MAYBE I'M NOT AN IDIOT

...Which doesn't make me feel particularly good because what happened today is, I believe, worse than what happened last week.  Last week was primarily a reaction to what had occurred in China particularly on the Shanghai Stock Exchange which had gone up like a rocket ship fueled by cheap and huge amounts of credit (more on that in a bit) pumped out by the Central Bank and what seemed to be an official policy of "buy, buy, buy" which in turn encouraged that there was the Big Put behind all this on the part of the Government.  When that didn't work out, everything went to hell and there was the "Oh My God" reaction in world markets.  Fine, after a few days it seemed we could live with that.

The Chinese, lauded for years over their tight control of all things began to really mess thing up.  First was the devaluation for probably sensible economic reasons but coming at precisely the wrong time and leaving, a situation on which few Over Here commented, of a 1% arb situation in the Yuan's value between the mainland and Hong Kong of all places.  Now 1% in currency terms is like all the money in the world so it was no surprise that bundles of Yuan began moving overnight headed for Hong Kong.  In stupid move #2 the government tried to tighten up on exchange controls already in place which had no chance of success but further convinced everybody that the boys in Beijing didn't really have a firm grip on things.  The half a city blew up purely because of corruption at the highest levels killing a reported 128 people which of course no one believed and they started putting people in jail for talking about all of this which received not a peep from Il Duce's mob and to be fair anyone else but it did have the effect among people who run money that these guys rally were losing it.  But they followed their own advice, stayed the course, didn't panic, scared the crap out of the shorts in the energy market and things calmed down causing Charlie to start looking for a gas pipe.  Then came today.

I don't sleep that well any more (residual guilt probably) and I woke up in the middle of the night and dialed into the Asia markets.  Not much happening over there but just for kicks I checked our futures and there was a lot going on.  Now I still don't understand futures but I get the impression that they are a pretty good indicator of what the short term sentiment might be and these didn't look good.  Couldn't figure out why.  Said Oh Well and went back to bed.  At 8:00 things were not looking good at all and it turned out that the Chinese PMI which had not been released at the time I made my middle of the night check, came in below 50...which means in anybody's country that things have not only slowed but have gone backwards.  Frankly, there had been a number of predictions that this might be the case but frankly, I don't think people wanted to believe it...the stakes were too high.  Gone was the 7% growth rate, gone was the economic stabilization, gone were the plans to redirect the economy from an export model to a internal consumption model.  This was no longer explainable; this was real and the fun began.

I can't help but think that maybe I have been pretty right for a while now.  Since 2009, the world has thrived (or survived) on nearly $10 Trillion in liquidity pumped out by the world's central banks with nary a thought as to fiscal or political adjustment at any level.  With the China situation we are witnessing a commodity collapse, huge currency realignments, sympathetic economic stagnation throughout the broad range of China's trading partners and a lessening of credit standing on the part not only of sovereigns but of corporates as well across a broad range of industries.  The banks have seen this show before had have been reducing credit exposure for some time now.  Can they avoid the past from becoming the future?  Frankly, I do not know but it seems clear that we are witnessing the start of a tremendous deleveraging operation around the globe that is not going to end any time soon.  Which is why I think today was far worse that what happened a week ago.  This time what occurred was because people began to figure this thing out.

A FUNNY THING HAPPENED ON THE WAY TO A RESERVE CURRENCY

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 but...it 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