The New CS Board

[jumanji0881]

I'm still short. Anyway you look at it, Greece is broke and China is desperately trying to support an inflated bubble. This will not end well. There are just too many cracks opening up to prevent the dam from breaking. Here's some good reading:

Weekly Commentary: Broken : http://creditbubblebulletin.blogspot.com/2015/07/weekly-commentary-broken.html
Excerpts:
Greece is Broken. Confidence has been shattered. The banking system is bust. So there will simply be no way to quickly bounce back from capital controls and a banking system shuttered for a couple weeks. Importantly, the very real possibility of the return of the drachma cannot be erased from memory. “Money” wants out – out of Greek banks, out of Greek investment, out of the Greek economy and out of Greece generally. Devoid of confidence and a functioning banking system, the Greek economy is in a death spiral. It will now take a tremendous amount of new finance to keep Greece afloat. Going forward, the lurking specter of the drachma will severely hamstring recovery.

The IMF appreciates that Greece today needs a huge new assistance program. But they also have rules. Greece has already defaulted to the IMF, so new “money” will not be forthcoming from the International Monetary Fund. The ECB also (supposedly) has rules. And I suspect Mario Draghi would even agree with Bundesbank President Jens Weidmann and others: At this point Greece is hopelessly bust. Sitting on tens of billions of suspect Greece obligations already, the ECB will tread carefully here as well. OK, so who’s the sucker at the table?

I’ve always envisioned there’d come a point when the Germans had been pushed too far. Backlash would inevitably ensue. Festering anger would erupt, in unGerman-like fashion. Thus far, the “mad as hell…” Greek people have spoken. As for Germany, they have been blanketed with vitriol and unfair criticism. Far too often they have become the convenient scapegoat. Will German citizens now ensure that their voices be heard?

German politics is entering a period of uncharacteristic uncertainty. It appears that Chancellor Merkel, finance minister Schaeuble and other key officials now believe Grexit is necessary and inevitable. But under what circumstances will they finally bite the bullet? Seemingly the entire world is now pressuring the continuation of a course German leadership views as destined for complete failure.

I’ve expected the bursting of the Chinese Bubble to be “frightening.” It’s commenced. I never really contemplated things would quickly turn so bizarre. “Revive the A shares, benefit the people.” Investigating “malicious short selling.” The banning of selling by large holders and company insiders. Forcing institutions to buy. Blaming rumor-mongering and foreign meddling. Media gag orders against negative reporting. Widespread trading halts and illiquidity. And the bear market is barely underway… So much in China is Broken.

“The bloom is off the rose,” as they say. Perhaps Beijing can restore some semblance of domestic confidence in Chinese equities. Tall order. But I fully expect foreigners will be looking to get out. As a foreign shareholder, would I trust Chinese communist officials to protect my rights and financial interests? Going forward, should we expect a focus on the interests of shareholders or the leadership’s political interests and fixation on global power? While the crowd ponders buying the dip, I increasingly question whether China at this point is even “investable”?’’

Some of the reporting is reminiscent of the initial subprime eruption. The general expectation is that stock market losses won’t have a significant impact on consumer spending or the overall Chinese economy. Only a small part of the population will be impacted. The government will protect against broader economic effects.

From my perspective, the key issue is the impact the stock market dislocation will have on the broader Chinese Credit Bubble. While very few appreciated it at the time, subprime amounted to the initial piercing of the mortgage finance Bubble. It represented the catalyst for a mortgage Credit tightening, escalating risk aversion, de-leveraging and a self-reinforcing general tightening of Financial Conditions. There was ebb and flow, repeated policy responses and bouts of wild volatility. Confidence proved resilient longer than I expected, with everyone somehow remaining oblivious to the ramifications of the bursting of a major financial Bubble.

Prior to recent tumult, there were already serious cracks in Chinese Credit. Housing Credit had slowed sharply, while commodities related Credit issues were also likely taking a toll. The government’s reflationary stock market gambit has been instrumental in sustaining rapid system Credit growth – massive ongoing Credit expansion required to keep a highly maladjusted and unbalanced economy levitated. With equities market Credit contracting, I expect a forthcoming huge issuance of government debt in the name of “system stability.”