If the markets are a self-organized internal structure that establishes certain dynamics of mutually interacting parts, then the environment it lives in must exhibit a similar behavior to the survival of the fittest. Economists are not prone to accurate forecasting because their framework in how the world works is linear. The financial world’s interconnection may have evolved no different than the uninformed investor entering into the markets that determine the same increased value of an asset or a piece of paper staring straight at them.
As long as liquidity and corporate buybacks exist, the market will generally rise. When illiquidity variables set in, then markets will not find sufficient buyers to offset the sellers. Yale University does produce some of the best economists the world has ever known; one of them was Professor Irving Fisher. In 1929 he stated, “I expect to see the stock market much higher than today.” 14 days later, the crash happened. Even Ben Bernanke got into the act in reference to the Great Depression when he wished Milton Friedman a happy birthday. “You’re right, we did it. We’re sorry. But thanks to you we won’t do it again.”
For a second let’s take China’s case in point: China’s central bank indicated that it plans to use multiple policy tools to maintain liquidity in the market and to sustain credit growth. They also warned of the mounting risks in the global financial markets and the notion that complexities shouldn’t be underestimated. China’s central bank is exacerbating the situation by pumping more money into paper certificates. They’ve spent $15.4 billion USD to purchase paper securities from banks with the agreement to resell them in the future at a substantially higher price.
So now China has maturing reversal repos draining liquidity from the markets enabling commercial lenders to stash some cash to meet regulatory reserve requirements. Shanghai and Shenzhen have announced restrictions to cool runaway home prices. One mainland Chinese analyst suggested, “The ideal situation would be to achieve a balance of supply and demand.” This means that Chinese families with one home already will need a minimum of 50% down payment for a second home. Shenzhen fares a little better: a family only needs 40% down payment for a second home.
The government stated investors are unlikely to sell as there are few alternatives for their money while the end users are unlikely to sell either. The Chinese government intuitively may understand the concept; that means if no one is selling then it must mean no one is buying.
What is reassuring for the global markets and Wall Street is that there will be no spillage effects anywhere else because the Chinese government wants to control the property market. They’re controlling the property with more-strict measures in granting mortgage loans. Last summer, many Chinese brokers indicated that it was high leverage that brought their market into a high-volatility variance. Now in March, analysts are singing a different tune with lower rates boosting the sentiment of investors and market liquidity.
Guosen Securities, a Chinese state-owned financial service company, stated, “Such a move will ensure investors’ confidence and that the market has bottomed out in terms of liquidity, and we should not be very bearish on where it’s going.” This is perhaps one statement that the Goldman Sachs President Gary Cohn believes in. This establishes the exact sequence of intellectual thought between him and the Chinese government.
Gary is very thankful that the Chinese shares will gain traction because of Chinese regulations assuring that shares will be valued at a higher price. Many analysts commented on stock registration reforms, “Take relatively long time, it’s too early to talk about.” The reason why it’s too early to talk about is because retail investors are happy that Chinese shares have staged an impressive comeback since state-backed margin regulators resumed lending to brokers under lower rates.
China’s capitalism never stops; it becomes progressive even with the elderly. Senior-care facilities will be supported if they list themselves on the stock market to raise funds. That means pension funds should invest through various channels to increase paper value to take care of the elderly. Banks and brokers are getting involved with credit policies that allow rollovers on loans, mortgages, land-use rights, and real estate if the money invested in certificates.
Yuan Yafei, Sanpower Chairman, pontificated, “I’m not afraid of losing face. One can never be successful if he or she is worried about losing face.” He made it known why he’s purchasing companies overseas, “The Chinese market is huge enough, but we don’t have enough experience. With the help of money, I buy Western brands and technologies which are exactly what Chinese lack.” The printing of money is really good isn’t it?
In order to win retail investors that lost their money last summer, the Chinese Securities regulators dismissed that there were 40 problematic listed companies which were planning to de-list. In fact, they now stated that all listed companies should operate according to the rules and regulations. This is why 95% of the companies listed always exceed expectations.
For example, Kweichow Moutai Company rose to a 9-month high after China International Capital Corp said that the liquor makers’ earnings may beat consensus estimates year-after-year. Does anybody have a bottle of Chianti? I definitely need a drink after this.
They did manage to de-list ZhuHai BoYuan Investment Limited. Even Reuters stated that the last trading day for this company would be May 11, 2016. However, the company still manages to trade a total of 14 million shares per day in volume. The Chinese retail investor has perhaps established a sequence and hypotheses that the true valuation of a stock is whether they paid less than what the state government enterprises are forced to pay for their own stock. The logical question is: Who’s going to get their liquidity first?
Market bubbles are rational prescriptions to our global economy whereby investors’ sentiment and the fundamental value of assets becomes a predictable pattern of higher expectations. The US Fed can not control the fundamental value of investors that are articulating higher expectations. On April 29, 2000, the Fed Chairman increased interest rates to cool off speculative fever; unfortunately this did not work and he was left scratching his head. In 1928 the rate increased from 3.75% to 5% without efforts to curb speculation. In August of 1929 they increased that rate again by 1%.
Asset price volatility is a rational self-fulfilling expectation; they are predetermined variables whereby the self-fulfilling prophecy becomes precise. Economists always believe that asset prices are determined by market fundamentals and empirical research; their models are not acceptable in the global markets. Even a rational asset price will be violated because the covariance can not show the magnitude in how the herd needs to survive; it is the role of the survival of the fittest in how economies work.
Something interesting occurred on April 7, 2016. Former Reserve Chairman Bernanke, Volcker, and current Fed Chairman Yellen got together for an intellectual powwow. They rebuffed the political rhetoric of a bubble burst. Yellen stated, “I certainly wouldn’t describe this as a bubble economy”, noting the so-called “healing” labor market. Volcker was less dominant and more timid; he noticed “overextended” pieces of the financial system, but no existence of a bubble.
The true meaning of their meeting wasn’t so much about the Chinese market that dominated their psychic; it was the change of the political climate involving Bernie Sanders, Trump, and Cruz who want to get rid of the political elites and the establishment that removed the middle class from the American dream. What these three economists gave to the middle-class of America were low-paying jobs and stagnant wages with the imagination of rising expectations of getting more and more.
I think all three economists established a perfect sequence that it wasn’t China or a bubble that made them worried. The problem with Janet Yellen is that she thinks she controls the Chinese market and how the Chinese people think and act. She knows how to control Wall Street by simply lifting her skirt, but that sight for the men and women who work on Wall Street may be very painful, even for the bulls.