Monthly Archives: July 2015

Here Beginneth The Lesson

There is a salutary lesson being given right now to anybody who invests in Western markets but few are paying attention. If the penny drops, things could get very ugly indeed.

Overnight, the Shanghai Composite Index fell another 8.5% - with the real damage being done in the last hour as sellers, spooked by a Bloomberg story which suggested intervention in Chinese markets may be curtailed at the behest of the IMF (who, somewhat hilariously, feel that the level of intervention from the Chinese government is a little over the top).

Shangai Collapse 2

Was the IMF story the cause of the meltdown? Well, it's hard to see why anybody would think for a second that the Chinese would listen to the IMF about such matters (not even in the face of their desire to be admitted to the SDR), and anyway, it doesn't matter. There doesn't have to be a reason for falls like this one.

This is exactly what I wrote about in my most recent Things That Make You Go Hmmm... 'The Sum of Both Fears' (

Whatever the reason, the selling overwhelmed the bids of both natural buyers AND the massive interventionist forces of the PBoC and the seemingly myriad regulatory bodies.

75 stocks fell for each one that rose and those hit hardest were the stocks (such as PetroChina) which had been the recipients of state largesse in the form of direct intervention in recent weeks.

Adding to the woes was the release on Friday of Chinese Industrial Profits, which fell 0.3% YoY.

Again, nobody really believes the numbers emanating from the Chinese National Bureau of Statistics, but when markets are rising, cognitive dissonance reigns supreme.

This time, however sentiment being tilted towards fear was all it took to generate the second-largest fall in the history of the Shanghai Composite.

The lesson? Well, Chinese investors' confidence was buoyed by the explicit promises (and actions) of the Chinese State machine who directly bought stocks and, seemingly, put a cast iron bid under the market but when investors' level of nervousness reached a certain point (a point that nobody could have pinpointed in advance), everything changed and even bans on not only those 'evil short sellers' we continually hear about in the West, but selling, period, were not enough to stem the tide.

Nor were threats of arrest for short sellers.

Nor were hundreds of billions of dollars (equivalent) in direct market support.

When Fear took over, the Central Bank was powerless to react.

In the West, there are no explicit official sector stock buying programs in place. There are no threats of arrest against short sellers and there are no bans on outright selling.

Everything..... EVERYTHING..... rests on one ephemeral thing - the market's confidence in the power of Central Banks to ensure a good outcome no mater what.

Anybody paying attention to the lesson should not just be thinking about what might happen when that fragile confidence evaporates, but taking steps to ensure they don't get caught out when it does.

The problem comes in leaving such precautions a day too long...

Ask anybody who was considering selling their Chinese equities last Friday but didn't...

Download Problems – July 23, 2015

Dear subscribers,

Unfortunately, the download links to the PDF files for Things That Make You Go Hmmm... are non-functioning today. I have notified the developers who are working to fix the issue as quickly as possible. In the meantime, letters can still be read inside your browser.

My sincere apologies for this inconvenience. The Gremlins clearly have it in for me.

I will notify you as soon as the issue is fixed.

Many thanks for your patience


Varoufak off

Greek finance minister Varoufakis in Germany

So, the EU finally got the 'yes' they wanted, only this time it was from Yanis Varoufakis, who resigned yesterday morning after posting the following on his blog (this is how politicians and central bankers communicate with the world these days - immediately - which is perhaps why many of their problems arise):

"Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.
"I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum.
"And I shall wear the creditors’ loathing with pride."

You could take that as a sign that a deal is likely going to be done in very short order. The Eurocrats needed SOMETHING to save face and Varoufakis' head was the prize.

However, the reality is that, with the 'Oxi' vote ringing across Europe, the balance of power has shifted enormously towards the Greeks (and not just them, but the Portuguese, the Spaniards and the Italians too). Meanwhile, in Brussels, the Eurocrats' overwhelming desire to punish the Greeks for their temerity in defying them is evident in the tightening of ELA provisions by the ECB overnight.

How dare the Greeks 'act up' like this!

Somewhat fittingly, this blind refusal to accept the shortcomings of the euro project will be its undoing and the foolhardiness of those who seek to protect it at all costs will be the architects of its demise.

In any ordinarily-functioning financial system, Greece's creditors would do the deal which made most sense financially - in this case, a debt restructuring and a BIG haircut on the amount owed to Greece's creditors - BUT, this is the EU.

Instead of being fiscally prudent and saving well over a hundred billion euros of taxpayer money, the Eurocrats are still looking to make an example of Greece (after all, money does grow on trees these days so a hundred billion here or there is no big deal). It makes no difference that the Eurocrats themselves lent Greece money they knew could never be paid back - the EU had to be saved regardless of the future cost.

Europe's leaders' own stupidity has led them into a prison cell of their own construction. Their blind insistence on preserving their precious idea of what 'Europe' was supposed to be was, in fact, nothing more than the protection of a series of legacies and the staunch refusal to consider the possibility that they may just have got a few things wrong when they put the EU together in the first place.

A monetary union without a fiscal union was always going to work until it didn't and the time when it didn't was always going to be the first 'crisis'.

There are a series of very good reasons why Italians, Spaniards and Greeks have historically been charged more to borrow money and a series of equally good reasons why German credit has always been worthy of a far lower risk premium. In these politically correct times, such words can be twisted into carrying all kinds of intention that didn't exist at the time they were said - such is the way of the world - but twisting the words doesn't alter the facts that they represent.

Greece got into the EU by cooking the books to ensure their entry. That is not speculation, but a fact confirmed by Greek officials. THAT was the time when action needed to be taken, but throwing hundreds of billions of euros at the problem instead of facing up to a stark reality which would have meant tough choices about EU membership was symptomatic of the 'extend and pretend' culture that pervades the 'leaders' of the world everywhere you look.

Now the Eurocrats face a stark choice of their own creation:

Make good on their implicit threats and kick Greece out of the euro which means waving auf wiedersehn/adieu/au revoir to a couple of hundred billion euros of taxpayer money OR, buckle, do a deal on something far closer to Greece's terms (and along the guidelines of the IMF's recent 'shock' recommendation - see this week's TTMYGH 'IMF'ed') which will involve huge debt relief but will cost a lot less, knowing full well that the leaders of Podemos in Spain and Five Star in Italy will be licking their lips at the prospect of speaking to their own austerity-ravaged electorates.

The man taking Variufakis' seat is Euclid Tsakalatos the Oxford-educated academic economist who has been described as 'the brains behind Milli Vanilli's talent' 'the brains behind Syria's economic policy'.

Prior to Sunday's referendum, he had this to say about Greece's plight:

"Even if they forgave all the debt and gave us €300bn we would still be in deep trouble"

One way or another, the Eurocrats are eventually going to get everything they deserve.