Juggling Dynamite

After topping 6000 in August 2007 on the hype and hope of voracious consumer demand during the subprime debt bubble, the Chinese Shanghai Composite Index collapsed 74% to 1585 by October 2008.  From that cyclical low the market then recovered 68% of its losses to crest at 4594 in May 2015.  Now back at 3052, the index remains still 50% below its 2007 peak, 10 years later.

This is how a secular bear moves: beginning from outrageous valuations and irrationally optimistic forecasts, stock prices move through manic swings, lots of risk and no net progress, typically for 15 to 20 years. As shown below, price is currently below the 2014 rally support, with a retest of the 2008 low still likely in the months ahead.

This is not just a Chinese market story.  A similar secular valuation and sentiment cycle has been driving the highly correlated international stock markets as well.

The Shanghai led the US stock market by 4 to 5 months at the peak of the last expansion (Dow peaked Dec 2007, Shanghai in August 2007) and trough (Dow in March 2009, Shanghai in October 2008).  Similar correlations are likely to follow this time as well.

U.S. Senator Elizabeth Warren is eager to pursue legislation that would break up Wall Street megabanks and has pushed the issue with members of the Trump administration.

“We’re certainly reaching out to the administration,” Warren, a Massachusetts Democrat, said in an interview with Bloomberg Television airing Wednesday. “‘So far we’ve had some good conversations and that’s what I want to see happen. I’m ready. Because you know, this is one of those basic things — folks on Wall Street may resist it. But most of the American people get it.”  Here is a direct video link.

From record leverage comes rapid repricing one way and then the other.  Levered traders are liquidating as excess supply of most commodities continues to swamp global demand.  This is dominant theme likely to persist for some time in the aftermath of the greatest debt bubble ever in human history.  If the producers are not yet concerned, they are in denial or– like the Saudis and their Aramco deal–trying to talk up values long enough to help them cash out.

Iron ore futures are under pressure again in Asia — signaling a possible return to the $50s for the benchmark spot price — as concern builds about the outlook for rising supply and China’s clampdown on leverage ripples through markets, possibly triggering forced sales.  Here is a direct video link.

Here is the price performance since March 2, 2017 of iron ore, steel, rubber and copper (chart zerohedge), down across the board from 9 to 46% in just 2 months.