Wednesday, 8 July 2015

And down again

And there you have it, everything rolled over soon after the last post and we started the European open testing lows again.

News and comment has seen even the nice Mr Noyer saying that with no agreement ELA will have to be stopped and that he is very concerned over the outcome. It's naturally unsettling to hear the pilot of the plane warning how scared he is of an imminent crash. In fact the chorus of 'very concerned’s has spread through all official ranks all the way down to minor UK MPs. That must be the political equivalent of a theme going ‘Tabloid’.

Though the potential outcome probabilities for Greece have not changed overnight, expectation appears to have, with many more expecting Sunday to be a rubber-stamping of an exit visa into the Greek passport.

Meanwhile the other shock function to everything has been China. A move down in the stock markets of 30+% has noise levels rising to 'deafening' and the wealth destruction involved vs book value from the highs is, on paper, huge. But (and here I get beaten up by many of my Financial Twitter friends), considering where the market has come from and were it is back to, I am not as concerned as they think I should be.

Wealth construction/destruction is indeed assymetric but all the money that has actually been lost has to have gone somewhere. Leverage is the killer though and there are two types of leverage on a stock bubble. Borrowing to buy the stock originally and borrowing against the book value of the stock to spend on lifestyle. Now in the case of housing bubbles, which are used as an example of wealth destruction when bubbles break, there were huge knock-ons as increases in book values had been used to borrow to spend and change lifestyles which were then exceedingly hard to readjust down. But in the case of Chinese stocks they were at this level earlier this year and I find it hard to believe that the rally has had time to cause dramatic irreversible lifestyle changes.

Leveraging to buy causes debt stress for those that bought but for every penny spent on a stock someone recieved that in payment. The move down has been redistributive as far as the real non-book wealth goes. Companies issuing at the highs cashed in, those selling cashed in but we are only hearing about the losses. Even those losses for the unleveraged aren’t that large. If we look at Chinese fund returns since Jan1 2015 we can see that they are down but not a lot.

I thank my friend @BrokenBanker for the following - 

which is about the same as we have seen in FTSE on which we haven’t heard a squeak. 

We know that catalogues of Chinese stocks are closed frozen holding them from dropping further but the shape of recent falls is panic and the volume of noise over it is at crescendo. Everything associated with a strong china trade has been washed out too with iron ore making 5% distress moves. Of course if you are in agriculturals it's the other way around. 

The concern is that China is not able to control an economy that is under pressure as well as a stock market crash. But China is China. The Chinese Government controls everything and has proven constantly, to the despair of China bears over the last 5 years, that control often produces results that are unwanted to the speculator but very much wanted by the controlling regime. The better question is not whether the Chinese can control things, but what they want the outcome to be. The terror reported upon the faces of Chinese stock brokers and punters may well be what they want. And driving the speculative longs out of the commodity markets has just made the deliverable a lot cheaper. 

And now what do we do? Risk was indeed sold off heavily from the last post, the distress noises first thing this morning was high again. Price action this morning has seen things stabilise and now that the US has opened up it's interesting to see SPX stuck around that gamma target of 2060. Whilst my feeling is that a Grexit on Sunday is very likely I have never underestimated the EU's ability to protect it's baby even if it does involve schemes and policies straight out of the Twilight Zone. With this in mind I have taken back shorts bought some bombed commodity/china linked suff and will step back off the field and into the stands for the next four days. Unless of course something breaks before then.. or I get bored.  

PS.. Gone a bit quiet from the German corner. Someone trying to gag them with a star spangled banner? 


Corey said...

Re: what China wants - a nice stock dump to provide cover for a deval?

mattyboy said...

nice post. have you ever watched "Princes of the Yen" by Dr. Richard Werner? i would highly recommend. many a similarity can be drawn between China's apprent unravelling and Japan's experience during the terminal phase of its credit bubble

Anonymous said...

Just watched the Richard Werner documentary. Really impressive. It looks like it it is always the same or at least very similar