzhen closed 7.1% down at 1,749.07, and the ChiNext plunged another 7.5% to 1,990.71. Tokyo tried an early rally (the BoJ buying like mad, probably) but sentiment rapidly reversed that and so the Nikkei too closed 4.5% down.

Out of 2,200 stocks on the Chinese markets, just 12 (twelve) rose yesterday.

But nevertheless,”Investors are overreacting about economic risks in China,” Capital Economics said in a research note to clients this morning. “A combination of poor data and policy inaction in China may have triggered today’s market falls but the bigger picture is that we are witnessing the inevitable implosion of an equity market bubble.”

There are two flaws in that balm. First, it leaves out a few points: for example, there’s been the screeching of brakes on economic growth, the banking system is short of cash, and investors are pulling money out of the country leaving only scorch-marks on the carpet.

Second – and infinitely more important for the knock-on effect – there is a blithe assumption in CE’s voice of calm that seems to suggest the US and UK aren’t equity market bubbles. There’s a very large elephant balloon bobbing against the ceiling in that room, with the letters ‘QE’ in 300pt Ariel black bold stamped on its bum.

But Goldman Sachs also put out a note suggested that ‘the risk of a U.S. recession is very low, considering the pace at which the economy is still expanding’ and ‘recent events may make the U.S. Federal Reserve less likely to take action in the coming weeks’. No shit, Sherlock. Or put another way, “FFS Janet don’t leave us to our fate cos if you do we’re all gonna die!”

As for the ‘expanding’ weasel there from GS, there’s no evidence of that at all. In fact, in June The OECD slashed its U.S. 2015 growth projection from 3.1% to 2%. Nothing at all suggests that the real US economy is expanding: non-farm payroll data have been fiddled since the days when Bill Clinton was using cigars for his gynaecological experiments, and neither hours per job nor wage rates have done anything but fall. Without taking account of the QE element in recent years (because yes, unbelievably the Fed counts its own chucking about of free money as ‘economic activity’ rather than ’emergency bank underpinning’) the US economy has been in permanent recession since 2010, it’s share of world trade has fallen steadily for more than a decade, and in case Lloyd Bankfine hasn’t noticed, world output and trade have slumped.

There was an unintentionally funny tweet yesterday from some mouthpiece or other saying ‘Important we recognise this fall reflects Chinese incompetence and local banking system problems’. Well buddy, here’s one thing all stock markets in 2015 have in common: bonkers credit levels. And after a certain plunge velocity is achieved, people start selling stocks not because they’ve lost faith in them but because they need to sell the equities in order to pay the credit bills. And if some people demand more credit because they’ve run out of stocks to sell, banking firms run out of money and start borrowing from other banks. Then the word gets round that so-and-so bank needs to borrow and to be continued soon at a bank near you.

It is of course entirely possible that the West’s investors will talk themselves out of this initial outbreak of reality, and it will remain ‘a correction’. Except even if that happens, it won’t be a correction….because neither the City nor Wall Street are anywhere near the value they should be as yet.

For example, here’s a startling fact with which to amaze your friends at supper parties: the S&P500 has gained 1500% in ‘value’ since 1982, yet the GDP of the United Stares is only up 250% on the value it recorded in 1982. That’s how daft bourses are. That’s what I call a bubble.

News about the real economy and other minor events like a Korean War will continue to play their part. As and when they do, we can expect broadscale censorship. Evidence coming out of China last night shows this is already happening there: in what was headed “A notice to all state media about negative market reports”, the four items below are to be declared illegal and censored:

chinese“Due to related rules & policy, some search results won’t be shown” said some pc screen panels as analysts tried to aggregate the more calamitous data.

And of course, before we all get hoity-toity about China being a dictatorship, let’s just remember that here in France, if evidence of say Credit Agricole being in a parlous financial state were to cross my desk, it would be a crime for me to publish it.

But for the time being in the West, it’s all calm reassurance. And indeed, the West’s futures do suggest the Damocles mood has eased somewhat: Stoxx Europe 600 futures are up 1.6%, German DAX futures climbed 1.4% and in the U.K., FTSE 100 futures are 1.5% higher. All those markets are open and reflecting those prophecies. Stay tuned.


  1. the wonderful midnight ramp has saved us all again…. everything is alright just buy.. and if you believe that, you will believe absolutely anything..


  2. It was obvious this moment would arrive in Beijing as soon as the one millionth empty apartment was counted. There are some 60 million chinese ’empties’ now, a number equal to half the total US housing contingent. Perhaps China could house the world’s migrants, and give them a job in a factory. Everyone would win.


  3. ‘give them a job in a factory’
    Nice idea but, all their newest factories are populated with robots, they don’t need workers anymore than anybody else.


  4. I think I may have worked something here, all are welcome to critique but here is my current theory.

    America has ‘won’ – its fiat based currency hegemony has at last come right for them, at the moment there are other things going on but they have in fact pulled off a stupendous sleight of hand.
    Currently the oil price is one of the major drivers of uncertainty and economic woe. Why is the oil price down? – oversupply and lack of demand – basic economics.

    Where does the oversupply come from? – US frackers adding output where once it did not exist.
    But the frackers’ costs are unsustainable is the retort, and we have had some superb comment on this subject from JW in terms of the business model of the fracking industry being unsustainable.

    Then this realisation, the frackers are built on debt, debt created from nothing on a bank computer – the US can therefore ‘create’ the fracking industry by creating the money to fund it – if you approached your local bank manager for a loan based on the fracking model you would be quickly ejected from the building, the fracking companies in the US are funded by the bucketload.

    Saudi relies on the petrodollar – and now the oil price is so low, their government spending means that they are now burning their reserves to pay for their government programmes.

    When oil prices were high the Saudis were in control because they were accruing dollars which could be sold/spent, now that they are depleting their reserves they are now forced to keep pumping and pumping oil in the vain hope the frackers will go bust.

    But the frackers are simply a construction of the US banking system built on fictional fiat currency.

    Because the frackers and the Saudis are strapped to the same currency system (as in the Euro crisis) the US will always be in a position to control the game – they can break Saudi, they can break anybody – if you control the medium of exchange you always win in the end.


  5. It’s a good theory, I’ll give you that, and very plausible but, where does China fit in in all this? Because quietly they too are planning for the future and that future is envisaged without a US hegemony/Petrodollar in their minds, is this all manufactured by China? Some believe that it is and it is aimed primarily at the US.


  6. Seems sound to me, IP.
    Also, low oil prices are damaging Russia’s energy export dependent economy, & breaking & dominating Russia, China & the BRICS is now the main plank of US foreign policy. It’s one reason Obarmy has made a deal with Iran, in order to concentrate On Russia & China in its mad world hegemony plans. How do you factor these in?


  7. Would it be illegal for to categorically state that not only Credit Agricole, but the biggest and second most bankrupt Bank in the the world just happens to be BNP, yes good old Bank Nationale de Paris Paribas


  8. But for the time being in the West, it’s all calm reassurance. And indeed, the West’s futures do suggest the Damocles mood has eased somewhat: Stoxx Europe 600 futures are up 1.6%, German DAX futures climbed 1.4% and in the U.K., FTSE 100 futures are 1.5% higher. All those markets are open and reflecting those prophecies.

    I could well disabuse you of that.
    Calculations show that the S& P 500 earnings are future earnings growth are actually at Feb 2010 levels and from that start point the current levels are GSPC 85.14% over the level at that time and have fallen just -11.15% from all time high.
    That means the SPY could fall at -11.15 % every month for the next 10 months.
    And STILL be over 30 % above its Feb 2010 level

    This was a pinprick in the bubble


  9. And the NASDAQ, well that is 116.38% over the level then and -13.27% off its high.
    So 7 month of down 13.27 every month will STILL have that at over 32 % above Feb 2010 levels.
    Scary or what .. That’s how far it has to go before any semblance of fundamentals appears


  10. Yes, the markets seem to be heading north of +4% this morning, panic over, business as usual, for the time being.
    Busy Boys the Plunge Protection Team eh?


  11. IP you are correct & Gil its all not a problem. Just manufacture more fiat when you need it and you control everything…… until the straw that will break the back then its all down the toilet…


  12. From ClubOrlov:
    “If you think that foreign powers repeatedly attempted to invade and conquer Russia in order to gain access to its vast natural resources, then you are wrong: the access was always there for the asking. The Russians are not exactly known for refusing to sell their natural resources—even to their potential enemies. No, what Russia’s enemies wanted was to be able to tap into Russia’s resources free of charge. To them, Russia’s existence was an inconvenience, which they attempted to eliminate through violence.

    What they achieved instead was a higher price for themselves, once their invasion attempt failed. The calculus is simple: the foreigners want Russia’s resources; to defend them, Russia needs a strong, centralized state with a big, powerful military; ergo, the foreigners should be made to pay, to support Russia’s state and military. Consequently, most of the Russian state’s financial needs are addressed through export tariffs, on oil and natural gas especially, rather than by taxing the Russian population. After all, the Russian population is taxed heavily enough by having to fight off periodic invasions; why tax them more? Thus, the Russian state is a customs state: it uses customs duties and tariffs to extract funds from the enemies who would destroy it and use these funds to defend itself. Since there is no replacement for Russia’s natural resources, the more hostile the outside world acts toward Russia, the more it will end up paying for Russia’s national defense.”


  13. For Northern hemisphere democracies, what is not to like? The price of crude oil tanks, a wealth transfer from the Gulf and Russia to us. A collapse in iron ore and copper prices keeps inflation low. China devalues, so imported loo paper holders fall.,in price. They still are reliant on buying Western technology. The Russian and Chinese middle class realise the game is up for one party states, rigged elections and aggressive foreign policy. You are witnessing the slow triumph of democratic capitalism over the impoverishment of the masses, inbuilt into the renegade political systems of both China and Russia., The level of stock market indices in the West is irrelevant, all provided that dividend payments are, in the round, maintained. Write a put in Antofagasta.


  14. @kfc ‘they don’t need workers anymore’. Exactly – this why increasing numbers of migrants (with refugees from war zones) will be rattling around the world in search of a job.


  15. Remind me, Rowan, what planet do you hail from?

    Reminds me of the old Lorraine Chase advert: voice says, “were you wafted here from paradise?”
    The lovely Lorraine: “NAAAWWWHHH, Luton airport.”


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