Bursting Bubbles: China’s Bubble Burst, What Next?
Bubble, bubble, we’ve got trouble.
China’s market turned to rubble.
Wonder, wonder who comes next?
Burst your bubble; read this text.
U.S. stock market’s hot-air balloon ride has already ended
With China’s bubble burst, you might want to re-examine the U.S. stock market if you have ever enjoined the illusion that the market’s growth actually indicated economic recovery. Clear proof that the U.S. market is a huge bubble (I call it a hot-air balloon because it exceeds the size of any bubble we’ve ever known) can be found in the fall of 2014 when the stock market plunged from late September to mid October.
What changed? Quantitative easing. The market became irreconcilably different than it had been for years as soon as everyone knew quantitative easing was ending. Sure, the market recovered briefly when it turned out that not all of Q.E. ended right away. Parts of Q.E. remained in the form of reinvestments, which nudged the market back up until the end of the year.
Since then, however, the U.S. stock market has gone nowhere. It’s a completely different beast now, just as I said at the start of the year you would find it to be. Recall that all the nation’s favorite gurus at that time were chiming about recovery, so it is not as if this was obvious to most. The market has bounced along sideways off of a definite ceiling with only six stocks driving its rallies back to that ceiling. Amazon, Google, Apple, Facebook, Netflix and Gilead Sciences account for half of the value added this year to the Nasdaq.
What one can see in these extremely narrow rallies is a flight of capital toward the surest and best performing stocks as other stocks are being left behind. I interpret that as a clear last hurrah in the stock market. Once those few leading stocks start to slide, the whole market will go down because so much is now resting upon so few. As the market becomes less broad in its support, it becomes more precarious. 37% of the Nasdaq’s gains this year were from Apple, Amazon and Google. Obviously, then, it only takes a fall in one of those to have a huge impact on the market. In fact, none of those have to fall. All they have to do is hold steady, and the fall that is already beneath them will take over.
The market has also changed to where it is now finding as many new one-year lows as one-year highs. Moreover, the lows are dipping a little lower each time. You may recall that I said at the start of the year that I anticipated a rounded top before a big crash. Over the rounded hill of the roller coaster and then a plunge into the abyss.
This prediction is not that hard to make once you stop denying that quantitative easing produced only an illusion of recovery — that it inflated a huge balloon — that all the inflation people thought would happen from printing so much money out of hot air all happened in the stock market where no one commonly calls it inflation. Thus, it happened in plain sight but was not seen because, for many, it happened in their blind spot.
If that’s the case (as I have always been certain it is), then without quantitative easing, the market cannot grow. The primary driver has been removed. The market immediately became utterly dependent on Q.E.. For years, I have said that Q.E. was not sustainable because you cannot run the printing presses at excessive velocity forever. Since the start of the Fed’s stimulus, I’ve said that, once the high-octane fuel is finally all removed, you’ll see what the Great Recession really looks like. For now, Q.E. is gone, but we still have zero-interest, which is free money for bankers to invest in stocks.
As soon as Q.E. and zero-interest have both ended, all the hot air will go out of the huge balloon at last. I think I see the slacking fabric starting to flutter now. Some of the market indexes have turned negative for the year, and the market is starting to descend. We have cleared the rounded top. The plunge into the abyss is imminent.
Take a breath and notice what your feelings are telling you. Forget your theories if you have believed the illusion. What do you feel in your bones? Doesn’t it feel like an awfully long time since our days were filled with joyous rides ever upward in the market on the lofting warm air of the Federal Reserve’s easing?
Those were heady days where one could endlessly ride the froth of the Fed’s quantitative wheezing, knowing the Fed had your back, while denying that free money was floating the market upward. Don’t you yearn already for those days to return? It feels like yesteryear, and yet it has been only a few months. That’s how big the chasm is that you’re about to descend into.
Today, on the other hand, even the continuing low interest rates can’t float the leaden market upward. They barely hold it aloft. It feels like the dog days of summer when nothing will make this thing get up and move. Nearly eight months now of the doldrums — eight months of a market trading sideways and now finally starting to fall. Can you feel the bottom moving away from your feet? It’s like that feeling you get when a big wave is about to hit you in the ocean, and you can feel the undertow of the trough that precedes it. You turn and look, and there’s the wave, ready to overtake you.
In this relentless summer heat, it seems a long way back to those days when the market gurus were harmonizing around their hallelujah chorus: “Oh, the economy is only down because of all the bad weather and the port strikes. Wait until you see the spring rebound when the weather warms.” This refrain seemed to be a veritable musical conspiracy, but their chorus is noticeably quieter now.
Somehow nearly everyone was singing the same tune in the face of one simple withering truth that, without quantitative easing, the market could go nowhere. It had no fuel to fly. It wasn’t flying. “Ahh, but it will. Wait for the winter chill to go away.” The theory was that the hot air just couldn’t keep up with the unusually cold winter that gripped most of the country, but once the chill was gone….
I would shake my head and say, as I did so many past springs, “There won’t be a rebound.” As proved true in those previous springs, there wasn’t. Yet, many repeats of those years never stopped the hallelujah chorus from donning their rosy glasses and singing with gleaming smiles.
The chill of winter is now long gone. Still, the market churns and gets nowhere. The singing has finally almost ended. Only a few loan voices now sound the rosier notes. A growing bass drone can be heard in the quiet background as most of the chorus stands silent. It feels like the calm before a late summer storm.
I’ve not been alone in predicting the economy’s demise. There are others — David Stockton, Michael Snyder, Peter Schiff, Marc Faber; but I think I was listened to the least of any of them. Yet, some of these, like Schiff and Faber, are the proverbial clocks that strike the same hour again and again every year until they are finally right. They are called “permabears” because if you are always a bear there will be times when you are right on.
I resisted over the past few years predicting an imminent fall. When Faber predicted in 2012 a fall in 2013, I said the market and the greater economy would not fall in 2013. It would not fall before Q.E. ended, taking the hot air out of it. I said it would not fall until fall in 2014, too, because that’s when Q.E. was scheduled to end.
That market crash has been slower in playing out than I first thought, but the change that happened is, nevertheless, obvious if one takes off his or her rose-colored glasses and looks at what has happened from last fall until now. Others — and not the usual others — are now seeing and talking about the same timing, thinking this is when when things start to get real again … and scary.
It should be clear after eight months that the bull market is dead. The only thing keeping the market aloft now is light-headedness. As the euphoria winds down, more hot air will leave the balloon, and the market will settle faster and then someday it will drop over the great ravine. I continue to place my bet for that event to come this fall.
The Manchurian Solution to China’s bubble bursting
“The U.S. stock market is immune to China’s bubble bursting,” we were told again and again, “and the Chinese have stopped the fall of the Chinese stock market.” To that, I retorted that they did not stop the fall of the Chinese market; they destroyed the market entirely.
Naturally, a market that no longer exists as an actual market where stocks can be bought and sold, is not going to fall. Big deal. Even so, on Monday, those few stocks that still formed a highly rigged facsimile of a market took an enormous crash, erasing another 8.5% of their value in the Shanghai Composite index. It was China’s largest one-day crash since the beginning of the Great Recession.
The Manchurians quickly stepped in with a traditional Chinese cure: “Any malicious trading will be investigated and severely punished,” they reminded investors. With the last market crash, Beijing started acting like communists again. The central planners tried to decree what the market must do — who could trade and who could not, and who must trade and who would be arrested if they tried. (Maybe some of the biggest players would even be assassinated if they didn’t play the cards the Chinese rulers ordered them to — a not too unrealistic fear players have in the back of their minds when playing their cards in China.)
I said then that Chinese stocks would continue to fall, in spite of claims that the route was routed, because, in taking such actions, the party leaders in Beijing completely destroyed their stock market. To the extent that some stocks are still allowed to trade naturally to maintain the illusion of a market, that remainder will also fall. China will not dictate its way out of this mess.
Yesterday, we saw that, even with investors knowing Beijing has committed itself to $480 billion in stock purchases, if necessary to support the market, the remaining market still fell. In fact, the stocks that fell the hardest yesterday were the ones Beijing had propped up the most a couple of short weeks ago. Reality wants to happen.
The Chinese stock market dropped enough more today to ring in a total 10% correction to the correction in two days. So, last week the route in the Chinese market was routed by Beijing’s corrections. This week the route was rerouted.
While the market closed the day about 1.7% lower than yesterday, it’s interesting to note that mid-day it was more than 4% lower — halfway to another 8% plunge. How much do you want to bet that it would have completed that 8% drop today, except that Beijing did as it promised and force-injected tens of billions into the market to correct the plunge?
This mid-day move back up was not a case of fear waning. Chinese investors are scared spitless, but they are also strapped to their chairs and gagged. No, I think today’s halt to another massive slide was China socializing more and more of its free-market economy by bringing that $480 billion fund into play to avoid an embarrassing repeat of yesterday. They did, after all, state last night, that they were ready to intervene if necessary. I would say a 4% drop in the morning alone, made intervention look pretty necessary after lunch.
Meanwhile, watch what you say. The Chinese government has warned Western banks that they had better stop their negative talk if the want to keep playing in China. And, true to form, the Commies said they would “investigate” the cause of Monday’s crash since it was due to “concentrated” trading. More of those “malicious” traders trying to escape a collapsing house of cards, built on a mountain of debt.
King George Bush II said he had to give up his free-market principals to save capitalism. I wonder if the current president will go as far as the Chinese did when they tried to save the market by decreeing it into being no longer a market at all, but just a vast holding tank. Actually, I wonder the other way around — if the Chinese have tried to do as George Bush and now Obama have done, letting government sop up all the excess of fat in the market.
Obama does seem to like to govern by decree. Maybe our own impending stock market crash will be ruled out of existence as soon as it begins, too. It’s a brave new world of Commie Capitalism, which started under Bush the Second when the government nationalized failing banks in order to save them from crushing the rest of us.
Then look what happened as soon as China’s bubble burst again. Surprise, surprise, all of the rest of the world’s markets took a little dive in fearful response … including the U.S. market. Where there is fear, there is not immunity. Fear is the worst form of contagion. Fear can erase all sense and crash even if a crash is not called for. It can move a market beyond what sense would dictate.
Currently, fear is just the beginning of a return of sensibility. It’s waking to reality. Fear is growing insidiously from many sides as more and more people start to realize the market is highly vulnerable after all — even apparently vulnerable to what happens in China.
Here is why I know the Chinese will fail at their effort to avert reality. $1.2 trillion of their market is being carried on margin debt. Those debts have to be paid, and the way they were going to be paid, of course, was with the selling of rising stocks. Now that the worst-performing investors have been frozen out of the market, they will be even less able to pay their debt. So, to the extent the market is saved, defaults on debt are going to increase.
The house of cards crumbles from the bottom up if they try to save it from the top down. In fact, the Manchurian solution could make the situation far worse by assuring collapse to the shadow banking system that has largely underwritten the market. Best to let markets sort themselves out freely; but, alas, the Commies have taken their lessons from the US play book. They’re acting like American politicians in New Amerika.
The bursting of China bubbles and American balloons
Here’s an intriguing statement:
China’s stock market has little direct connection to its economy. Since trading began in 1990, the mainland’s two exchanges in Shanghai and the southern city of Shenzhen have been used mostly to raise money for state companies. Regulators have eased access for private companies but the exchanges still are dominated by state industry. In this government-dominated system, investors react more to changes in regulation and the availability of credit to finance trading and less to economic fundamentals. That can mean share prices move in the opposite direction from economic performance. The explosive rise over the past year came as manufacturing and other economic indicators declined. (NewsMax)
That could just as easily be a description of the U.S. stock market where, for the past several years, bad economic news has been considered good news by investors because it meant the government’s central bank would keep printing that free money and making interest-free loans, which everyone denied was driving the market.
People in the U.S. still have not woken up to the fact that the entire recovery was and is an illusion, a trick of the Fed’s fake money. They don’t see the bubble because the entire economy around them is a bubble.
But they will wake up. The shiny image of a golden city on the surface of the great bubble that surrounds them is about to burst. Reality is going to relentlessly force itself upon everyone because the law of diminishing returns is growing in strength daily now. Central banks aren’t getting as much bang for the buck and have exhausted their bag of tricks, while the number of troubles bedeviling the global economy are increasing in number.
My prediction last spring was that the change that would happen in the fall of 2014 would open people’s eyes to the reality that there has been no true recovery all along. And that’s a prediction I feel 100% confident of — even if I am less confidant of the exact timing — because the recovery was rigged by unsustainable free money, created by the ship load. When all that money stops, the illusion of recovery stops with it.
It’s as simple as that because, during the time that was bought with Fed stimulus, nothing has been done at a fundamental level to create a new economy built on better principals than our debt-driven economy. All we did was astronomically accelerate the printing engines to force the dying economy on to the brink of its own self-anhilation.
So, that’s where we are today — just letting the old system play out at full throttle. The engines are exhausted; the free money has almost stopped, and interest-free money has to stop soon, too.
Bubbles, bubbles everywhere, and everywhere about to burst
The Greek crisis is far from over. Grexit has not been averted, as the rosy optimists want to believe. It has not even really been stalled. Rather, it has been assured by measures so much more austere than the ones Greece was fighting against that they are certain to turn Greece’s economy further down.
The pain from greater austerity is certain to increase outrage in the streets of Athens over time. That means greater political disruption. Some in Germany want Greece to exit, and without a clear means of making that happen under the Eurozone treaties, this is their way of forcing that hand.
Student loans in the U.S. are crashing at an increasing rate all around us because college students can’t get the better-paying jobs they were assured would be there for them. Many, finding no jobs, stayed in college longer and piled up even more debt. Now they have their masters or doctorates but even newly graduated attorneys find that legal help can often be more cheaply bought in India than by hiring someone at home.
Canadian housing prices are astronomically high around Vancouver and haven’t had their bubble burst yet, but I said a couple of years ago their time will come, and it will be quite bad for those parts of Canada when it happens.
Commodity prices are crashing in China. Commodity prices are crashing in the U.S. Commodity prices are crashing everywhere. That’s another bubble bursting. The Chinese fueled a false housing and industrial bubble that they have not intentionally ended. That bubble created huge demand for commodities that drove the price up all over the world as nations competed for the same resources. The result is that everything from tin-ming companies to gold-mining companies are dropping with iron, oil and copper — the real industrial stuff — seeing the worst of it.
There will likely be a few U.S. dominoes that fall specifically because of their tie to the Chinese stock market, and then there will be that general fear we saw on Monday that will cause more stocks to fall. Fear will find other things to fix on, as the U.S. stock market continues rounding downward more quickly.
And global conflict has gotten worse with each passing year of the Obama administration, while his overruling of immigration policy by decree has left U.S. borders so open to unchecked crossing that even a child can do it. In fact, tens of thousands of children have done it, unaccompanied by adults. So, the opportunity for internal terrorism has to be higher than it was. Racial conflict and anarchy in our cities is on the rise, too.
The world is not just full of bubbles everywhere but battles everywhere — Ukraine, Syria, Iraq, Libya, the South China Sea (looking more like it all the time), Yemen and Egypt … Baltimore and New York.
All of this adds up to lot of top pressure for that day when the Federal Reserve finally decides to end the remainder of its stimulus by making the first gradual raise in interest rates. Some are predicting the Fed won’t be able to do that now that things are looking so shaky; but the Fed has been shortsighted about ending stimulus in past recessionary cycles, pulling the plug as soon as recovery appeared, only to blow it all up.
Really, one cannot pull the plug too soon as the whole thing is an economic fun house anyway. However, there are moments when the timing can be catastrophic. It is almost twistedly funny to watch how our leaders at the Fed think they can actually raise interest rates without killing the illusory recovery they have crafted out of those low rates. (And, yes, they are our leaders, as they have done more to control our economy than congress has done, for congress abdicated its responsibility to the Fed long ago.)
The twisted humor is in seeing seemingly smart people believe their own illusion by thinking that a recovery they created from nothing but their own artificial stimulus, which is totally addicted to that stimulus, will somehow remain when the last of stimulus is taken away. The humor is in the looks of surprise I anticipate when their own bubble illusion bursts as they pull the plug. “Oh my, how did the lights go out?” they ask, holding the plug in their hands. The real question is “Oh my, how could they possibly not go out?”
It’s not truly funny, of course, as we will all feel the pain. It is only funny like a distorted face. Odd. Bizarre. Grotesque. The twisted humor is exaggerated because they will almost certainly raise interest with the worst timing possible because they don’t understand what they have created. Why do I think they will raise interest this fall when others believe they cannot? Because they actually believe in the illusion of recovery they have created … believe in it enough to believe it will hold even after the trick ends. When they pull the plug and are shocked as the lights go out, I will wonder, What the Sam Hill is the matter with you? How does that even surprise you?
If the pressures I’ve mentioned and others that we don’t even see coming don’t appear too obvious to the Fed this fall (and I think it is close to certain that nothing will seem obvious to the dull-witted Fed who believe their own bubble), then the Fed will raise interest rates this fall, and that will prove disastrous. It will be the trigger to an enormous load that is already pressing to give way.
Of course, if the economic turmoil throughout the world becomes so obvious that even the Fed can see it, they will have to hold off. BUT they really, REALLY want to raise those rates because the one thing that they actually are afraid of is that they have no tricks left. So, if there is another downturn when the rates are already effectively at zero, they have nowhere to go. They also want to prove to their critics that their illusion is real — that it can hold when the plug is pulled on stimulus. They want to prove that really, REALLY badly.
One last dance around the bubble before our economic denial bursts
There’s one thing coming up that could stop the Fed from raising interest rates: We could find out this week that we have been in a recession all year long — once second-quarter GDP is out. If that’s the case, the Fed won’t be able to raise rates … as how can you justify raising interest rates when a new recession has begun? The Fed will, in that case, be caught in exactly the trap I said they fear — a recession with nowhere to go because interest is already at the zero bound.
But don’t worry about that. The government is already working on hiding truth that it wants no one to see — does not even want to admit, itself. Just when I was thinking people were going to wake up to see reality as it truly is … the government is coming to the rescue in true Chinese style. It’s cooking the books:
The Bureau of Economic Analysis (BEA) is slated to release the advance estimate for second-quarter growth [Thursday] morning, for which the consensus estimate is 2.7 percent, along with revisions to GDP growth for previous years and a new metric that may offer a more accurate reflection of the nation’s economic performance.
As such, Meyer and Lin referred to Thursday morning as the American economy’s “moment of truth.”
They expect we’ll learn that U.S. growth has been smoother and stronger than previously thought. (Newsmax)
Well, surprise, surprise! A little touch-up paint for the economy’s image before the picture is released to the public. Yes, the previous belief that we have been going through tough economic times this year will turn out to have been the actual illusion. The U.S. government has discovered that we were measuring GDP incorrectly all along! There are downward forces that should have been factored out that never were, so the government is about to correct that illusion for us in order to show us that things have not been so bad under Obama as some thought.
You can ignore my fear-mongering predictions because with a wave of the hand, the government is about to whitewash them all away. Well, it is trying to, and we’ll have to see how good the results are. It is limited in its ability to whitewash things away because it must still appear to inquiring minds that is using real arithmetic and actual accounting principles. In fact, it actually believes that in what it is doing.
This is how denial works. We find plausible ways to justify what we want to believe. So, there is a limit to how far the government can stretch and still pretend to be real. What they are doing is removing from their GDP equation some of those nasty things that made our economy look bad in the past when it really wasn’t all that bad.
“This will likely leave the Fed comfortable arguing that the economy is making progress closing the output gap, allowing a gradual hiking cycle to commence,” the economists concluded.
I’m sure it will leave the Fed comfortable in arguing for a rate increase. They will believe this twice-told tale about GDP that changes with each telling. With that visual aid to support their economic denial, the Fed will feel comfortable raising interest because it believes in its own delusion. It will be the fact of recession that gets hidden, so there will be no outbreak of clarity to hold the Fed off. They will readily accept the BEA’s new formula.
Unless the recessionary trend is so strong that it cannot be erased by this new insight into our past accounting errors without making the smoke and mirrors more obvious than the illusion of recovery, the Fed will raise rates. However, that rise in interest will bury all notions of recovery, which the Fed believes in, as the last of the hot air exits their balloon. Sad befuddlement will overwhelm the romper room of the Ecclese Building where the Fed operates. (Ah well, “Vanity, vanity … ” said the writer of Ecclesiastes in talking about human economics. I guess the building is well named.)
The economists involved in formulating the new equation have wondered wether the new math could “take the spotlight away from GDP.” I’m sure they would like that, as GDP has been a little unruly this year, refusing to cooperate with the government’s recovery narrative.
If they can just tweak the first quarter of 2015 up 0.2%, erasing the recessionary measure of GDP that is on the books now, they can keep us out of recession because it takes two consecutive quarters of negative change to GDP to declare a recession. It would be wonderful for them to be able to show that even that harsh winter quarter didn’t really go negative on us … so long as we stop measuring things the way we have done for decades.
Oh how fun!
Bank of America, naturally, calls this new formulation a “moment of truth” that is about to arrive. I call it a moment of self-deception. It is truth ala George Orwell where the government creates a new mathematical language to restate historic facts in a nicer way.
The new seasonally adjusted GDP will factor out those pesky things like bad weather impacts and end-of holiday lay-offs. Never mind that those things are actual economic occurrences that are winter’s economic realities. “We don’t want to see that our GDP slides each winter just because of pesky facts. We’ll adjust those out for you. So, get ready for our new-and-improved GDP!” There is apparently no end to our national desire to deceive ourselves.
Enjoy the delusion while you can because, unfortunately, economic denial only means a bigger price to pay when reality forces its ugly head in front of us, as it surely will. Denial does not change reality; it only makes us oblivious to it long enough that it can sneak up and clobber us. And it’s just about clobbering time. Our last dance around the golden bubble will not last long.
The Obama Administration will, of course, do all it can to inflate the market and keep the illusion going through election season so that Obama doesn’t get blamed for the crash and so Democrats don’t take the fall. I just don’t think it will succeed. Even though new accounting tricks may mask the recession, they won’t change the reality of recession.
In the end, the Fed’s own belief in their own illusion will trick them into raising rates at the worst possible time. Obama and the Fed will both find, as China is showing now, that you cannot forever suspend economic laws by decree. Reality wants to happen. And, as they don’t listen to me, nor even know I exist, you don’t have to worry about them seeing this coming. The truth is as good as written in code … to their eyes … because it’s written where they would never think to look.