The Great Chinese Stock Market Crash of 2015

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Massacre and cover up.

It was inevitable. The bubble had gotten too big. Its flimsy filament could no longer contain the air trapped within. It had to burst. And burst it dead, taking the fortunes of millions of ordinary citizens down with it.

Backdrop: 80% of the Chinese stock market comprised individuals (as opposed to institutional investors), many of whom, at the encouragement of the all-knowing and benevolent Chinese government, borrowed money in order to stake their fortunes in the market.  This was known as ‘margin lending’; they were borrowing money (from shady sources such as p2p lending websites) with the shares themselves as collateral. Of course as share values and thus, collateral values started to fall, these ‘investors’ faced margin calls which they could not possibly meet.

As a result, the Chinese stock market inflated more than Pamela Anderson’s boob job, with the market growing far more than the rate of economic growth and the profits of the companies they were investing in. At its peak, half the companies listed on the Shanghai and Shenzhen exchanges were trading at above 85x price to earnings! Let me repeat that number, 85x!!!

Like I said, it was inevitable.

When prices started to fall and investors faced margin calls, they had no choice but to sell their shares, resulting in further downward pressure on the stock market; basically a negative feedback loop of money bleeding out into the ether.

The response of the Chinese government was basically straight out a Hollywood movie on repressive governments, they:

  • Announced that they would be ‘taking action’ against ‘malicious short sellers’.
  • Pressured large mutual funds and companies to buy more stocks.
  • Imposed a 6-month ban on the selling of stock by holders of more than 5% of company stock.
  • Suspended trading on about 1,300 companies, representing about 45% of the entire stock market.
  • Arrested 197 people, including a journalist and stock market officials, for the super deadly crime of “spreading rumors”.

They also devalued the renminbi by about 4.6% to CNY6.3975 to the US dollar (Yay for the American consumer! Cheaper goods for all!).

What is the lesson in all this? Besides highlighting to the world that underlying economic forces and principles are not to be ignored (one commentator described the rise of the Chinese stock market as ‘completely untethered from reality’) it really highlighted a weakness in the illusion of a more free market economy that the Chinese government had tried so hard to maintain.

Of course we should ask, why did the Chinese government pump up their stock market in the first place? (This reminds me of the scene in Dodgeball: A True Underdog Story, with White Goodman’s inflatable jockstrap)

Basically, all the government did was look at the state of their economy and the level of corporate indebtedness (160% of GDP – USD16.1T- the largest in the world, and expected to increase to USD28.8T over the next five years) and say: hmmmmmmmmmm, what if we replaced all that debt with equity?

FUCKING BRILLIANT!

Of course, what happened was individuals (who again, were the majority of investors in the stock market), got into debt themselves in order to buy into the companies’ equity!

In effect, ordinary citizens again bailed out corporates,  only instead of the Western scenario of taxpayer dollars bailing out too-big-to-fail companies, this bailout came by a more indirect route.

I suppose one could call this a fairer bailout, after all, nobody forced anyone to invest in the stock market. Corporate greed bailed out by individual greed. And the cycle continues…..

Until next time, and still writing from a Chinese-made laptop

Godfrey Goldberg

Greece, Russia, Europe, and Syria

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Hey, anyone remember Greece? No? I guess Russia and Syria are all the rage now, what with the Russian air campaign against ISIS (haha) and all those Syrian refugees flooding Europe ready to steal all your jobs and white women. Of course a lot of those refugees are also entering Europe via Greece, and on 3 November 2015, Greece relocated the first of its migrants to Luxembourg.

Considering that 86% of Luxembourg’s economy is banking, I wonder what jobs those refugees will take up? I also find it mildly ironic a country bankrupted by bankers are sending their refugees to an economy comprised mainly of bankers; I guess G-d has a sense of humor after all.

With the ECB acting like a loan shark toward Greece, and constantly waving the agreed austerity agreements in their face, it is no surprise then that Greece has also made a pivot away from Europe (and NATO) and toward Russia.

I wonder if the ECB and the troika, for all its bullying, ever wonder the power Greece, even as a debtor, have over them?

As we have mentioned before in our article on Fractional Reserve Banking, the entire financial system is an illusion only sustained by the confidence of global citizens in the system; just like Tinkerbell in Peter Pan, clap your hands if you believe in fairies and want to bring her back from the dead! Thus if Greece collapses, confidence in the Euro is gone and a Grexit would likely be followed by the rest of the PIIGS (Portugal, Italy, Ireland, Greece, Spain) with a default by Italy, the 8th largest economy in the world, likely to have severe and lasting global impacts.

It’s just like the case of those idiots who claim that China holds super ultimate power over the US due to its large holdings of US debt (USD1.27T as of Aug 2015), well if the US doesn’t repay that debt, isn’t it China that’s going to be the one holding the check once everybody else has left the party?

In any case in August, China dumped USD180B in Treasuries and the market…. Barely reacted!  So much for China trying to launch a deadly economic missile against America to drive up its borrowing costs by dumping US Treasuries!

While I sincerely believe that the global power of the dollar will soon end, this is unlikely to happen over the short to medium term. All Americans can sleep safely and soundly in their beds for the time being.

Another interesting fact: China is the largest holder of US debt but Japan is a close second, coming in at USD1.20T as at August 2015. I wonder why the mainstream media never brings that up? Didn’t we fight a war against Japan 70 years ago? (Yes, I realize the Korean war was basically just a Chinese-US proxy war).

Wow, this article is really all over the place, I suppose the fifth of vodka I consumed prior to writing this didn’t help.  I’m going to go hit the gym, have a nice protein shake after (as a certified cheapskate, I only consume cheap whey protein), and write a more coherent post sometime soon.

Until next time,

Godfrey Goldberg.

America = Bad means China = Good?

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Here at World Dollar, we have talked extensively about the upcoming fall of the dollar, with the first harbinger of doom being the rise of the AIIB, which is a Chinese led initiative. This might lead readers to conclude that if the dollar is on the way down, then China must be on the way up, right?

Wrong!

China indeed has been slowing recently, although it still remains a dominant global economic and political force. The slowing China has of course had an adverse knock-on effect on the global economy, particularly the emerging markets, which have seen capital outflows back to the good old safe haven of the almighty dollar.

As a combination market/planned economy, the Chinese government has its hands in every pie in the oven, although this is seen as a positive thing, especially for foreign investors, particularly when State Owned Enterprises, or SOEs, issue debt. The Chinese government is seen as being a guarantor for such debt, even if there is no explicit guarantee, and it is simply based on it being owned by the State. One look at rating reports from the ‘fair and balanced’ rating agencies such as  Moody’s will see many of these SOEs get their low credit ratings bumped up several notches from such linkages to the state.

Let us look at banks, specifically. Chinese banks have one of the lowest Non-Performing Loans (NPL) ratios in the world, with the average NPL ratio officially standing at 1.5%. Truly a remarkable figure and a testament to the strength and credit quality of the Chinese economy, am I right?

But if we know one thing about China, we know that relying on ‘official’ figures is naïve at best, and outright stupid at its worse.

Let’s see what people in the thick of it actually has to say. Via Bloomberg:

“If I have one piece of advice for people worrying about the financial status of Chinese companies, it’s this: it’s right to be worried,” said Ho, senior managing director in Hong Kong for Kroll Inc., a U.S. risk consultancy. “Often a credit report for a Chinese company is not worth the paper it’s written on.”

While the analysts interviewed for this story differ in their approaches to calculating likely levels of soured credit, their conclusion is the same: The official 1.5 percent bad-loan estimate is way too low.

She says her work suggests that nonperforming loans may be at 20 percent to 21 percent, or even higher.”

Uh-oh! Looks like people in the know are totally and rightfully skeptical about these so called ‘official’ figures. Should China’s historical high GDP growth data perhaps be scrutinized more carefully also?

Let’s look at another case, the first onshore bond default by a Chinese SOE. Again, via Bloomberg:

“The unit of government-owned China South Industries Group Corp. failed to pay 85.5 million yuan ($13.8 million) of bond interest due Tuesday, Baoding Tianwei said in a statement posted to Chinamoney.com.cn, the China Foreign Exchange Trade System website.”

We won’t even talk about the great China stock market crash of 2015, in which the government’s ‘hidden hand’ in the market was laid bare for the world to see. This will be the subject of a later post.

Until next time (and writing from a laptop made in the Orient)

Godfrey Goldberg.

Is this the end of the US Dollar as the world’s reserve currency?

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For almost a century, the dollar has held hegemonic reign as the world’s reserve currency, with global economic trade conducted primarily in dollars, and the international reserves of the various countries’ being held largely in dollars.

Even in the seventies, when President Nixon announced that the dollar would no longer be pegged to the price of gold, dollar demand kept growing.

The United States economy has benefited greatly from the global role of the dollar; it is widely known that the United States has had negative balance of payments for decades now, with our largest trading partners such as China and Japan holding huge current account surpluses over us.  However, thanks to the global role of the dollar and its high global demand, the Fed could simply print money to cover our balance of payments deficit!

Yes, as long as the US dollar continues to be the world’s global currency, the United States Fed will always have the ability to simply print more dollars to cover economic deficits!

Of course, doing so will increase the monetary supply of the dollar, and as Economics 101 tells us, more supply = lower value.

For decades we have enjoyed such a privilege, yet there are signs that the hegemonic role of the US Dollar may be ending soon….

For one, developing countries such as China, artificially devalue their own currencies relative to the dollar in order to lower the price of their exports, something that we, as an American consumer, are all too happy to accommodate (cheaper products? sign me up!).

We then turn around and argue that multinationals are outsourcing our jobs away (der taking our jerbs!!) while enjoying all the sweet, cheap, imports that our strong dollar directly, or indirectly (exactly where do you think your smartphone was made?) brings us.

Hypocritical much?

However as the emerging BRIC economies (Brazil, Russia, India, China) gain in global economic (and military) power, they have begun to put the wheels in motion that may at the very least challenge the role of the US Dollar as the global reserve currency.

Enter the Dragon AIIB

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The Asian Infrastructure Investment Bank is a proposed international financial institution which when fully set up, will challenge the ‘global creditors’ such as the IMF and the World Bank, both of which are heavily dominated by the West. The AIIB then, is nothing less than a direct challenge to Western financial hegemony.

As of October 2015, 53 states have signed the Articles of Agreement including, the United Kingdom and Australia! Of course it was widely reported that the United States had ‘strongly discouraged’ the aforementioned countries from joining the AIIB, citing concerns over ‘potential government standards’ (ain’t that a hoot?).

According to the Financial Times, a US official stated that “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.”

Does that sound like concerns over governance to you?

Ladies and gents, before I sign off today, I want to leave all of you with one key takeaway, and that is IT IS ALL A POWER GAME.

~Godfrey Goldberg

 

What Is Fractional Reserve Banking?

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jcmindblown

Investopedia defines Fractional Reserve Banking as:

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Most countries operate under this type of system.

Basically, imagine this highly simplified scenario, where a bank has only one depositor.

You deposit $100 dollars in the bank, and they pay you an interest rate of 1% p.a. (yeah, right!). They then take $95 of your deposits and lend it out at 5% p.a. This difference in interest rates is basically their profit margin (also known as Net Interest Margin).

But this means that only $5 of your deposits remain in the bank! (the % amount that a bank is stipulated to keep in its reserves is known as the reserve ratio and is determined by the Central Bank or Fed).

So if you were to go to the bank a week later to withdraw your $100, they would not have this amount because they have lent it out! You will have caused a run on the bank, and the bank will not be able to give you your cash.

Check out this detailed video by the Khan Academy if you are interested to know more:

This brings me to my next and most important point:

What are the implications of fractional reserve banking?

Its simple; the main implication is that the figures that appear in your account balance are not actually there! While on paper, you are confident that you have $1,000,000 in cold, hard, cash sitting in the bank, in reality, only 5% of that money is there! (Of course as long as the total withdrawals are under the total cash reserves sitting in the bank, you will get your money).

This means that the money you see in your account balance is nothing but an illusion, an illusion that is only sustained by the collective belief of the citizens in the banking system!

That’s right, the current fractional reserve banking system is basically a faith-based system, no different than any religion.

If the collective masses were to simultaneously lose faith in the system and try to pull out their cash, it would result in nothing less than a total collapse of the current financial system.

We typically think of banks as the safest form of storing our wealth, but in reality, this “safe form” of wealth storage is only sustained by the collective belief that banks are the safest form of storing our wealth!

jcmindblown

Even Jackie Chan doesn’t understand fractional reserve banking! After reading his post he may very well withdraw his considerable wealth and hide it under his floorboards, trusting his kung-fu skills to defend it over the banks illusion of safety.

In my About Me page I stated that we are living in the Matrix. An apt (though admittedly highly overused) analogy to describe fractional reserve banking if I ever saw one. Only our collective belief in the system keeps it going; the more people unplug, the more scepticism spreads, the more the system is in danger of collapse.

Before I end this post and you head off to bed, ask yourself this one question:

DO YOU FEEL THAT YOUR MONEY IS SAFE WITH THE BANKS?

~Signing off,

Godfrey Goldberg.