Chinese Stocks Just Staged A Dramatic U-turn

In what was another wild session, Chinese stocks finished the trading week mixed, disappointing those who had been expecting a mammoth market rally before the nation breaks for a two-day holiday to commemorate the 70th anniversary of the end of World War II.

The benchmark Shanghai Composite index finished the day at 3155.04 points, a decrease of 0.37%. Earlier in the session the index was down more than 4% before staging a miraculous late rally into the close, yet again.

All sectors bar financials and utilities closed lower with energy, following last night’s rout in the crude oil price, suffering the largest decline at 3.25%.

The late jump in financials – finishing the session up over 2% – yet again suggests the government, along with the so-called “national team”, were actively intervening in the market to ensure large cap stocks finished higher before tomorrow’s V-Day military parade.

Lending weight to this theory, large cap stocks outperformed their smaller peers yet again.

Never before have so many of the most important countries in the world printed so much money and left base rates at near zero for so long.

I have been confounded by this phenomenon for years. I am sure you recall the debates about the initial rescue under Bush and the subsequent $800 billion stimulus package under Obama, about the risk they would cause of runaway inflation. Since then the Fed has dumped trillions into the market and we have seen precious little inflation.

Do you put your money in gold? That has not prospered as an anecdote to inflation when inflation is negligible. The eternal question is with all of this instability is the world teetering on the cusp of prolonged deflation or prolonged inflation? Does one buy real property, gold, currency? So far, the power of the Fed has proved that the best alternative is the artificial market, the stock market, created by the Fed.

For a model answer we have Japan which tells us that somehow there exists a black hole which absorbs money and causes very little change in the economy, especially not the degree of inflation history tells should have occurred. Is the world going to be like Japan for the next decades?

I have no answer to the black hole question and neither, apparently, does Deutsche Bank and to their credit they admit it. One thing is really hard to admit and that is that the Paul Krugman's side of the debate says we must shove more fiat money into the economy and there is nothing on the scene now, or in the story of Japan for that matter, which says he is wrong.

Could it be something like this?
Because all this central bank money is only "on-paper" money...that is, simply digital accounting entries instead of actual wealth, in reality very little money in real terms has been "dumped into the markets?"

We see how these wild swings in the equity exchanges are said to 'create' or 'lose' huge sums when in reality nothing of substance has been created or lost.

So that is my thinking - this imaginary Monopoly money of little substance has had little substantive effect - at least so far.

Most of the explanations that I have seen for this anomaly blame Wall Street arguing that the money goes into the stock market does not get out of the stock market into Main Street and so has little effect on the economy.

I have never fully understood this argument either because Wall Street is more than a place where pieces of paper called stock certificates are bought and sold, it is a place where Main Street goes to get capital to expand. I suppose the argument is that all of this excess money goes into instruments which are traded which we are now calling derivatives which float around in cyberspace and amount to trillions of dollars but which do not actually make any widgets or produce any tangible thing.

In order to qualify for this industry you have to be a Phi Beta Kappa at MIT and way above my pay grade and IQ.

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