Can you hear it? That giant sucking noise?
That is the sound of $240 billion getting pulled into a bottomless pit.
That’s just since June, and it is just the start of it, too.
China is in full-blown triage mode, dumping all that money into its stock market, along with:
- investigating short positions,
- arresting or questioning 197 people about online market rumors,
- raising margin requirements and tightening position limits,
- driving futures market volume down 99%,
- halting IPOs and new share issues.
Plus all of the scuttlebutt and press releases showing glimpses of intense concern behind the official facade of 7% growth.
Somehow, always 7%. How peculiar and convenient.
Plus the People’s Bank of China spent $93.9 billion propping up the yuan, nearly twice the $50 billion it spent in July.
This puts the country in a vicious cycle where anyone with the capacity to move capital out of the country will to retain wealth, accelerating the rate at which the PBOC has to burn through cash.
No wonder it just started tightening capital controls, after years of letting them gradually unwind.
In spite of Chinese officials’ attempts to quell global market fear over China’s economy, reality is staring us right in the face.
A Tough Decade
The day after the massive 1,000 point drop in the Dow, I wrote about how China isn’t solely to blame for what happened.
I still stand by that, in spite of everything going wrong in China right now.
China is entering a rough transitional period.
It spent decades tooled for ultra-cheap exports and labor. Now wages have grown considerably and the goal is to depend on domestic consumption to propel growth.
It has been common knowledge for years that this would involve a period of slower economic growth.
It has also been widely known that shadow banking has become massive in the country.
Same with zombie companies that can only subsist on the chain of bank loans propping them up, and the government propping up the banks.
Ditto with industrial overcapacity and massive infrastructure spending propping up growth.
Yet, no one can stomach it now. The simple fact is, now is never the right time to deal with reality anymore.
Greece, debt ceiling limits, and the eternally ominous Fed rate hike, etc.
These are all issues we need to deal with. We know it, but it is always not now.
All this, in spite of the fact that the problems are only getting worse.
Greece’s “bailout” was essentially the rest of Europe moving money from one hand to the other, and forcing Greece further into a form of national serfdom.
The debt ceiling will eventually be lifted, after another round of brinksmanship and bluster. Yet Congress hasn’t managed to pass a budget in many years.
China doesn’t want to deal with the fact that it is faltering, so it is throwing hundreds of billions of dollars in a matter of months at a problem that will persist for many years to come.
And the Fed is under renewed pressure because of market uncertainty over a hike from 0.15% to 0.4% with no other hikes even visible on the horizon.
It never seems to end, but it has to, and we’re caught in the growing storm with no paddle.
Extracting Every Last Cent
At the heart of this untenable procrastination to fix problems, or at least let them pan out without manipulating a way out of them, are legions of institutional and professional traders that are hell-bent on getting every last cent out of the market right now.
No matter what it costs them tomorrow, no matter what lasting damage it will cause, the stocks must rise, the companies must buy back shares, or they will throw a temper tantrum.
The domestic stock market is shrinking as it cannibalizes itself with the buybacks, cash mergers, lack of IPOs and secondary offerings, and that money is going straight to the top earners in the economy and skipping the rest.
Part of squeezing every last cent out is making sure everything stays propped up as long as possible. Hence the pressure on the Fed to keep the floodgates wide open.
Same with ECB and European intervention, Japanese intervention, and now Chinese intervention.
While business leaders and institutional investors, many of whom have been cycling through the same revolving doors for decades, cannot directly do this, they certainly can bring a lot of pressure.
The same applies to China’s wealthy elite, who have seen meteoric rises in fortunes, which are then siphoned out of business accounts via rampant corruption and spread to tax havens, foreign real estate, and God only knows what else.
Then there is us…
Today we have a large chunk of the EU, America, Japan, and China, a vast swath of the global economy, throwing everything they’ve got at preventing the inevitable.
We have a minuscule fraction of the population sucking it all up and calling for more — junkies in need of an ever greater amount to get their fix.
Then there is us, stuck along for the ride.
I hate to sound defeatist, but there isn’t much we can do to change the situation except to keep calling for rational policies and spreading the word.
However, there are things we can do for ourselves that will make a huge, positive difference for our ultimate outcome.
We’re looking at a tough couple years, if not a tough decade ahead. We can weather this and, in the end, come out ahead.
There are more ways to do this than I can list, or possibly know well enough to use for myself. But this is what I know well.
Invest in companies that have something that people need. Find strong companies with things that cannot be replaced. Invest in something real, and hold it until the manipulation ends.
