06 July 2015

Another China Syndrome

Much news today about, wait for it... China (and here). Previous entries in these endeavors have remarked on reporting that China's economy is an export junky, dependent of a flexible currency, poor workers, and lazy foreign capitalists. Since there is no social contract, and restrictions on use of savings, it's been well documented that working Chinese have been caught up in a housing Ponzi scheme for some time. Still going on.

What is somewhat new is that there's also a stock market pyramid abuilding. When economies, and China is hardly the first only the latest, segue from productive capital investment to fiduciary investment, the ending is always bloody. The Great Recession was our latest example, although the move to 84 month car loans might be considered the most latest (the macro amounts involved aren't the same, phew!!). Gains on fiduciary investing are by definition Ponzi returns. Nothing substantive exists behind them. Nada. Zilch. Zip.
The effects are already being felt in homes across China. Individual investors own four-fifths of China's stocks, a far higher proportion than in Western markets, where institutional investors predominate.
A ninefold increase in so-called margin lending by brokerage firms over the past two years helped fuel the rally.

Much of China's Mr. Market are more like our Blue Book than blue chip. Thus:
Only a third of the Shanghai stock market, and even less of the Shenzhen market, consists of shares in large businesses.
Huge increases in percentage terms were possible because shares in hundreds of these companies were cheap a year ago. As their share prices began climbing, they drew in millions of first-time investors who bought shares simply because they were rising fast and seemed likely to continue doing so.

Remind you of Viagra in the home? Yes, yes it is. Price went up yesterday and the day before, so it'll go up today and tomorrow. Data says so. Irony: the copula which abetted the Great Recession was dreamed up by a Chinese.

Fact remains: the giant pool of money which propelled the Dot Bomb, thence the Great Recession, is still out there and continues to grow. Or, to channel Taibbi, an ever hungrier vampire squid. It deserves 10% return for no risk or physical investment, forever. It just does.

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