Wednesday, July 8, 2015

Drama Queen and the Dragon in the Room



No doubt most people who have read this blog in the past few days think I’m a blithering idiot and I’ll admit, maybe I am. Then again, maybe I’m not.

I am not a market investor. I do not trust brokerage houses, or Wall Street, or anything to do with stocks, bonds, commodities or equities of any kind. If I cannot hold ‘it’, whatever ‘it’ is, in my hot little hand, I want no part of it.

My husband, back in 1989, quit his job to become a day trader. He began playing the market – longs and shorts, puts and calls – and we made some money. In the process, he became fascinated by the operation of the various markets: stocks, bonds, commodities. His enthusiasm spilled over onto me, willing or not. It has, for the past twenty-five years, been the primary topic of conversation in our house.

We talk at length about market manipulation and algorithms and all sorts of other shady things. Watching the markets as we do we were not surprised to hear about ‘front running’ markets. That is a trick where fund managers intercept electronic transactions and trade ahead of them via algorithm. That way they are guaranteed to have the price of their ‘whatever’ go up. Their order hits, they buy and golly gee whiz be damned, a second later another order shows up and boosts the price. Then the first guys have a choice: buy, hold or sell?

They can buy more or hold what they have if they think another order is going to come through. Otherwise they can sell and take the profit off their trade, then do it again the next time and again and again and make a whole load of money.

‘Flash Boys’ is a book on the subject that was released a while back. When it was talked about all over the financial news stations, no eyebrows in our house were raised. It was a shrug and a ‘yeah, so?’ Since then a number of other books on the subject have been released.

Naturally, a bunch of people “inside” rushed forward and tossed the BS flag. But if the guy who wrote the book, Michael Lewis, was on the inside, saw it happening and didn’t like it because he actually has a moral compass so outted what’s well known within the industry, isn’t it just possible that the naysayers are just covering their hinies?

Whatever.

The point is that I am not a complete nincompoop when it comes to markets and trading and understanding the lingo. I’m not an expert, either. I’m a person who knows more than the average person because I’ve been talking the talk for a quarter of a century. I pay attention and I graze, looking through a variety of sources and putting the pieces of the puzzle together until it makes sense and fits the overall scheme under discussion by all parties.

So, back to the economies and the news.

Up until today, what Greece is going through, the speculation, referendum and talk about a ‘Grexit’ has been overshadowing, to some extent, what’s been happening in China. With all eyes focused on the drama queen in the Med nothing was left to spare to the dragon in the room. Now, though, that focus is changing – rapidly.

Starting last night, during the early morning in China and Bloomberg’s looking up from Greece for a moment, there was an ‘oh shit’ moment. They started talking, actively and with some energy, about China and the Chinese markets.

In China over the past few years, stocks have flown high on speculative trading. Now, as usually happens, the parabolic curve has tipped over and the market is in free-fall. The government has stepped in, throwing money at the conflagration to no effect.

Since June 12 – in less than four weeks – the Shanghai Composite has lost 32% of its value. Almost $33 or €33 or whatever currency marker you want to use out of every one-hundred is gone. Vaporized because it was paper and there was nothing supporting its value.

More than one-half of all of the companies listed on the exchange have decided to pull their stocks – they will no longer offer shares for sale. That is as of this week.

The People’s Bank of China is stepping up, offering money – but it is government money. The government will print, the people will be taxed, and nothing will fundamentally change. According to Bespoke Investment Group, China’s stock markets have lost a whopping $3,250,000,000,000 ($3.25 trillion).

In China, regulators are now allowing people to put up their homes – the houses in which they live – as collateral against margin trades! I kid you not, the report about that is here, in this article (fourth bullet point near the bottom of the first page):


I graze broadly when I’m interested in something. Forbes, CNN, CNBC, The Economist, Financial Times, New York Times, whatever. In my graze last night, reading and skimming, I saw several interesting, and alarming, points.

First, several articles and Op Ed pieces commented on the similarities between what’s happening in the world economies now and what happened in the run-up to the 1929 crash on Wall Street. Just because Wall Street has moved to the Far East doesn’t change the effects a major market crash would have on everyone and everything else.

Hong Kong, India and a number of other markets, including currencies, are already feeling the pinch, and it’s only going to get worse. As one starts to rattle, it’s going to shake the next, all the way around the world, through all of the markets. It’s just as is happening in Europe on a much smaller scale since Greece’s referendum. Only China is the elephant and Greece is the gnat.

This is the biggest problem with having things so inter-related. It’s like being a conjoined twin. If the system of one fails, the system of the second will follow suit and there’s no getting around or saving it. Same thing here. We are too tightly conjoined to be able to stand alone, on our own.

What happens in China is not going to stay in China. At 11:11 this morning local time, the Dow Jones Industrial Average was off slightly more than 180 points. This afternoon, ten minutes before the NYSE closes for the day, it’s down 231 points. It was down yesterday and I’m pretty sure it’s going to be down again tomorrow. Looking at the one month chart, it’s off about 700 points, so it’s much less than 1% of the overall market value. However, is this the start of a major bear market?

If we are a conjoined twin with China and the EU, how far down will we go?

How is the China effect going to impact business and production here, in the US? If we cannot buy cheap goods from China, our prices will go up, what effect will that have on the cost of living?

Lots of questions – far more than I have room to ask here.

Another issue is the commodities markets and, no, I’m not talking about pork bellies. It’s the metals that are interesting.

China has vast gold holdings – bullion, the hard stuff, not the paper ETFs that aren’t worth the ink with which they’re printed.

(Aside: take a tree, a single tree and make it into sawdust – that is what the gold ETFs do to gold bullion. The tree had value, until it was ground into sawdust. Then it has no value, just like the gold ETF you probably hold in your retirement account. It’s a paper IOU, a promise that cannot be redeemed even if you wanted to. Try – take your shares of paper gold and try to redeem one ounce worth. You will be laughed at and told ‘sorry, you can’t do that’ or ‘sorry, it’ll be six months before we can deliver it to you’.)

So, will China dump gold into the world market in order to cover their economic implosion? If they do, that will be a temporary punch in the gut to the price of gold. All gold prices – bars, rounds, ETFs, stocks of gold producers – everything will drop like a rock. But when the paper money reaches its intrinsic value (zero), gold will revert to its historic relevance and become ‘money’ again. Then the value of it will soar because physical gold is in limited supply. Paper gold – those ETF shares so many hold – will have value only as toilet paper.

Time will tell and guessing is simple exercise to no real purpose. So, I’ll sit here on the sidelines and watch the action unfold.

Good luck to you in this mess!

Best~
Philippa

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