We look for patterns and when there are no patterns we invent patterns. If China is down and our futures are up, then, gosh darn, we're shrugging off China.
To which I say, based on what?
China can't be shrugged off because it can't be done going down because it should never have been up in the first place.
I am incredibly conscious that China's stock market had no impact on the way up, but the fact is the real buying came at the top. That's where the sizable volume came, where all the accounts were opened, where all the bank loans were made.
But here's an interesting postulation. The Shanghai Composite is still 800 points from where this move began, which would be a sizable hit from the 3,000 level, but nothing earth-shaking given where it's come from and the losses taken already. Oh, and let's be sure there isn't a person in this business who doesn't think the whole move has to be repealed because many of the companies don't deserve to trade anywhere near where they are. The Shenzen, which, amazingly, is still UP for the year, 15% yet and that's a total lunacy given the flimsy nature of so many of the stocks in that, the true Nasdaq of 2000.
But what happens after the 800-point loss that's about to occur and the big rollback of the smaller Shenzen. What happens when Shanghai goes back to 2,000 and we lose this vital symbol of what, of who, of why? It was never anything on the way up and when it gets back to where it was my bet is that we stop thinking about it altogether. We will still trade off of ugly China data that will always be worse than expected because the estimates are created by brain-dead analysts.
But China's indices will cease being in our faces the faster they get to where they have to go because they never meant anything anyway. The people who lost their life savings will just go about their lives absorbed in a sea of 1.3 billion people. It's sizable. We know that Credit Suisse puts the number at 90 million who own accounts. Many used margin, which is why the losses are so severe, but only a third of those 90 million accounts were opened within the five months of the top and the Chinese were allowed to have up to five accounts each. Who knows how many of those 30 million accounts were individuals? I doubt that it could be as few as 6 million, but the 30-million figure just can't be as we know that many individuals were thought to take advantage of the easy credit and opened new accounts with that borrowed money.
Still, it is inconceivable to me, given the breaking of the velocity of the decline, that everyone is underwater, even with stocks closed for trading and insiders being asked not to sell. It's also entirely possible that some are even hedged!
Nevertheless, I return to the notion that once the Shanghai gets back to where it was a year ago, we will simply say, "OK, they are buying fewer cars," and then be done with it. Why? Because we have a tremendous misconception about China. It would be fabulous if we really did the business people think we do in China. But they won't let us. It would be amazing if they started to rebuild the economy because then the MSCI indices could rally.
Nevertheless, the stock market wasn't a real tell for economic activity a year ago and it won't be after the 800 points are repealed.
So, as China comes down, remember three things:
- It has little to do with the real economy for our finished goods, simply because we have been blocked for most industries and the tech numbers are overstated because we have tech parts assembled there and then shipped overseas.
- The Party does take care of its own. We will not see people selling apples on street corners and for all we know losses will be compensated. Yes, we have that little idea of what will occur in a country that's a totalitarian state.
- The hedge funds that have decided we trade one-for-one with them will move on to another target when they get back to even year over year and we can accept that the pattern really is indeed broken.
So, get ready for 800 more points down and the concomitant decline the hedge funds think should occur and then be prepared to forget China, except for a couple of real bad PMI numbers each month.
The cavalry will come in the form of a moribund stock market that took away the savings of 30 million rich Chinese people, while, perhaps, an equal amount made out or got back to even. And the live-and-die China trade will at last be upon us, something that I think should happen, at this pace, about two months from now.
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