Juggling Dynamite

Good top down view of risk today from technician Cory in this longer-term chart of the Shanghai Composite. More levered loans in Europe are unlikely to turn the tide of the global cyclical downturn any more than QE efforts over the past couple of years in the rest of the world. The prior cycle lows of the Chinese stock market were in November 2008 at 1664 (30% lower from where it is today). The Chinese market has served as a leading indicator for other global stock markets and the commodities sector over the past few years, usually moving 3 to 4 months ahead of the pack. The fact that it is presently showing no signs of a recovery here should not be ignored.

The ongoing side-show of the Euro crisis is dominating anew this morning. The latest fix for over-leverage in European governments and banks is a familiar old American favourite: add more leverage! European Union officials are reportedly proposing to each deposit seed money for a special-purpose vehicle that would be able to issue bonds and buy up euro zone sovereign debt with reported leverage of eight-to-one (or so), depending on how much capital comes from the European Financial Stability Facility (EFSF). The EFSF is a vehicle financed by euro zone members and designed to provide financial assistance to euro zone states suffering economic difficulty. At 8 to 1 leverage, seed capital will be wiped out entirely on a 12.5% decline in asset values. Who’s in?

This latest round of insanity too shall fail as another desperate plan to avoid truth and the inescapable need to write off bad debts. So far the German Finance Minister seems to be against it. Stocks and commodities are joyous on the hopium nonetheless. Stay tuned for the next jolt of reality from economic indicators which will re-focus the world back from the side-show to the main presentation: the in coming global recession.

This is an excellent summary of the events, players and human behaviours leading up to the financial crisis that hit in 2007 and that we are still working our way through today. As we watch this series we should understand that this is not a crisis that is past, this is a crisis that the world is still struggling with and will be for a few more years. But we must be clear: the pain is not because the bubble burst, that was and is inevitable, the pain is because the world allowed it to balloon in the first place. Now it is up to all of us to admit and understand the errors so that we can learn and change our thinking, behaviour, laws and leaders. In this way all of this pain will not be in vain.