BREAKING: Chinese stock market ends 3% lower, w/ 1,200+ stocks down 10% daily limit; Chinese media admit gov “failure to boost market” today
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Can We See a Bubble If We’re Inside the Bubble?
Can We See a Bubble If We’re Inside the Bubble?
We want this time to be different so badly, we can almost taste it.
If you visit San Francisco, you will find it difficult to walk more than a few blocks in central S.F. without encountering a major construction project. It seems that every decrepit low-rise building in the city has been razed and is being replaced with a gleaming new residential tower.
Parking lots have been ripped up and are now sprouting condos and luxury rental flats.
The influx of mobile/software tech into the S.F. Bay Area has triggered not just a boom in tech but in all the service sectors that cater to well-paid techies. This mass of new people has created traffic jams that last virtually all day and evening, and overloaded the area’s BART transit rail system such that trains at 11 pm are as jammed as any during rush hour.
This phenomenal building boom is truly something to behold, as it has spread from S.F. to the East Bay as workers priced out of S.F. move east across the Bay, driving up rents to near-S.F. levels.
This is of course a modern analog of the Gold Rush in the 1850s, and the previous tech/building boom in the late 1990s: an enormous influx of income drives a building boom and a mass influx of treasure-seekers, entrepreneurs, dreamers and those hoping to land a good-paying job in Boomland.
The same phenomenon has been visible in the Oil Patch states every time oil/gas skyrocket in price.
We know how every boom ends–in an equally violent bust. Yet in the euphoria of the boom, it’s easy to think this one will last longer than the others.
…click on the above link to read the rest of the article…
Within Or Without The Stock Bubble Matters A Great Deal
Within Or Without The Stock Bubble Matters A Great Deal
As doubts surrounding QE have grown, there has been a somewhat detectable if still small trend in central banker repentance. Alan Greenspan to an extent has embraced a more decentralized and market framework in his public comments even though he has yet, to my knowledge, actually repudiate his own work more directly. As noted a few days ago, former BoE governor Mervyn King has been far more open and alarming. While that may seem to indicate that monetarists only find free market “religion” once out of the drudgery of their professional office, I think Zhou Xiaochuan, head of the PBOC, performs the exception.
The direction the Chinese central bank has taken since late 2013 seems to confirm that idea more and more. Viewed as a repudiation of textbook monetary tactics and even basic justifications, the PBOC has become if not more “market” oriented at least drastically shifting priorities from the conventional, QE definitions of “growth at all costs” to something like managing that past mistake (as the PBOC took orthodox monetarism to new levels of insanity from 2009 through 2012). Last April, really at the outset of what China was about to do, Zhou issued a warning that looks to have been quite appropriate:
“If the central bank is not a part of the government, it is not efficient in coordinating policies to push forward reforms,” [Zhou] said.
“Our choice has its own rational reasons behind it. But this choice also has its costs. For example, whether we can efficiently cope with asset bubbles and inflation is questionable.”
That certainly seems to be a damning repudiation of the monetary illusion. Faith in the QE world is waning everywhere and with very good reason; it just doesn’t work in anything outside of dangerous financial imbalance and asset price inflation. Even Krugman appears to have wavered:
…click on the above link to read the rest of the article…
Chinese Stock Plunge Resumes With 1200 Stocks Halted Limit Down; Yellen, Greek Elections On Deck
Chinese Stock Plunge Resumes With 1200 Stocks Halted Limit Down; Yellen, Greek Elections On Deck
Just when the Chinese plunge protection team (and “arrest shortie” task force) seemed to be finally getting “malicious selling” under control, first we saw a crack yesterday when the composite broke the surge of the past three days as a result of yet another spike in margin debt funded purchases, but it was last night’s reminder that “good news is bad news” that really confused the stock trading farmers and grandmas, which goalseeked Chinese economic “data” beat across the board, with Q2 GDP coming solidly above expectations at 7.0%, and retail sales and industrial production both beating, but in the process raising doubts that the PBOC will continue supporting stocks.
After all, the only purpose of the stock bubble was to deflect attention from the bursting of the housing bubble and the collapse elsewhere in the economy. So if Beijing is willing to telegraph that the worst is over for the economy, there is no further need for SHCOMP 5000 which can now be carefully deflated, as otherwise a violent bursting threatens China’s social stability.
As a result the Shanghai Comp tumbled -3.0% and Hang Seng slid -0.3% with markets showing a subdued reaction as the data does dampen calls for further actions by the PBoC. However that does not do justice to yet another day of Chinese stock insanity. This does:
Will Puerto Rico Cause An Inadvertent “Black Swan” Derivatives Melt-Down?
Will Puerto Rico Cause An Inadvertent “Black Swan” Derivatives Melt-Down?
I really had not been paying much attention to the Puerto Rico debt situation. After all, $72 billion in debt that might go bad – big deal. The Fed can print up $72 billion in credit lines with the push of a button.
But a friend of mine happened to mention to me today (Monday) that MBIA’s stock was down over 23% and Assured Guaranty’s stock was down over 13%. That woke me up.
MBI guarantees $4.5 billion in par amount of Puerto Rico muni paper. As of it’s latest 10-Q (March 31, 2015), MBI showed a book value of $3.9 billion. Puerto Rico alone could more than wipe out MBI’s net worth. But that’s only a portion of the story. The bigger part of the story is buried off-balance sheet in the footnotes in opaque financial structures called Variable Interest Entities (VIE’s). Remember those from 2008? I remember them vividly.
The VIEs are the off-balance sheet vehicles that triggered the massive chain of counterparty defaults which de facto collapsed the U.S. financial system in 2008. The VIEs are where the credit default swaps and other nebulous forms of OTC derivatives bet slither around.
Companies like MBI and AMBAC underwrite credit “enhancement” guarantees on these massive cesspools of debt – and the associated derivatives that are “wrapped around” the debt structures – and stick them in VIEs. MBI’s 10-K has several pages of footnotes which vaguely describe the contents of its VIEs. The problem is that MBI and its ilk are thinly capitalized relative to the potential size of the liabilities they face if the credit markets become volatile to the downside.
Toxicity plus toxicity does not equal purification. But VIEs that contain off-balance sheet debt and derivative guaranteed equals toxicity cubed, at least. In other words, whatever MBI lists as its “net” credit exposure in its financials, take that number and, at the very least, triple it.
…click on the above link to read the rest of the article…
Its 1929 In China—-Here’s The Chapter And Verse
Its 1929 In China—-Here’s The Chapter And Verse
I’ve mentioned the Chinese stock market mania here briefly in recent weeks. I’ve now compiled a fair amount of data along with some interesting anecdotes that show just how crazy it’s gotten so I thought I’d spend this week’s market comment laying it all out for you.
U.S. Dot-Com Bubble Was Nothing Compared to Today’s China Prices http://www.bloomberg.com/news/articles/2015-04-07/u-s-dot-com-bubble-was-nothing-compared-to-today-s-china-prices … $FXI $PEK
The first thing I like to focus on is valuations. If the dot-com bubble is the gold standard, then China is a bona fide financial bubble. According to Bloomberg:
Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them. The average Chinese technology stock has a price-to-earnings ratio 41 percent above that of U.S. peers in 2000, while the median valuation is twice as expensive and the market capitalization-weighted average is 12 percent higher, according to data compiled by Bloomberg.
Another way to look at it is to compare current valuations around the world:
One of these bars doesn’t belong. http://www.bloomberg.com/news/articles/2015-06-16/real-cost-of-china-stocks-dwarfs-2007-bubble-as-valuations-jump …
I’ve made the case that US stocks are more overvalued than they appear due to the fact that the median stock is now more highly valued than ever. There’s now a very similar but far more dramatic situation going on in China. Again, from Bloomberg:
…click on the above link to read the rest of the article…
The problem with the Shanghai Composite is that 94 percent of Chinese stocks trade at higher valuations than the index, a consequence of its heavy weighting toward low-priced banks. Use average or median multiples instead and a different picture emerges: Chinese shares are almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and more than three times pricier than any of the world’s top 10 markets.
…click on the above link to read the rest of the article…
The Lesson In China: Don’t Go Bubble In the First Place
The Lesson In China: Don’t Go Bubble In the First Place
There can be no mistaking that Chinese stocks are in a bubble. Since November 21, the Shanghai SSE Composite index has risen more than 100%. Going back to July 22, the gain is nearly 145%. Those dates are not random coincidence, as they mark specific points of PBOC activity. The stock bubble in China is certainly a monetary affair, but in ways that aren’t necessarily comparable to our own stock bubble experience (twice).
There is, of course, great similarities starting with leverage; in China at the moment there is no shortage, which is precisely the problem. It is quite precarious, though, in that the PBOC has at times shown far more open contempt for Chinese stock margin than the Federal Reserve or Bank of Japan ever did.
Stock forecasters in search of an early-warning system for the next Chinese bear market are zeroing in on the country’s record $358 billion pile of margin debt.
When that three-year build-up of leveraged positions starts to unwind, regulators will struggle to limit the selloff, according to Bocom International Holdings Co. and Rabobank International. Almost all of this year’s biggest declines in the Shanghai Composite Index, including a 6.5 percent slump on May 28, were sparked by investor concerns over margin-trading restrictions. The securities regulator announced plans Friday to limit the amount brokerages can lend for stock trading.
Unlike central banks here and elsewhere, the PBOC has a vastly different understanding and appreciation for asset bubbles, at least to the point that in 2014 and 2015 under reform it is not shirking responsibility for them. The Federal Reserve, in particular, had long been against any linkage between monetarism and asset bubbles, believing instead that they were fully contained under “market” irregularities (that has evolved, somewhat, under the relatively new Yellen Doctrine). I’m not sure the PBOC ever went so far as to completely delink its own activities from asset bubbles, but it at one point was clearly embracing of them even if reluctantly part of a greater government mandate.
…click on the above link to read the rest of the article…
