Assets are being sold across the globe today in liquidation-style typical of participants who have been rolling the dice on record high leverage. As prices drop they must increase selling to cover margin calls, which forces more selling and more price drops…and so it goes.
In a related theme, China sold over $20 billion in US treasuries in the month of June. Some have suggested this was out of concern for US debt levels. This sounds very savvy, except more likely, I think, is that China is repatriating cash (selling investments) to raise liquidity needed in their domestic banks and economy.
See this clip on growing stress in China’s banks–some of the biggest in the world, aggravated by a surging shadow banking sector that has taken on a momentum of its own. Here is a direct video link.
It should not be forgotten that China has seen a large reduction in its trade surplus and thus income over the past few years (always worse because “unexpected” of course), and this trend has been accelerating in recent months as the global economy turns down again.
As with individuals and companies facing high overhead and falling income, China needs to sell assets and raise cash. The same thing is happening in Japan (they sold about $20 billion of Treasuries in June as well) where rates have been virtually nil for years, exports have been falling and an aging population is increasingly selling financial assets to pay for living expenses.
In the end, the net effect of all of this is that financial assets are being sold and yields are moving higher. (Just one example: REITS are now off more than 17% from recent highs). Bonds are also being sold and rates are moving higher–precisely what the confidence men in central banks assured they would not allow to happen.
Over time the mean reversion of market prices will bring better opportunities for true investors. At the same time it will no doubt crush many speculators and harm those holding over-pried assets today–not least of which are the central banks themselves, who have swapped trillions in longer dated and lower quality bonds onto their balance sheets over the past 3 years.
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