Juggling Dynamite

Humans are consistent anyway. Lots talk about the beauty of free markets, but only so long as prices are going up. The higher and faster, the more irrational the pricing, the more confident humans get. But when necessary and inevitable mean reversion begins, the same ‘free market’ lovers start doing everything they can think up to stop price discovery from happening. While policymakers and participants chalk price gains up to their own genius and skill, they are quick to blame conditions beyond their control for the losses that follow.  In the end reality always has its way and reprices assets back below fair value.  By then of course, the masses are not buying but liquidating their losses in horror. We can learn from all of this and do the opposite.  But it takes thinking more than feeling, and a commitment to personal discipline.

The deflating bubble in Chinese stocks is uncannily similar to Nasdaq’s dotcom boom and bust. James Mackintosh, FT investment editor, analyses what we can learn from history and whether desperate efforts by authorities to pump up prices bring any hope.  Here is a direct video link.

Also see: China setting up stock fund to stabilize market.  Funny no one was talking about trying to “stabilize” Chinese stocks after they had shot up more than 100% in 12 months.  It’s only after they start mean reverting at the speed of light that people start wanting to “stabilize” prices at a ‘new permanently high plateau’.  The rule of irrational exuberance in asset markets:  prices typically fall 3 times faster than they rose.  Par for the course.

Policy-pumped stock bubbles typically implode at shocking speed to the decimation of participants. China’s round trip nightmare is not over yet and offers lessons for deluded confidence in other debt pumped developed markets. See: Troubling lessons in China’s crumbling stock market.

It is easy to dismiss China’s stock market as nothing but an old-fashioned speculative bubble. But the government’s direct involvement in pumping it up, and its failure to keep it aloft, should have investors concerned about China’s ability to control even more consequential markets.

Chinese stocks crumbled another 6% Friday, despite the government throwing everything but the kitchen sink at engineering a rebound. In fact, it did throw in some kitchen sinks, telling investors they can now use apartments as collateral on margin loans.

Other measures over the past week include an interest-rate cut, a loosening of bank-lending and margin-lending conditions, rule changes allowing pension funds to own stocks and even, according to some reports, state buying of stocks.

So far anyway, what’s resulted is a market that has lost more than a quarter of its value in 13 trading days.

In the end, extraordinary efforts geared to push prices far above fundamental reason end in extraordinary losses, pretty much always. Its only a matter of time. China is learning this lesson now (and counting), other bubbling asset markets around the world are set up to do likewise.

CBC reports on how a growing number of seniors are declaring bankruptcy. Here is a direct video link.