Bubblevision host Scott Wapner this week nearly split a neck vessel denouncing the U.S. stock market sell-off. It was completely unwarranted, he thundered, because China don’t have nothin’ to do with anything.
Why, insisted CNBC’s best-dressed pom-pom boy, China’s stock market has never been correlated with its economy, and anyhow, its economy doesn’t matter all that much to the S&P 500 because China accounts for only 14 percent of global GDP.
Besides that, China’s stock market is exactly like what Yogi Berra said about his favorite restaurant: “It’s so crowded, nobody goes there anymore!”
According to the talking heads, Chinese households don’t go to the stock exchanges, either. Few of them own stock, and equities account for only 20 percent of household wealth, compared with upwards of 65 percent in the U.S. So enough of the schwitzing about the red chip sideshow. Buy the dip!
China’s Radioactive Core
The better advice would be to flee the dip with all due haste. The truth is: China is not a sideshow. It’s the radioactive core of the entire global bubble.
Needless to day, the Wall Street shills and touts are so oblivious to this fundamental reality that they cannot even see the obvious facts about China, to say nothing of the macro quicksand upon which the entire global economy is poised.
The meme of the day, that China doesn’t have so many gamblers, is hilarious. China’s version of red capitalism has evolved into the greatest gambling den in history. The whole thing is a giant farce: from 60 million empty high-rise apartments to ghost cities and malls, to endless bridges, highways and airports to nowhere, to laying down more cement in three years than the U.S. did during the entire 20th century.
Monday’s 8.5 percent plunge on the Shanghai market, mostly in the last hour and in the face of $1 trillion of state-buying power and several thousand paddy wagons thrown at sellers, malicious or otherwise, is merely a fore-shock of what's to come.
It’s a fateful warning about the global-scale financial temblors heading at the incorrigible army of dip buyers in New York, London and their farm teams elsewhere.
In the first place, upwards of 90 million households are in the Chinese stock market, most of them buried under margin debt. Among them, they hold 258 million trading accounts and a significant fraction of these were opened in just the past year by Chinese pig farmers, bus drivers and banana vendors, among millions of quasi-literate others.
The country went nuts speculating in stocks just like it has in empty apartments, coal mines, expensive watches, Macau slot machines, fine wines, copper stockpiles, and almost anything else that can be bought and sold.
So when the Beijing overlords go into full panic mode about the stock market plunge, they actually have a reason: There are more trading accounts in their red casinos than there are people in Japan, Korea, Thailand and Malaysia, combined!
Do they fear the wrath of the tens of millions of newly affluent Chinese that they have lured into the stock market?
Yes they do, and for good reason. Namely, if the stock market comes crashing back to earth, then what is at stake is not merely several trillion dollars in paper wealth, but the essential credibility of the regime itself.
Even in China’s fevered gambling halls, the people would surely notice the $7 trillion elephant missing from the room, and wonder about its implications for the rest of the Beijing Ponzi.
At its June 13 peak the Shanghai stock index was trading at 70 times the reported last-12-month earnings of its constituent companies. Were these nosebleed valuations to be re-rated to a merely bubbly 30 times, the Shanghai index would plunge back to its level of one year ago, vaporizing the aforementioned $7 trillion in the process.
The Chinese stock market is not even worth 30 times earnings because the entire Ponzi scheme is unraveling. The Chinese economy is bloated with monumental malinvestments and stupendous excesses, the likes of which have never previously been visited upon a modern industrial economy.
While it is impossible to gauge the magnitude and timing of the hard landing now imminent, one thing is certain: The virtual impossibility that an economy flushed with a helter-skelter debt expansion from $2 trillion to $28 trillion in just 14 years, especially one that has no rule of contract law or even semblance of honest capital markets, can avoid a thundering deflationary collapse.
Profits have already nearly vanished in upstream sectors like coal, steel, aluminum and cement. They are now eroding in shipbuilding, construction equipment, solar equipment, and other capital goods. Earnings will soon be falling in overbuilt consumer industries, especially automobiles. Like Japan in the mid-1990s, China is heading for an era of profitless deflation as its credit binge comes to an end.
China’s companies are not worth last July’s stock market valuation, let alone their current perilous perch. The Beijing suzerains cannot afford to pump more fiat credit into the stock market, meaning that the only remaining recourse is to arrest the sellers as enemies of the state.
Red Capitalism Kaput
Needless to say, red capitalism isn’t the same as Mao Zedong’s red socialism He held that power comes from the barrel of a gun, and if push-came-to-shove, full jails and energetic firing squads could enforce the regime.
But since the time of Deng Xiaoping, the power of the Chinese communist party has come from the end of a printing press. For all practical purposes the People’s Printing Press is out of business. China is now imperiled by massive capital flight.
During the last five quarters, its external accounts have hemorrhaged upwards of $800 billion of private capital outflows. That staggering figure represents the sum of its current account surpluses plus its drawdown of official reserve assets.
Had China’s $400 billion of current account surpluses been added to its reserves during that period, its reserve balance would total $4.5 trillion, not $3.7 trillion. The difference is a massive stampede of hot capital.
A regime that lives by the printing press is consigned to eventually dying by it. Accordingly, Beijing cannot open up the credit spigot again without further exacerbating its torrid capital flight.
The only tool left to prop-up the red casinos is Beijing’s enormous fleet of paddy wagons. But with 258 million trading accounts in place, it is doubtful that even Beijing can arrest the sellers fast enough to forestall the stock market plunge still ahead.
Phony Numbers Machine
As the communist oligarchs desperately hop from increasingly gimmicky stimulus ploys to the mailed fist of economic repression, one thing is quite predictable. Even its phony numbers machine will not much longer be able to hide the fact that the Chinese economy is grinding to a halt, and that the miracle of red capitalism was never remotely what Wall Street cracked it up to be.
Between the 2007 pre-crisis peak and 2014, the estimated world GDP expanded from $53 trillion to about $69 trillion. But fully 33 percent of that $17 trillion gain was directly accounted for by China. Far more than half of the total is actually attributable when the multiplier effect on resource suppliers like Australia, Brazil and Canada is accounted for, and when the pull effect on intermediate component suppliers like South Korea, Malaysia, Japan and Taiwan is added to the brew.
That’s not 14 percent. The collapse of red capitalism in China is exporting gale force deflation to the global economy, meaning that the already evident rollover of world trade is just beginning its descent.
So S&P profits are not immune, not by a longshot. One of these days, perhaps soon, even Scott Wapner will get the memo.
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