Juggling Dynamite

The Chinese economy has been deflating since the US consumer debt bubble peaked and burst in 2007.  In the first quarter of 2015, official growth averaged 7%-less than half the 2006 peak–while real life indicators like energy and freight use suggest that actual growth in China might be 3%.  As the economy has swooned, policy makers have turned to the usual debt tricks seeking to entice borrowing and speculating as a way to add ‘liquidity’ and soak up excess capacity.  It has not worked, but it has seduced many Chinese workers and companies down a time worn path to financial demise.

Greek default news this morning is further reason to rattle the Chinese stock market which was already crazy fragile.  Bubbling Chinese stocks had fallen 20% in the past couple of weeks, and lost a further 3% today.  About 10% of Chinese households own some amount of stocks (compared with 50% in America).  Still in a population of extremely modest means and perilous, world-record-financial-leverage/debt, the hit to sentiment in recent losses is no small matter.  See:  China’s economy not immune to market sickness.

All of which is particularly damaging because home prices have already been falling in China for over a year, and working people have lashed themselves to the debt-rack there in epic proportions. Only the Chinese can make Canadian households look stable in comparison.  An article this weekend in the Globe, summed the situation poignantly, see: China’s middle-class dream on shaky ground:

Among the many ambitious but debt-burdened Chinese millennials I met this week, one of them, a 28-year-old air-conditioning engineer named Li Hongyan, is pretty much the living and breathing embodiment of the new, post-export Chinese economy: Ambitious, highly risky, mildly panicked, tumultuous and impossible for his authoritarian government to predict or manage.

I met Mr. Li in the claustrophobia-inducing dormitory room he shares with his fiancée in northern Beijing, taking part in the suddenly popular Chinese activity of worrying about real estate.

It has been five months since Mr. Li used years of savings to buy his (and his entire extended family’s) first house – a 650-square-foot apartment in a slightly worn-out building.

His flat cost him the until-recently-unthinkable sum of $519,000, or 22 times his salary. On top of that, he borrowed most of the 40-per-cent down payment from a variety of friends and relatives; he, like many of China’s millennials, is leveraged up the wazoo.

His mortgage payments on the little apartment, at 5.3-per-cent interest, are $2,400 a month; his salary is $2,000 a month, which should make him comfortably middle-class, except that he really can’t afford the property that goes with it. So he’s renting it out, but can only get $940 a month for it, so is still paying the largest share of his earnings to support a house he cannot afford to live in.

Masses of people the world over are steadily awakening to the reality that ‘get rich quick’ schemes sold to them the past few years as the path to prosperity, have brought them only bankruptcy–fleeced by the bankers, salespeople and politicians that they looked to for advice.

The Supreme Court of the United States ruled today that same-sex couples have the right to marry in America, at long last.  As with all major social evolution, early advocates attracted anger from all sides.

After new Supreme Court rulings on gay marriage, Fareed Zakaria interviewed Andrew Sullivan about gay rights, then & now.  Here is a direct video link.

Valuations in corporate debt and equity markets have been loony bin for many months. Apart from a brief retrace to fair value in the spring of 2009, most security prices have made no fundamental sense since at least 2011 when the world economy turned down once more, and central banks went into a panic of QE experiments and corporations doubled down on ‘engineering’ earnings by buying back their own inflated shares.

Still, many outsiders have continued to pile in new capital along for the ride, glad-handed all the way by throngs of financial folks happy to make a sale. But the trouble with buying dangerously overvalued assets is that it’s the opposite of investing; it’s speculating, and what speculating give’th it eventually take’th away and more. Chinese participants are learning this lesson encore this week, first hand. After soaring more than 100% in the past year, Chinese stocks are a recent example of all that is messed up in financial markets.  Plunging growth and soaring credit risk sparked a mad rush for margin debt and reckless bets among regular people hoping to ‘get rich quick’.

And then like a thrill ride at a theme park, Chinese markets dropped 20% in the past two weeks to the shock of sheep-like participants.  This is most likely just a starter.  It takes a drop of 50% to take back 100% of the previous increase, and before this correction is over, we should see much further downside.  Of course, because they were highly levered, many gamblers have already been forced to liquidate in tatters.  Chinese losses offer a warning shot to others still ‘playing’ in extremely overvalued developed markets.

See, China Investors get the greater fool feeling as sell-off deepens:

Wang Yan is starting to regret that day two months ago when she gave into temptation and piled into the Chinese equity market.

“Back then, I thought I must be stupid not to invest in stocks as making money out of it was so easy,” said Wang, 26, who works for a publisher in China’s eastern Zhejiang province. “Now I think I’m even more stupid. The money I lost almost equals my one-year salary.”