Whoppers

Woke up this morning to see that the Shanghai stock index is up 3,1%. Wow!, this must mean that China agreed to the previously negotiated tirade terms ... and Trump held back on the new 25% tariffs. A little further investigation revealed that exactly the opposite happened and the Dow Jones futures indicated a down US market today. So why is the Chinese market up ... and up so much ... and ours might be down?

Dear reader, may I speculate here? I can visualize Xi Jinping turning to a subordinate after hearing that China’s power play didn’t work and Trump upped the tariffs ... and saying (in Mandarin Chinese), “Make the stock market go up.” And so it happened. This bit of psychological warfare is a side benefit of autocratic government control.

Often this type of single-point decision making is seen as an advantage of the Sino-form of capitalism ... whereas such market outcomes in the US are the net result of millions of back-and-forth decisions rolled up into an overall free-market result ... much, much less efficient ... but, far more democratic.

Which is really better? Well, the Chinese form is obviously more efficient ... but when they make a mistake (like the Great Leap Forward), it is usually a whopper ... and I don’t mean a hamburger.

Afterthought: And the million Muslims concentration camps might be at least a Big Mac ...

Price Controls

The Chinese government is effectively manipulating the Shanghai stock market (reducing supply and increasing demand). It has restricted trading in certain stocks (reducing supply), outlawed short selling (reducing supply), told certain large investors that they couldn't sell certain stocks for five years (reducing supply), encouraged government-owned banks and insurance companies to step into the market to bolster stocks (increasing demand), reduced margin interest rates (increasing demand), etc. The result is that the recent free-fall in the Shanghai market has been arrested ... see below:.

Is this a good thing? Somehow I doubt it, because history has repeatedly shown that government "price controls" never work. However this Chinese government market interference differs from past price controls in that it is encouraging price increases, not discouraging them. One might also point to our Federal Reserve Bank insofar as its actions over the last seven years have clearly done effectively the same thing ... flooding our economy with liquidity and holding interest rates at near zero. So maybe China is just learning from our experience ... only taking it four steps further.

My spider senses tell me that this type of inverted price controls by a government will also not work, but that they take a longer time to fail ... and the cathartic consequences may be far more devastating. 

New economic theory and history is now being written.

In Spades

The European stock markets are up substantially this morning for two reason: one, the hope for a Greek debt settlement and two, the fact that the Shanghai stock market is up over 10% in the last two days ... both reasons being baloney juice. Whatever the Greek terms, it is clear that the vast majority of its debts will never be repaid and a capitulation by Germany and the EEC will now only encourage other debtor nations (Spain, Portugal, Italy) to swing left and emulate Greece in petulant defiance of their debt obligations.

And insofar as the much bigger issue, China, it is abundantly clear that the current Shanghai stock market is now a state-run artifice. The Beijing government has stepped into this "free market" with both feet ... decreeing that big investors not sell major investments for six months, threatening short sellers with prison, stopping trading on huge numbers of listed stocks, forbidding new IPOs, forcing banks and insurance companies to buy stocks, etc. ... see: The Economist Story. Such government manipulation of prices cannot bode well for the future of this trading venue ... and clearly is no reason for any bullish sentiment in the rest of the world.

Even that perennial bull, Jim Cramer, is chary about these developments and is offering constant veiled warnings about the state of the world's stock markets. I concur ... in spades.

Broken China

Recently I have pointed out the dragon in the room insofar as financial risk is concerned ... and that is the Shanghai stock market and its dramatic rise and fall ... see: The Next Bubble. Since I wrote this blog entry the stock market there has plunged 27% with no real relief in sight ... see: CNBC Story. The Chinese government seems in fibrillation mode in its frantic efforts to remedy this "bloodbath."

Shanghai Composit Index

There are many who believe that this major stock market correction in China poses a bigger threat to world financial stability than either the Greek or Puerto Rican problems.

I am among them.

Afterward: Not a good idea ... see: NY Times Story.

The Trigger?

I have pointed out in the past as to how the Shanghai stock market has been quite frothy of late and might presage a general collapse of world bourses like what happened in 2008 ... see: The Next Bubble. Now this Chinese stock market has declined 15.2% in the last five trading days ... see the chart below:

To me this may be a disconcerting trigger to corrections in similar markets around the world ... particularly if this swoon continues in Shanghai for the rest of this week. I haven't yet liquidated my investments ... but I am sorely tempted.