July 12, 2015
On the heels of a wild trading week, today one of the top economists in the world sent King World News an incredibly powerful piece warning that as asset bubbles implode, synthetic economies will enter a monstrous worldwide depression. Below is the fantastic piece from Michael Pento.
By Michael Pento of Pento Portfolio Strategies
July 12 – (King World News ) – Amid an intense global economic slowdown that began in 2008, China’s economy amazingly appeared to be unaffected. Defying the worldwide real estate collapse, China’s GDP grew by an impressive 8.7 percent in 2009. Fueled initially by a $586 billion stimulus package, China would end up plowing an additional $20 trillion into a fixed-asset bubble that was designed to produce the government’s desired GDP print….
Continue reading the Michael Pento piece below…
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China's Massive Ghost Cities
Perhaps inspired by the movie “Field of Dreams,” the Chinese government believed in the adage “If you build it, they will come." For the next six years China built empty cities in spades. But sadly the Chinese peasants never came to occupy these edifices in the predetermined numbers because prices grew out of reach. New construction remains mostly unoccupied to this day; estimates are that 52 million homes are vacant and 90 percent of those empty units were purchased strictly for investment purposes.
Apartments were snapped up as investments by the nation's wealthy upper and middle classes, then sat empty as the owners failed to find tenants who could meet the expensive rent.
Investors sat on massive mortgages on unoccupied real estate holdings and home prices began to fall, just as loans from the shadow banking system started to dry up. This caused the Chinese authorities to quickly search for another bubble to create, one in a more convenient and easily manipulated asset class. If the average citizen could no longer afford to buy a house, why not try to create a wealth effect by putting equities in a perpetual bull market?
China's Real Estate Bubble Morphs Into An Equity Bubble
Substituting empty cities for brokerage accounts with little capital, Chinese Internet lenders set up margin accounts with the same fervor as U.S. subprime mortgage lenders in 2006. In addition to conventional brokerage accounts, 40 Internet lenders helped arrange more than 7 billion yuan worth of loans for stock purchases in the first five months of 2015. Lending volumes surged 44 percent from April to May alone.
China’s margin finance problem quickly reached epic proportions. Margin trading jumped 30-fold over the past three years on the Shanghai stock exchange. Chinese margin debt has risen 123 percent year-to-date, reaching a new record of 2.3 trillion yuan ($370 billion) on June 18.
But some analysts believe the real amount of money borrowed by Chinese investors is likely to be much higher. The amount of shadow margin financing, which includes umbrella trusts and stock-collateralized loans, in the mainland stock market could easily be double or triple that of the balance of conventional margin financing taken through brokerages.
In addition, unlike other major international stock markets, which are dominated by professional money managers, retail investors account for around 85 percent of Chinese trading.
For a brief moment it was a magical solution to combat the failed real estate bubble. The Shanghai Composite started 2015 at 3,234 and hit 5,023 on June 4th — a 150 percent surge from the preceding 12 months, before plunging to 3,800, where it sits today.
Despite Stock Market Crash, China's Shares Still Trading At 57-Times Earnings
But the market is still far from trading at a discount valuation. Despite the recent carnage, Shanghai shares are trading at 57 times earnings. That’s down from the June price-to-earnings ratio of over 100, but it’s still three times higher than the price-earnings ratio of the S&P 500.
The totalitarian regime is making daily policy modifications in a desperate attempt to stem the fall. But interest rate reductions by the People’s Bank of China (PBOC), cuts in reserve ratio requirements, and relaxations in margin trading rules have done little to calm investors.
Brokerage firms and fund managers have now vowed to buy massive amounts of stocks, aided by a direct line of liquidity from the PBOC, which is directly monetizing securitized loans from China Securities Finance Corp., China’s state-backed margin finance company.
The nation is also trying to coerce corporate officials to buy back their own shares to a great degree. But with China’s questionable accounting practices and stock prices completely decoupled from fundamentals, this is a little like asking Jim Jones to drink his own Kool-Aid. In addition, China has promised to investigate “malicious” shorting of stocks (basically banning short selling unless you want to make the communist government your enemy) and has banned selling of shares outright from any shareholders who own at least a 5 percent stake in a company.
To make matters even worse, more than 50 percent of stocks in the primary Shanghai Exchange are in a trading halt. Just imagine how much lower the stock market would be if these shares were allowed to trade freely. Given all this it is foolish to believe that there is a stock “market” in China any longer. Perhaps the Chinese government will be able to manipulate stocks to prevent them from going down much more, but it will be powerless to prevent the ultimate collapse of its phony economy.
China Debacle Worse Than 1929 Stock Market Crash In U.S.
The debacle in China is actually much worse than the U.S. equity collapse in 1929 and the Japanese economic bubble in 1989. Despite what the carnival Barkers on Wall Street are saying, the Chinese economy is suffering from the evaporation of the wealth effect. New Chinese millionaires, bolstered by their stock market wealth, had been fueling the consumption economy that was supposed to supplant the nation's export-driven growth model.
After a stock-market rout that has erased about $3.2 trillion in perceived value, car sales in June were down 3.2 percent month over month. This is the first such decline in more than two years and refutes the claim that China is still growing at the fictitious 7 percent rate the government has sought to produce.
Once the darling of the Keynesian dream, a booming China spoke to those who believed that a command-and-control economy was superior to the free market. As the Chinese communist economic regime begins to unravel, the bubble in the belief that a small group of central planners can make better decisions than millions of people acting freely in their own self-interest should burst along with it. And the current massive bubble in the credibility of central banks to save every market should suffer a massive blow as well.
The Chinese are communists masquerading as capitalists. They have no idea what a free market is; instead they have layered an artificial equity bubble on top of a manufactured real estate bubble. Now they are busily trying to command both bubbles to magically and perpetually float.
Worldwide Asset Bubbles Floating On Top Of Synthetic Economies
China is by no means alone in its disdain for free markets and its willingness to create a facade of prosperity at all costs. The governments and central banks of Japan, Europe, and the United States have also eviscerated the price-discovery mechanism in all asset prices. What we have left are worldwide asset bubbles floating on top of synthetic economies. This somehow has caused universal confidence in governments to borrow and print all problems away.
These Potemkin central banks will be able to erect only hollow economies built with counterfeit money. So you must employ a strategy that will profit from the inevitable fate of these economies, which is intractable inflation and a protracted depression … at least until governments embrace free markets again.