Aug 242015
 August 24, 2015  Posted by at 9:00 am Finance Tagged with: , , , , ,

NPC Grand Palace shoe shining parlor, Washington DC 1921

After losing 11% last week, Shanghai this morning was down almost -9% at one point, after lunch went back up to -6.5%, and ended its day at -8.49%. A Black Monday for sure, but is this the BIG ONE? It really doesn’t matter one bit. Unless perhaps you persist in calling your self an investor, in which case we pity you, but not for losing your shirt. Because God knows we’ve said enough times now that there are no functioning markets anymore, and therefore no-one who can rightfully lay claim to the title ‘investor’.

Plenty amongst you will be talking about economic cycles, and opportunities, and debate how to ‘play’ the crash, but all this is useless if and when a market doesn’t function. And just about all markets in the richer part of the world stopped functioning when central banks started buying assets. That’s when you stopped being investors. And when market strategies stopped making sense.

Central banks will come up with more, much more, ‘stimulus’, but what China teaches us today is that we’re woefully close to the moment when central banks will lose the faith and trust of everyone. After injecting tens of billions of dollars in markets, which thereby ceased to function, the global economy is in a bigger mess then it was prior to QE. The whole thing is one big bubble now, and we know what invariably happens to those.

More QE is not an answer. And there is no other answer left either. Those tens of trillions will need to vanish from the global economy before any market can be returned to a functioning one, and by that time of course asset prices will be fraction of what they are now. It may not happen today, but that doesn’t matter: what’s important to know is that it WILL happen.

And if you keep being out there trying to outsmart a non-functioning market, you’ll get burned as badly as the millions of Chinese grandmas who already lost 20%+ so far just this month. And that’s just on their share holdings; Chinese property ‘markets’ will be at least as badly burned.

China’s leaders, and its people, have walked eyes wide open into an ugly albeit nigh perfect trap. They’ve all started to believe that borrowing more could make them richer. Outstanding credit across the entire society has reached idiotic proportions. We can get somewhat of a glance at what levels debt have reached in Steve Keen’s Is This The Great Crash Of China?, in which he argues that a crash is inevitable, simply given those levels.

But we can at the same time be sure that this doesn’t tell the whole story. Much of what has gone on in the shadow banking sector remains unknown and carefully hidden. Thousands of local governments have plunged themselves into the deep end borrowing from trusts and other often shady instruments, at interest levels much higher than the ‘official’ ones. Even these shadow trusts last week have begun asking for bailouts, a development that can only make one think of a Godfather episode of one’s choice.

China’s first big mistake is that Xi and Li and their ilk think they can control housing and stock markets. Which basically means they think they can stop people from selling property and assets when they feel these might go down in ‘value’.

China’s second big mistake is that so many people believe that Xi and Li actually have any such control. Which means the people don’t sell nearly soon enough, and will be saddled with the losses. From an economic perspective, it’s an exercise in stupid futility, or, if you prefer, futile stupidity.

Add to this that the credit that allowed the Chinese to purchase all these alleged assets came from nowhere, and will therefore of necessity have to go back to nowhere, and you have a recipe for deflationary debt deleveraging the likes of which the world may never have seen before in history, unless perhaps you count the tulip- or South Sea bubbles, but they are just small scale anecdotes compared to today.

This deleveraging will be global. We pity the many millions of poor souls who think that countries like the US and Britain will be spared the worst because their economies are doing ‘so well’. Doing well in a global Ponzi is not a recommendation.

China’s fall is being exacerbated by the fact that it has two -heavily intertwined- parties who believe in their own omnipotence, the government (Politburo) and the central bank. Both are being found out at the same moment. And both will resist this discovery. As will all central banks in the west, where at least any idea of omnipotence of governments has long been eradicated.

But the entire west has become so addicted to China’s debt, and the illusion of prosperity and economic recovery it has brought, that all prices everywhere must come down, as noted above, until the tens of trillions of dollars in stimulus measures have vanished into the thin air they were fabricated in. Until value becomes real value again, not this virtual zombie Ponzi pricing.

Today may be just a warning sign, and it may take a while longer before the deluge, but it will come. And since China has nothing left to fall back on but even higher private and public debt levels, make that sooner rather than later.

The main advice we’ve always given with regards to debt deleveraging stands: get out of debt.

Meanwhile, the western financial press, which has been reporting on non-functioning markets for years as if they actually were still functioning, is worrying about a potential Fed rate hike, telling its readers and listeners that the US central bank ‘looks set to make a dangerous mistake’. But the real ‘mistake’ was made a long time ago.

Home Forums Is This Black Monday Crash The BIG ONE? It Doesn’t Matter

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    NPC Grand Palace shoe shining parlor, Washington DC 1921 After losing 11% last week, Shanghai this morning was down almost -9% at one point, after lun
    [See the full post at: Is This Black Monday Crash The BIG ONE? It Doesn’t Matter]


    What did most people (90%) lose?
    No debt (leverage)! No savings! No market investment!

    John Day

    It looks like bankers will be content if they can just keep stepping this thing down for awhile.
    A long while, lots of steps…


    With you 100%.


    Why not load up on debt? Only if I have assets to lose I suppose. If I have only debt, what do I stand to lose?


    Rob your freedom


    “The main advice we’ve always given with regards to debt deleveraging stands: get out of debt.”

    Can someone please explain to me if mortgage debt is considered bad or not in regards to the line above? Think about it, if credit going to dry up in the future thus making it hard to obtain a loan, wouldn’t it better to own a property now (albeit with a mortgage) as opposed to renting? The only negative that i can see is if the price of the property drops. I rather buy something semi cheap and I wont be fighting 50M+ other people trying to secure rent. I am in the US by the way. Can someone explain and articulate why a mortgage is bad, if it truly is?

    Also, given population increase, what would happen to housing supply in general in a tight credit market? What would happen to the construction industry? Soaring rent/home prices for existing homes?


    In debt deflation (amount of debt shrinking, i.e. less money in economy) asset prices drop. In another words, you could be ending up having more debt on your house than what it is worth. Might not be a problem as long as you don’t lose your job and can pay down the debt (and interest of course). But what if one ends up losing his job? This is actually a topic I would like to read more about: Should people try to get rid of mortgage debt and be renting? At least this is what I’m currently thinking about. Would probably do it if I was living on my own (i.e. didn’t have a family), would be far easier than with small kids..

    I’m from Finland so I would say there are people across the globe thinking about this at the moment (well at least the “enlightened” ones).


    There hasn’t been a remotely functioning market in years. The vast majority of the transactions are performed by HTC and machines. Moreover we saw what happened when the last round of QE ended in 2011..

    This is shaping up to be the same scenario. The fed will respond and restart QE.

    While QE makes the average person more poor, it us great at inflating the market and driving the search for returns which are paltry in the bond market.

    Count on it…more QE and remember that the market stopped being connected to the economy a long time ago and has grown very fast despite a stagnating state of economic affairs.


    One problem the Fed has is they already have too much Treasury paper. The rest of the world wants that paper and buying up more even as the supply shrinks and shrinks, the deficit is now down to 2% of GDP, presents a serious problem. But that’s just technical stuff.

    The big problem is that the sophisticated have known all along that QE only boosts asset prices not the economy. Not the economy directly anyway. Bernanke himself said QE was meant to raise asset prices and thus sacred sentiment, that new age trope so loved by our high priests of money, which would then boost the economy. Of course it isn’t sentiment which brings GDP expansion, it’s money. In this case the money went into the financial system to buy financial assets, and stayed there, as it had to. Anyway if they try QE again everyone will know it is only to boost stocks and that’s a dangerous political thing or will be, eventually. The Fed had better not do it. They will but they better not.


    Cash is King! That is the bottom line. All asset prices will fall. People will be selling their houses in droves or at least trying to. Housing prices always move much slower than stock prices but in the coming scenario it will probably move quicker than 2007-2009 debacle. It may be different if you own your house and you don’t consider it an investment. Jobs will be scarce and if you do have a job you will probably be taking a pay cut. This will come as an overwhelming surprise to most. Consider the fear that will be generated. Inner cities will become dangerous. Even if you rent, many landlords, who have bought rentals in recent years, will be sellers. All asset prices will fall…..EVEN GOLD!


    @ FF @ sinabl

    Lots of variables all changing at the same time.

    If your mortgage is at a low interest rate (below 4%) which many are nowadays, it probably is not such a bad thing compared to rent. At least you have title and can’t be evicted on a landlord’s whim. But, of course, you can be foreclosed upon if you can’t keep up the mortgage payments. In a deflationary spiral keeping up with mortgage payment can become more and more difficult. Other factors come into play, though.

    A debt jubilee could be instituted by the sovereign by which in the name of economic stability all debts are absolved and the debt-money-monopoly undergoes a “reset” of sorts. In such a jubilee, those with no debt should receive cash grants in order to creat a more level paying field between whose who then would own debt-free assets versus people who have no assets, but at least also had not debt. In such a jubilee, those with mortgages MIGHT come out ahead of renters since the formula for a cash grant to renters can be less than the effect of a forgiven mortgage; and those with forgiven mortgages also get the added benefit of staying in their own home.

    Another factor that could come into play is the increasing power of savings. If while paying down a low interest mortgage one was also able to accumulate some savings, then he or she would be in the position to offer the bank something less than the nominal payout in order to end the mortgage. In a deflationary spiral with no debt jubilee, even Banks will be hungry for cash or other assets that are holding their value. With a low mortgage interest rate, a buyer who could have paid cash, but who took the mortgage anyway, and kept the cash in their mattress would very likely be in a position to pay off the mortgage for far less than its nominal pay-out and therefore perhaps gain a significant financial advantage because of the mortgage.

    Renters who had saved will also be in a better position to buy a house if housing prices have collapsed, but it is less likely they will be in the position to offer to buy the house they particularly like and have customized to their tastes over the years.


    @ casamurphy, thank you, interesting pondering about different possible scenarios.

    What I’m aiming for is the lowest risk option. Mortgage owners might get all debts absolved but I would consider that option extremely unlikely (given the background what happened here in Finland in the early 90’s with massive unemployment etc.). However, it is also very likely that the next crisis is so massive that it will make all the previous crises look like little bumps down the road. Therefore, it might be that because of a crisis which size is not comparable to any previous ones debt might be absolved. But then again, we are in the euro system here in Finland so the debt absolving option is not in the hands of our government.

    If I didn’t sell my home and the value of it goes down dramatically (say +20%) and I had to move e.g. because of the need to change employer I would be in deep troubles. But, if I was renting I’d have more freedom to relocate + I could buy a house if and when the bottom has been reached in the housing markets (although the decline in Japan housing markets doesn’t seem to end ever so there’s no point buying a house at all).

    I’ve been studying the monetary system for 5+ years and global economics by myself for a couple of years quite extensively and I believe I have a pretty clean view of the quite devastating outlook of our economic situation. I guess what I’m currently looking for is for some arguments that could shake my view and prove that my understanding is either wrong or insufficient. Because, to me, it is one thing to understand what is likely ahead of us and another thing to really act based on that understanding (in my situation, sell the house and become a renter; a very wise choice I would think but so hard to accept mentally and really execute it). After all, we are humans with a built-in will to believe in a better tomorrow, even when that is most likely not going to happen but the exact opposite…


    Perhaps TAE should do an article on the rent vs buy (lock in low interest) discussion.

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