Wolf Richter

It’s easy to deny a bubble but impossible to deny its implosion.

We’re having the kind of day when the New York Stock Exchange felt compelled toannounce very encouragingly before markets opened that it would halt trading for 15 minutes if the S&P 500 drops 7% to 1,833 before 3:25 p.m. Once trading restarts and the index plunges 13% before 3:25 p.m., trading would be suspended for a second time. If the index plunges 20% at any point today, NYSE would shut the market entirely for the rest of the day.

Monday’s meltdown commenced in Japan.

A follow-on to Friday’s debacle. The Nikkei started out in the hole and dove from there, ending the day down 4.6%. This is a market where the central bank has a mega-QE program in place with an explicit policy to buy equities to inflate them. Yet, despite the furious efforts by the Bank of Japan’s trading desk, the Nikkei dropped to 18,541, down 11.5% since June, the lowest since February.

It was in reaction to a whiff of panic in China, triggered by a total loss of faith in the government’s and the central bank’s machinery designed to prop up the markets.

The Shanghai Composite Index opened down nearly 4% and went to heck from there, closing at 3,210, down 8.5%. It annihilated the entire phenomenal bubble gains this year.

The thing is, the government vowed to support the stock market when it hit the “policy bottom” of 3,500 to 3,600 points. Now that it crashed through what was nothing but a line in the sand, hopes have shifted down to a new line in the sand of 3,000 points.

In all Chinese stock markets, only 12 stocks rose, and 2,200 stocks hit their 10%-down limit.

The Shanghai Composite is down 37% from its mid-June peak. At the time, the halcyon bubble era when the index had been up almost 60% for the year and 100% from a year earlier, the government denied that there was a bubble. It’s easy to deny the existence of a bubble and invoke some magic metrics to explain it as rational. But it’s impossible to deny its implosion.

George Chen, Managing Editor at the South China Morning Post News International Edition shared this tidbit: “A Chinese newspaper editor just told me he got ‘order’ that he shouldn’t use words like ‘crisis’ or ‘disaster’ 股災 for today’s market story!”

So how cheap are Chinese stocks now?

After Friday’s crash, stocks at all mainland-China stock exchanges combined were still trading at 61 times earnings, three times more expensive than the S&P 500, which at its own insane valuation, trades at an earnings multiple of 19.

In its newest move to prop up the markets, the State Council announced on Sunday that it will allow pension funds managed by local governments to buy stocks for the first time. The idea is not to improve the fate of the woefully underfunded pension plans by loading them up with overpriced stocks, but to send new money into the stock markets regardless of what the fundamentals may be, with the sole goal of propping them up.

A draft rule to that effect was first published on June 30, during the prior stock market rout. At the time, the pension funds could only invest in bank deposits and treasuries. But now they can plow up to 30% of their net assets – 3.5 trillion yuan, or $547 billion, at the end of 2014, according to Bloomberg – into equities and other goodies. That would free 1 trillion yuan to stop the meltdown.

Japan has already implemented a similar policy change this year. It’s not working very well though.

For investors in China, this move didn’t exactly inspire confidence. Instead it showed for everyone to see that the government was scared and desperate.

Now there are rumors in the media that the PBOC would add liquidity to the banking system before the end of the month. This was billed as a “surprise” move that everyone is expecting to fix the markets. And if it doesn’t?

Bloodletting hit other Asian markets.

Hong Kong’s Hang Seng plunged 5.2%, down 15.6% from a year ago, and down 26% from its April peak.

The Indian BSE Sensex plummeted 5.9%, its worst percentage fall since 2009, to a new 52-week low, and down 14.7% from the Modi-election bubble peak in March. And the rupee dropped to a new two-year low of 66.74 per dollar.

“We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee,” Reserve Bank of India Governor Raghuram Rajan explained. But central banks shouldn’t prop up stock markets, he said. “Once market volatility settles down, India should emerge once again as an investment destination of choice.”

Taiwan’s Talex plunged 5.9%, down 21% year-to-date, Asia’s worst performing stock index.

In South Korea, policy makers lined up to stem the bloodletting. Tensions with North Korea, including cross-border shooting incidents, punctuated trading. President Park Geun Hye asked officials to keep an eye on markets and prevent “nervousness” about North Korea from spreading. The Bank of Korea said that calming the markets was important; it would closely monitor external risks and develop measures to mitigate them if necessary.

It might have stopped further carnage. The KOSPI ended the day down 2.5%, but 15.8% off its 52-week peak in April, in the hole for the year, and down 11% from a year ago

And oil plunged.

West Texas Intermediate at one point hit $37.75, down nearly $3, before bouncing off. As I’m writing this, it trades at $38.35, down 5%! It didn’t help that the EIA justreported this:

Continued growth in global production of petroleum and other liquids has outpaced consumption growth since August 2014, resulting in rising global liquids stocks. Total global liquids inventories are estimated to have grown by 2.3 million barrels per day (b/d) through the first seven months of 2015, the highest level of inventory builds through July of any year since 1998.

In Europe, the bloodbath from Friday continued unabated. The German Dax plunged 4.7%, the French CAC 40 5.4%, UK’s FTSE 100 dropped 4.7%. Euro Stoxx 600, which covers the largest European companies, was down 5.3%.

But wait… Europe is where the omnipotent ECB and other central banks have imposed negative deposit rates. The ECB is engaged in a massive ‘whatever it takes” QE program to inflate stock markets. But it’s not working. Omnipotence stops functioning once people stop believing in it.

Mini mayhem broke out in currencies. The dollar plunged against the euro and the yen this morning as markets abandoned expectations that the Fed would raise rates in this environment or any environment ever, and as the clamoring on Wall Street for QE4 Infinity got even louder. Alas, as stocks recovered, the Fed’s interest rate increase reappeared as a vague possibility, and the dollar found a bottom and then bounced off.

But all is well in US stocks?

After plunging 1,000 points at the open, the Dow has resurged, and is currently down only 157 points, less than 1%. The S&P 500, after hitting 1,867 – a little shy of when the NYSE would halt trading – bounced to 1,950, down about 1%. The Nasdaq, which had crashed to 4,292, almost 1,000 points below its peak last month, has bounced 400 points off its low and is currently down 0.5%. The dip buyers have emerged, after having gotten clobbered on Friday, and they’re once again seeing an endless ocean of buying opportunities, though they may get sucked down again without prior notice.

And this is what happened last week, though it wasn’t t supposed to happen. Read…What the Heck is Going on in the Global Markets?

Reprinted with permission