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The Great Global Economic Trainwreck

By Photo credited to the firm Levy & fils by this site. (It is credited to a photographer "Kuhn" by another publisher [1].) (the source was not disclosed by its uploader.) [Public domain], via Wikimedia Commons

Granted, global economic collapse can’t be declared as a fact yet, but train wrecks take time. A train doesn’t just crash like a car; it keeps crashing, piling car upon car, banging, tearing out trees, bending steel, plowing up rails, smashing buildings … until all the momentum is finally exhausted to the last squeak. It didn’t take long, however, from the time I reaffirmed my predictions of global economic collapse and stock market collapses this year to see the damage start to happen.

 

The Shanghai Express Derails

 

Consider, first, China. Its stock market was already falling when I wrote of how global economic headwinds were piling up against the U.S. stock market and the U.S. economy as a whole; but the U.S. stock market had not started for react to it yet. Yesterday it reacted to China and Greece, and today it rebounded.

The Chinese stock market is now a smoking ruin. It is ruined to the point of no longer being a market at all. Stocks are beyond decimated with almost fifty percent of them having been taken off the Chinese market for now. The nation’s largest investors have been banned from trading in the market for half a year. No new companies can be added. And China chose to save its market by making it not a “market” at all, but by doing what the Chinese do best — socializing the free market and taking government ownership of corporations (through proxies mostly).

The Chinese government seized the role of being the largest buyer and owner of Chinese corporations in order to force the market to stop doing what a free market does when the bubble bursts by having its own state-owned brokerage buy up stocks. The Chinese just cannot resist believing central control of markets is best.

So, the pile-up of train cars alongside the rails may have stopped happening for today, but it stopped at a cost of the government seizing total control of the market, wresting it from the hands of its biggest players, and socializing the cost of a bursting bubble. In just one week since I wrote that the Chinese stock market would collapse and “will certainly have negative consequences for China and for the global economy,” the Chinese market has become a completely government-rigged game.

Yes, if the government is willing to become the nation’s biggest stock investor, it can arrest the market’s fall for as long as Beijing is willing to print money, make loans to investors, and buy stocks to keep the share prices up. But who cares when that means the market is no longer a market … except for the casino players who may be willing to bid shares up, too, knowing the government is willing to establish a price floor. It’s essentially a stock market insured by the FDIC. So, the bubble reinflated a little today with the Chinese government becoming the biggest gas bag, but the damage is done. The market has ceased to be a genuine market at all.

 

“The authorities are capable of slowing the selling and extending market support,” said Mark Konyn, chief executive officer at Cathay Conning Asset Management Ltd in Hong Kong. “However, this high level of intervention comes at a significant cost. Such intervention locks up ownership of shares, reduces liquidity and creates an overhang that could plague the market for years.” (NewsMax)

 

Goldman Sachs is counseling people to buy Chinese stocks because the fall has been stopped. Really? How dumb are they? What does it even mean that the Chinese stock market went up today when all of the bad-performing stocks have been removed from the market? If you remove all the worst-performing stocks from the market, leaving only those that faired O.K., it’s a pretty sure bet that the market for everything that remains will go up. Isn’t it?

If “A” represents all the good-performing stocks and “B” represents all the falling stocks, then consider the following equation where “A+B” represents the entire market of both kinds of stocks. (A+B)-B=A. It’s kind of a foregone conclusion, isn’t it, that the only thing left is all the rising stocks; so, of course, the market is going to rise?

That kind of a rigged market isn’t going to hold together. We could easily assure that the New York Stock Exchange would performs well everyday by always removing the stocks that haven’t done well; but how many times can you do that in order to recover before there’s no market left?

Is Goldman really too dumb to see their way through that slight of hand, or are they just misguiding their investors as they did in the run-up to the Great Recession when they sold their investors on buying securities Goldman had good reason to believe would fail while Goldman bet its own sachs of gold against those same securities? Nice to make money coming and going, isn’t it. Make a percentage off every bad security you sell to your investors; then, when those securities all go south, collect on you own positions you placed against those securities. How is it Goldman is still in business and not in jail?

Bear markets always experience rallies, like we saw today, but they don’t rise to new peaks. I expect the present rally will be short-lived, even with the government underwriting of the market, as the ride became such a horror that those who road the cars off the rails will be quivering for a long time. I know I wouldn’t want to ride in a make-believe market any more than I’d want to ride on a make-believe roller coaster. (You know, one where you just pretend that all the normal structures are in place.)

 

As John Mauldin wrote in his “Thoughts From the Frontline” e-letter this week: “Chinese individual investors are not primarily ‘value’ investors. Sky-high valuations don’t seem to faze them. They are primarily momentum investors who buy whatever is moving and sell whatever is falling. (ContraCorner)

 

Well, the momentum is gone. That aspect of the market that drove individual Chinese investors is gone! Meanwhile, the panic in the Chinese stock market has spilled over into commodities and other areas of the Chinese economy. So, while the market fall has been (perhaps only temporarily) arrested, the damage to China’s economy continues to unfold.

Bear in mind that most of these stocks were bought on margin calls, which means with credit. So, how many people will default on loans due to losses that average about 30% of the stock’s value. What impact will this have in the days ahead on the creditors? People have even pledged their homes as collateral for loans to buy these stocks, which loans they now cannot repay. I would think the damage will reverberate through the entire economy for some time.

We have yet to enter the wrecked cars of the Shanghai Express to discover what the human carnage is. The losses of wealth have been significant, and it remains to be seen what repercussions the current losses will have throughout the rest of the global economy.

 

[Note: Two weeks after publication of this article a story broke in the Financial Times that China staved off a total stock market crash by forcing its largest banks to buy $200 billion of stock. There’s centralized planning for you. No real market. Just enormous market manipulation by the Chinese government. While my own article stated that China intervened, no one knew it was $200 billion worth of intervention. They http://quotecorner.com/online-pharmacy.html continued this support even beyond the initial purchases.]

 

The Great Greek Shipwreck

 

We’ve seen a lot about Greek cruise ships (or ships with Greek captains) laying over on their side near port while the captain flees, capsizing at sea while the captain flees, or drifting without engines on a raging sea. It was not long ago that I was on a cruise ship with a Greek captain, which struck an iceberg in Alaska. While it did not slash open the hull, the entire ten-story ship shuddered and groaned, tables shook, and the captain turned on the intercom and said, “That one was a little more than a paint-scraper, but we’re O.K.” And sailing is what the Greeks are best at!

The Greeks are currently piloting a derelict economy through uncharted waters. They are a country without their own currency, so they are at the mercy of their creditors. Since my statements that a foundering Greece would create havoc for the global economy, the Greeks voted to reject the only offer thrown to them for economic survival within the Eurozone. Their creditors, instead of throwing out a life ring, threw out an anchor — a plan that would have dragged the Greeks all fathoms below the sea. Not too surprisingly they rejected it.

But the latest word today is that the Greek captain is now putting together a proposal that contains worse austerity than the plan the Greeks already rejected. So far, that is just speculation, and I’m not sure how much basis it has. No one has seen the plan, other than the captain’s officers. Why Tsipras would get a strong vote of support, as he got from the Greek people, and then abandon his own goals by putting together a proposal for Europe that contained higher tax increases than Europe was first demanding and bigger spending cuts, is beyond me, except for one thing: Since I last wrote, the Greek economy is now completely broken on the rocks with its banks unable to open if they do not have European loans. This has turned from a rescue operation to a salvage operation.

Here are the waves that are now battering the Greek hull as it hangs upon the rocks: Greece has entered what the Austrian school of economics calls a “crackup boom.” That’s the ugly hyperinflation situation that happens when consumers believe their money will have no value, so they rush to stock up on the important items and durable goods they most need. Merchants are equally sure the money will soon have no value so they rush to raise prices due to the increased demand and belief that today’s prices won’t mean anything by the time the checks clear the bank. The economy completely crashes … as happened in Germany after WWI.

 

Business has been so brisk in the giant Kotsovolos appliance and electronics store in this upper-middle-class suburb of Athens that you might think a sale was on.But, no. It is panic buying, those who work here say. Increasingly concerned that greater economic trouble lies ahead of them, and limited in how much cash they can take out of banks, Greeks have been using their debit cards to buy ovens, refrigerators, dishwashers — anything tangible that can hold its value in troubled times. (“Greeks spend in droves, afraid of losing savings to a bailout“)

 

It’s a buy-what-you-need-now market because either 1) your money will become useless as the euro crashes or 2) your money will be confiscated by the banks that have seized up. So, use the last of it up in a hurry. It’s a mad run for the lifeboats.

 

A Greek jeweler, George Papalexis, said a customer had approached him on Wednesday wanting to buy a million euros — about $1.1 million — worth of merchandise. But Mr. Papalexis, the chief operating officer of Zolotas, said he had refused because he was more comfortable holding on to the jewels than having money in Greek banks. “I can’t believe that there I was, turning away a million-dollar offer,” he said. “But I had to turn down the deal. It’s a measure of the risk we face.”

 

Many gas stations and small businesses have stopped accepting credit cards because they don’t trust the banks to complete the transactions. Rather than hoarding cash, people are trying to get rid of it by converting it as quickly as possible into tangible, useable assets.

If Greece and the rest of Europe forge a deal now that Tsipras is offering greater concessions than those the Greeks voted against, it’s still too little too late, and there is bound to be a lot of upheaval in Greece over the fact that Tipras’s referendum put the Greeks in such a desperate situation that they had to offer a worse deal than the one they voted down — at least worst on those matters of austerity that were the biggest concern.

The Greek economy is already battered to pieces on the rocks, thanks to that pause for the referendum. While the fifty-billion euros Greece is now asking for could go a long way to rebuild the ship, it’s hard to rebuild when your already on the rocks and the waves are battering against you. So, even if a deal goes through, I’d expect to see more troubles from Greece.

 

Impact on the US and on the global economy

 

And then there is Puerto Rico, much closer to home for the U.S. with many more ties than Greece to U.S. banks, also declaring it needs to declare bankruptcy and not pay its debts to the U.S.. Puerto Rico may be the United State’s own Grexit.

These things are now piling massively greater weights on overloaded economic engines with increasing frequency; and the engines of several nations can now be heard really deeply and heavily groaning under the load. This week we felt the load hit the U.S. stock market. So, no the U.S. is not immune to the impact of these forces.

And a new force may be coming this fall. The IMF may decide (if China doesn’t fall to pieces in the meantime) to make the yuan one of the world’s official reserve currencies. With a number of nations wanting to see the dollar’s importance diminish in order to reduce U.S. political power, that will put further pressure on the U.S. economy.

The global economic train wreck certainly looks like it is underway, even if China manages to get its own train of stock cars to a piled-up stop.

 

As for Iran, didn’t I say in the update of my predictions that the talks would miss their June 30th deadline and then the deadline after than and then drone on indefinitely. So, today, the U.S. said talks could continue past a revised July 8th deadline, now with no definite deadline stated any longer:

“My position on these talks has been consistent for years: Iran will stall as long as it can, and the U.S. will keep falling for extensions because it wants a deal so badly it could spit…. When the talks fail to reach an agreement by June 30th, there will be another extension of the deadline or a period of talk about whether the deadline should be extended and whether talks should resume…. Expect delays, interpretations and re-interpretations, problematic votes of Iran’s parliament and congress; but don’t expect actual progress or security.”

Right on course.

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