The Chinese appear to have lost control of their stock market. In reality, the stock market is a psychological theater with no rhyme or reason. A bad day in one market can induce a world panic. Value is determined by the potential buyer’s willingness to agree on price. Is google worth 630 dollars a share? It is, if you can sell it to someone else for even more. A lot of the rest of the world is living on margin. And in our country, every rest home retiree is in the stock market—the bond market won’t pay the rent.
Our bond market is living on borrowed time. Risk is not factored into the market. Triple D bonds are not like a bra size, bigger is better. Buyers should be demanding 25% interest, not fighting each other for 7.25%. And in the past when things got really bad, the Federal Reserve would drop interest rates a quarter point time after time. Guess what, they are as low as they can go. You have to laugh when they talk about raising the interest rate one quarter point. This is not going to send people to the banks to open up savings accounts.
In times of panic, the stock market can have moments where there are no bids to buy a stock (called air pockets) and a stock can take a very large quick drop. Like 50 to 60 dollars.
And then there is the phrase, “Stocks always come back.” If you retired in 1929, were you around in 1954 when they came back? The real truth is; the stock market is an allusion of wealth without having to work for it.
Mark Faber is expecting a black swan event in world markets. I think we are fast approaching it. The bond market marches to a different drummer. It is manipulated by the Federal Reserve guarantees. The weird thing is, the Federal Reserve can buy all the bonds it desires and keep interest rates low. All it does is force investors into different investment vehicles. Real estate, oil drilling in the Midwest, and stocks have replaced bonds for interest’s rate returns.
So we have the Chinese market swirling out of control. Nobody ever claimed that a Socialist Republic had any entrepreneurial financial acumen; that would run contrary to the fabric of the socialist doctrine. They played our game using our rules and it had a good run. Now it has turned sour, like the tulip bubble, of several centuries ago. Financial meltdowns don’t destroy buildings, they destroy fortunes. One minute you are rich and the next minute you are poor. It is invisible in its speed and reach. This is what we are fast approaching. Oil goes from $110 a barrel to $40, an unexpected event. What happens if real interest rates jump to 8 percent? Of course it is not supposed to happen, but oil was never expected to hit $40. We can project what will happen in the future; the only trouble is that common sense, is not what markets run on.
China right now is like a bunch of school kids walking by a graveyard late at night. One loud noise and they’ll run like the devil is chasing them.
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