WASHINGTON, July 27, 2015 – Forget Greece and the U.S. Federal Reserve. Don’t even pay any attention to that massive Puerto Rican default in the making. The ongoing Wile E. Coyote waterfall decline in the grossly overinflated Chinese stock market continued at a sickening pace Monday, dragging all other world stock markets right down with it.
After bowing, scraping and paying obeisance to the Chinese Communist Party’s new and improved version of capitalism—we call it “Command Capitalism”—Western economists, politicians and traders in particular are getting yet another lesson on how “this time is different” never is.
What’s happening in Chinese markets
For a variety of reasons beyond the scope of a short column, the Chinese allowed hordes of small investors for the first time to buy and sell Chinese stocks on Chinese stock exchanges, even permitting foreign traders to invest directly in Chinese stocks for the very first time. “Irrational exuberance” doesn’t begin to describe what happened next.
Neophyte investors swarmed the markets and bought up everything in sight, no matter what the price. Chinese markets began to go parabolic* within days (see chart below), a situation made even more volatile as the newbies discovered the magic of margin and leverage, doubling and tripling their bets with what seemed like free money.
When the Chinese government belatedly figured out that their version of Wall Street was morphing into a virtual Macao, they tried to slow things down by making margin requirements more stringent. Ooops, here comes a wave of panic selling.
The plunge began in June and has increased in velocity ever since. The Chinese government first tried to halt the decline by banning nearly all selling. In other words, if you’re stuck with a dog of a stock—which pretty much described all Chinese stocks at this point—too bad. You’re not allowed to dump it. Worse, if you or any corporate entity tried to dump stocks on the proscribed list—anything between 70 and 85 percent of all stocks as best we can ascertain—you could wind up in the slammer or worse.
That was a winner. Every time the Chinese tried to restore normalcy from this point on, stocks and averages got hammered again. So next, the Chinese government’s version of Western governments’ secret “Plunge Protection Teams” (PPTs) intervened and pledged up to 10 percent of that country’s gross domestic product, an amount estimated at around $1 trillion in U.S. dollars, along with implementing numerous other “tools” to prop those collapsing averages back up.
In addition, according to ZeroHedge, the Chinese government also issued “such threats as arresting shorters of stock and ‘malicious sellers,’ actions which have merely slowed down the bursting of the world’s biggest stock bubble in recent years… China has finally reverted to what the communist regime does best to preserve ‘order’ – implement witch hunts in which the population rats out any criminals who dare to go against the protocols of the communist party. In this case, the targets are ‘malicious sellers’ with the regulator adding that those found guilty of shorting will be ‘dealt with severely.’”
In Communist China, of course, that last phrase often translates into “dealt with by issuing death penalties against all perpetrators and hooligans,” to borrow that favorite term Russian Communists love to use to describe anyone who disagrees with them in the slightest.
What are the lessons we can take from the Chinese market decline?
Why should we care about this latest Chinese witch hunt? Simple. First, such a thing could happen here at some point, just as the mess of impossible Greek indebtedness has plagued and perplexed Europe. If we continue to make the same mistakes as other governments are making, we’ll suffer the same fate. That’s particularly true with our current feckless administration which is either ignorant, malicious or both when it comes to preserving this country’s economic strength.
But marketwise, and perhaps more important, since all markets are interconnected these days—even heavily manipulated ones like China’s—the rest of the world has become frightened as well. Investors large and small are reacting by either bailing out of or shorting just about anything they can find, creating massive, endless selling pressure with larger and larger bid-ask spreads;** and, in some stocks, creating a complete inability to discover a realistic bid. Which means of course that there are essentially no buyers left. Which, in turn, means that the current decline is growing faster and deeper than Wile E. Coyote’s worst nightmare.
Things haven’t been helped, either, by the deflationary decline of commodity prices virtually across the boards. This even includes gold, although the precious metal has been manipulated on a massive scale by international central banks and their minions for reasons that haven’t been disclosed.
Oil continues its steep decline, with WTI down again
Worse still, instead of settling down, the tsunami of oil and gas production worldwide has sent the price of those raw materials cascading downward at a dizzying rate. West Texas Intermediate (WTI) was off again Monday morning, sitting at $47 bbl. and change this morning. WTI is getting awfully close to the bottom it reached earlier this year when that price dropped briefly below $44.
Earlier this year we estimated that WTI would travel between roughly $40-60 bbl. for the indefinite future, and so far we’ve been more or less right. WTI broke through $60 to trade around $62 bbl. for a bit, sitting around $60 for a time before commencing this summer’s sickening swoon. Given how swiftly this happened, we now wouldn’t be surprised to see it tick below $44 again, and maybe even dip below our low end estimate for a time.
Meanwhile, everyone is getting scared again whether they’re in the market or not. No one, apparently, bothered to spend all the money they saved when we got that spring dip in prices at the pump. Evidence is clear that Joe Sixpack either banked the money he saved, or else used it to continue paying down all that 2008 debt that’s still on the family balance sheet, given that the Fed never put any money into Joe’s hand during the “stimulus”—just into the waiting arms of big banks and big business where it has sat idle for seven years.
Greedy oil companies promptly squandered their opportunity to snare commuters and summer vacationers back into filling up their tanks with abandon by running their usual seasonal game of pumping up summer gas prices close to what they were last summer in many states. That slowed consumption that was finally beginning to take off, demonstrating equal amounts of greed and stupidity, which by this point should be no surprise to anyone with half a brain.
What do do as Wall Street instant re-plays “The Fear Factor”
Watching your personal portfolio these days is like being on a hidden camera in that periodic cable TV “reality show” known as “Fear Factor.” In that show, unwary participants suddenly confront a contrived but very real horror scenario, and the camera–and the viewers–get to watch how these hapless victims freak out.
In this summer’s developing “Fear Factor” market, until and unless things settle down, just about any investment you have in the market is at least in short term danger, meaning that getting and staying in cash becomes more and more important. As the selling eventually exhausts itself, those with a lot of cash will be in good shape for picking up super-bargains. Problem is, we have no clue at this point when this bloody decline will finally come to rest on the canyon floor.
It’s almost a certainty that we’re going to be short term oversold some time this week and perhaps even at today’s close. So stocks could get a swell short-term bounce.
But this reversal is getting powerful, even inclining us toward doing something we don’t normally do, namely, take our lumps in stocks, like oil and gas issues, that we overestimated and over-bought, and gradually re-deploying it in select regional banks which will do nicely if and when the Fed ever finds a convincing reason to increase interest rates, something that will help these banks out enormously.
But even this is a long-term bet.
Short term, it behooves you and the Maven to stop any bleeding in the portfolio by cutting off and cauterizing the offending stock or stocks. Right now, the big markdown is still underway. So at this point, the shrewdest and safest thing to do is wait for the final liquidation sale.
None of this is any fun. But if it were always fun, everyone would be rich, right?
*Parabolic. **Bid-Ask Spreads. This article is too long already. But if you’re relatively new to markets and want to understand the significance of these key terms, we’ve provided that info in a related article in our general educational CDN investment column, “The Prudent Man,” which you can read by clicking right here.