Monday, July 27, 2015


In the great scheme of things the collapse of the Shanghai stock market which resumed its downward course today with a damn near limit down close may not mean much.  Then again, it may mean everything.  China has always been a funny place.  A former friend of mine (former as in deceased) once said that the Chinese people are like a school of fish; they all move in exactly the same direction at exactly the same time, seemingly without guidance or control and despite language differences, geographic distances and communication impossibilities.  Much of that is no longer the case today but the result is the same; they seem to be either all in or all out--there is no middle road or, in a financial sense, longs and shorts.

The other thing that has been occurring, primarily because they have been told that it is truth, is the complete confidence in the belief that the government will make it right even if it goes very wrong and as a result the enormous stock boom was fueled to a great extent by margin buying.  Sure, the intellectual realization that one could lose some money is there but no one expects to lose a lot of money.   Losses are now in the neighborhood of $3 trillion and counting.

That is a lot of money but it weighs no where nearly as heavily as the collective loss of confidence in their government on the part of the Chinese people and hence the dilemma: can the government do what it should be doing and let markets find their own levels or continue to try to stem the tide with the continued purchase of shares through government controlled entities?  So far they have done neither with any real conviction and the immediate fear is that the government genuinely does not know what course it should take.

Now it is bad enough to lose the confidence of the people one governs--indeed, it is very bad--but coupled with that is loss of confidence within the global financial community which is beginning to view the government's policies which helped create this financial bubble as hardly the responsible actions of a nation that strives for global leadership in all matters but particularly in things financial.  For me, of course, it is doubly amusing as once again our friend Chrissey at the Fund has managed to get another important item badly wrong as she wanders through the financial landscape without, seemingly, her GPS.  Reserve currency, indeed.

Meanwhile in all of the world's bourses, the continued Chinese retreat and not particularly favorable corporate news resulted in dramatic reversals whilst a penchant for safety drove the 10 year yield down to 2.21%.  Signs are that this is going to continue which makes it more and more likely the Fed will not move until next year.  September it seems has finally been written off by all is reliably reported...Stanley Fisher, who whilst still being the smartest guy in the room will not have the support of the politicos.  This is probably as confusing a moment as we have seen (meaning I guess that I have no idea where we are going), and with no clear leadership anywhere around the globe.  Fortunately, he tomato season begins this week in the fly-over zone and things look terrific in these parts.  Tomatoes should be a reserve currency.  Maybe I can get Chrissey to promote that idea.

N.B.  Take a look at Ken Griffin's op ed piece in the WSJ today.  More on that tomorrow

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