by William Skink
It’s been an interesting couple of weeks for the global markets. While Greece has received much of the attention, the extreme measures China is taking to stabilize its stock market are worth paying closer attention to. In addition to QE (Quantitative Easing) type measures, tweaking interest rates, and forcing state institutions to buy back stock, stricter restrictions on selling have been implemented to keep the lemmings from leaping off the cliff:
Can pumping still more money into the economy to buy stocks offset the panic and urge to sell by investors? Will still more quantity of money injected into the markets really prove sufficient to offset the ‘fear factor’ of investors, as they try to salvage what they can, to take their money and run? Maybe not if those investors are mostly what are called ‘retail’ buyers—i.e. individuals rather than institutions—who are notoriously prone to herd mentality both in buying and selling stocks. And China’s stock buyers are reportedly 85% retail. So that’s a big problem, because once they panic, as they now have, measures to offset selling by encouraging more buying may not work very well. Indeed, may not work at all. Once it replaces ‘greed’, ‘fear’ of loss is a psychological mindset among retail investors that is difficult to turn around again.
That’s why China has also undertaken parallel measures to halt the selling of shares in the markets as well induce more buying. It has suspended sales of Initial Public Offerings (IPOs) for companies selling shares for the first time. It has taken action to check speculators, domestic and foreign finance capitalists, and stop them from ‘shorting’ stock prices, i.e. betting stock prices will decline which in effect only drives prices still lower. Another ‘stop-sell’ measure was announced by the China Securities Regulatory Commission, CSRA, on July 8. It ordered that holders of more than 5% of a company’s stock were henceforth barred from selling shares for the next six months. The government has also ordered more than 1500 companies on the China stock exchanges to suspend all selling of their stocks. Estimates are that between 50% to 70% of the China stock markets are thus ‘frozen’, with the majority of the companies prevented from trading their shares. So the precipitous decline in stock prices in recent weeks reflects maybe only a third of the companies at this point.
Combined, these measures expose China’s desperation, and that’s not good for jittery markets. Along with fear, at least for me, comes an increased propensity for paranoia. So when I heard about trading at the NYSE halting for over three hours because of a “computer glitch” I wondered what the hell might be actually going on? I’m certainly not the only one. Here’s a piece from Zerohedge about why the NYSE debacle matters. It’s an interesting read.
One of the realities that was never quite absorbed by the general public seven years ago when the markets melted down was just how insane the derivatives market had become. And in seven years post-crash, it’s gotten worse:
U.S. total public, personal, and corporate debt is now $60 trillion, and to a few cognoscenti, there is a palpable sense of teetering. Puerto Rico is running out of cash. Illinois struggles to pay pensioners while avoiding insolvency. Detroit is already in receivership. Irvington, Harrisburg, Oakland, Providence and a host of other municipalities are close behind.
But just where would a flock of black swans originate? Certainly Detroit is not going to tank the entire U.S. economy.
At the beginning of George Bush’s presidency, the total global derivatives market —credit default swaps, mortgage backed securities, forward contracts, currency swaps and their inscrutable mathematically murky cousins—amounted to $4 trillion. When Bush got finished with us, that is, when 8 million Americans lost their jobs and 3 million Americans lost their homes, the derivatives market had soared to $585 trillion. Kind of a jump and certainly a very lucrative gaming house.
When Obama took office, most thought he would bring these excesses under control and initiatives like Dodd-Frank or the Commodity Futures Trading Commission would shutter, or at least reign in, this egregious casino. Not so fast. The five leading “too big to fail banks” actually grew 28 percent bigger than when Obama took office. And the global derivatives market swelled to $1.5 quadrillion.
This is fucking madness. The mind boggles at these figures. How will this insane debt unwind? Will it take another World War?
No one can say. What’s obvious is this situation is not sustainable. Where do we go from here?