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Generational Dynamics Web Log for 2-Sep-2015
2-Sep-15 World View -- China leads a worldwide stock selloff

Web Log - September, 2015

2-Sep-15 World View -- China leads a worldwide stock selloff

Oil volatility illustrates exogenous factors affecting Wall Street

This morning's key headlines from GenerationalDynamics.com

China leads a worldwide stock selloff
Oil volatility illustrates exogenous factors affecting Wall Street
China rescues the stock market every day at 2 pm
China arresting people who spread malicious rumors by telling the truth

China leads a worldwide stock selloff

Beijing skyline (Getty)

Beijing skyline (Getty)

China's Shanghai stock market index fell 1.2% on Tuesday, which isn't that much, but possibly more significant was China's Caixin manufacturing index, which showed the quickest factory contraction in China in years. China's economic slowdown is raising concerns around the world. Japan's Nikkei index fell 4% on Tuesday, and stocks in London fell 3%.

Tuesday was a very rocky day on Wall Street, with the Dow falling 570 points at one point, ending the day down 470 points, or 2.8%.

With the S&P 500 Price/Earnings ratio (stock valuation index) above 20, far above the historical average of 15, Wall Street stocks are in a huge bubble that must burst and collapse at some point. ( "28-Aug-15 World View -- Explanation of Price/Earnings ratio and Stock Valuations")

It's impossible to predict when that will happen, but as I've been saying for a few weeks, it may be happening right now. The analogy with the 1929 crash is as follows: The market peaked on September 3, and fell steadily after that, not reaching a bottom for three years, only reaching a bottom on July 11, 1932. However, when people talk about "the 1929 crash," they're not talking about any of that. They're talking about October 28, 1929, when stocks fell 13% in one day, and the country was in a state of panic that's still imprinted on people's memory to this day (like September 11, 2001, for a different reason).

The current volatility in stock prices -- surging upward one day, falling the next -- is a sign that a collapse may be near. If stock prices settle down, then things can continue as before. But if this volatility continues and grows, especially with astronomically high stock valuations, it's a sign that the inevitable panic may be close.

If we are in fact now in the middle of a collapse of the stock market bubble, then a day like October 28, 1929, has not yet occurred. That day will come at some point, possibly soon, and it will be remembered for decades. CNN and USA Today and CNN

Oil volatility illustrates exogenous factors affecting Wall Street

It's not just stocks that are extremely volatile -- it's commodities too. Oil was the most extreme. The price of a barrel of oil has been surging, up 27% in three days, to $49.20 per barrel (West Texas Intermediate) on Monday. Then on Tuesday, it fell 7.7%, back to $45.41.

The price of oil is set globally. China's stock prices are set in China. Neither of these is controlled by the American economy, and yet they affect the American economy.

This leads to a concept that I've been developing that the current Wall Street stock market bubble is being affected far more by exogenous factors than by domestic factors, and that this is a change from previous bubbles.

The 1929 stock market bubble was almost completely internal to the United States. The late 1990s bubble was based almost entirely on technological financing within the United States. The 2007-8 financial crisis was caused by the deflation of the American real estate bubble and deleveraging of subprime mortgage backed synthetic securities, almost always from American banks.

But today's bubble is largely exogenous. Yes there's a Wall Street bubble, but this time Wall Street is heavily interlocked with stock markets and financial centers around the world, and the Wall Street bubble is smaller than all the other bubbles put together.

I understand that total debt in the United States is $60 trillion, of which $18 trillion is federal government debt. I've also read that total debt in the world is $230 trillion. So, once again, the debt exposure of the United States is big, but only a small fraction of the world debt, in countries with whose economies are interlocked with ours. That means that if almost anyone else sneezes, then we catch a cold.

I've actually been nibbling at this theory for a few weeks. I've been trying to explore some of these concepts in the currency area, when I've been writing about the devaluation of the Chinese yuan, then the devaluation of the Afghanistan tenge, and then crashing of commodities and various African currencies. These actions have all strengthened the US dollar, making the US goods and services less competitive in the world. In addition, this past weeks there was news that China is selling off over $100 billion of US Treasuries. This will strengthen the American dollar even more, possibly significantly, and the make the US even less competitive in world trade. This would be an example of how the current situation is significantly different from previous ones, because today we're reacting to exogenous events, not internal ones as in the past.

If these observations about exogenous events are correct, then America may have less control over what's happening than even the already clueless mainstream analysts and politicians believe. Bloomberg and Dow Jones and Bloomberg(8/27)

China rescues the stock market every day at 2 pm

Every day for the last four days, the Shanghai stock market index fell sharply in the opening, down 4-6%. But then, in the afternoon, like magic, the index starts to rise, so that by the end of the day, it's only fallen 1% or so.

It turns out that this afternoon magic is a conscious policy by the Chinese. Every day around 2 pm, the Chinese used government-backed funds to make huge purchases of shares in large capitalization companies.

According to analysts, individual retail investors are selling off in the morning, and then Chinese officials are intervening in the afternoon. Chinese officials do not want anything to spoil their World War II victory parade celebration on Thursday. However, this kind of intervention may end on Friday, after the victory parade has ended. Bloomberg

China arresting people who spread malicious rumors by telling the truth

Investors and journalists in China are becoming extremely nervous about aggressive actives Chinese officials to investigate or arrest bloggers and journalists who write about what's happening in the stock market and investors "meddle" in the stock market by selling stocks.

According to reports, Chinese authorities arrested almost 200 people over the weekend. These include journalists, critics and traders. Once arrested they're forced to confess. One local journalist was forced to confess on national state television that he had spread information that caused "panic and disorder."

When stocks started plunging, Chinese authorities issued censorship instructions on June 23:

"Radio and television stations must substantially cut down on coverage of the stock market and strictly observe the following rules:
Necessary coverage of the stock market must be completely balanced, objective, and rational. Do not join the chorus of the bull or bear market. Rationally lead market expectations to prevent inappropriate reports from causing the market to spike or crash.
Without exception, discontinue discussions, expert interviews, and on-site live coverage. Do not conduct in-depth analysis, and do not speculate on or assess the direction of the market. Do not exaggerate panic or sadness. Do not use emotionally charged words such as “slump,” “spike,” or “collapse.”
Strictly report according to information released by the China Securities Regulatory Commission. Resolutely avoid promulgating false information.
Programs on securities must be produced and broadcast by the broadcast organization. Do not rent or transfer time slots, do not broadcast programs produced by consulting organizations, and do not embark on commercial ventures with consulting organizations."

Similar rules apply to reporting on the Tianjian industrial disaster last month. Daily Express (London) and Reuters and China Digital Times

(Comments: For reader comments, questions and discussion, see the 2-Sep-15 World View -- China leads a worldwide stock selloff thread of the Generational Dynamics forum. Comments may be posted anonymously.) (2-Sep-2015) Permanent Link
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Generational Dynamics Web Log for 2-Sep-2015 2-Sep-15 World View -- China leads a worldwide stock selloff

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Oil volatility illustrates exogenous factors affecting Wall Street

China rescues the stock market every day at 2 pm

China arresting people who spread malicious rumors by telling the truth

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Generational Dynamics Web Log for 2-Sep-2015
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