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:
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.