Dear member,
Anti-free market forces have become so prevalent that the final price of almost every asset you buy, be it a stock, house or even pork at the local grocer, has been grossly manipulated and likely inflated. Because of this manipulation it has become more difficult for the global markets to function properly. Widespread dependence on central bank 'support' has created a volatility-prone, weak financial system that can no longer stand on its own two feet.
Due to over half a decade of ZIRP (zero interest rate policy), which essentially makes the cost of money zero (for the right banks and billionaires), assets have been propped up and the debt bubble has not been allowed to burst.
All global rounds of QE -- from Japan to the US' numerous programs, China, and most recently the ECB -- have been engineered to lower long-term interest rates. This has made cash more accessible and equities more attractive. This has fueled the stock bubble for years as such policies have made equities one of the last places investors can achieve any kind of yield. From family household debt in Canada, which inched up 1.8% in Q2 of 2015 to an all-time record of 164.6%, to corporate debt in the US, the debt bubble is all around us.
CB Capital Research reported, "According to Goldman Sachs, U.S. corporate debt issuance averaged $650 billion a year during the 2012-2014 time frame, or 40% higher than the 2009-2011."
Predictably, record corporate debt issuance has been projected for 2015.
As we've written about before, money printing has done little to help the overall economy. Substantial corporate debt has been accrued to buy back shares and boost dividends, funneling the cheaply borrowed cash into shareholder pockets at the expense of true innovation.
When we have experienced a correction in recent years, due to deleveraging, it is quelled as quickly as possible by central bankers. This is because a prolonged decline in asset values would destabilize the current debt-based system.
When bouts of deflation pop up, central banks and financial entities tied to global governments take matters into their own hands. The Plunge Protection Team, as we like to call them at Pinnacle, now spans the globe and has been very, very busy the past few months.
China Taking a Page Out of America's Book
Chinese stocks led global markets into chaos when they began free falling in early-summer. What happened next provides us with the latest example of blatant, and massive, market manipulation...
State-run China Securities Finance Corp., which is a Financial Institution with the approval of the State Council and the authorization of China Securities Regulatory Commission, has been publicly tasked with supporting share prices.
On September 7th, Bloomberg published a story that revealed, according to Goldman Sachs Group, China's government has spent 1.5 trillion yuan ($236 billion) attempting to stabilize its stock market since shares began falling three months ago.
Two days later, on Wednesday, September 9th, CNBC announced that the Chinese government had "recently invited in BlackRock CEO Larry Fink to discuss the market situation there", according to sources familiar with the invitation.
Fink reportedly traveled to China in the final week of August, according to the source.
This timing is all too convenient. First it was announced that China unleashed its own Plunge Protection Team to the tune of $236 billion to shore up stock prices; and then, days later, it was revealed Fink was in China two weeks prior advising the government on how to deal with the market 'situation'.
To think that Fink's Blackrock, the world's largest asset manager, wouldn't be positively impacted by a stabilization of the markets in Asia, led by China, is naive.
To connect the dots even further, Fink's right-hand man, Rick Rieder, Blackrock's Chief Investment Officer and Co-Head of Americas Fixed Income, has been advising the New York Federal Reserve for months. He sits on the Advisory Committee...
image source: Zero Hedge
Zerohedge published an article last week that explored this relationship. Below is a short excerpt:
"And more to the point, what exactly did Larry Fink tell China is the best way to manipulate its stock market higher, and the immediate follow up to that: how much of whatever it is that Larry told China to do, is BlackRock already doing in the US?"
China Securities Finance Corp. (CSF) and its $236 billion buying spree of Chinese stocks shows how far its government is willing to go. Apparently, CSF has up to $483 billion of funding available "to support the stock market" according to the source mentioned in the Bloomberg article. As is usually the case with central banks and governments, the $236 billion appears to be just the tip of the iceberg.
In a video featured on Pinnacle from earlier this week titled China props up stock market, Swiss America Chairman Craig R. Smith explained that China has $3.7 trillion in reserves which they can use to prop up the stock market.
This interview follows an open-ended promise by the People's Bank of China (PBOC) to use its balance sheet to support equity prices.
China's market was due for a natural correction. It was an overheated bubble taken over by leveraged gamblers. Check out the 5-year chart of China's Shanghai Composite index below:
For TSX Venture investors a chart like that may be commonplace. But we're not talking about small-caps here. We are talking about one of the biggest exchanges in the world...
To put the above chart into perspective, think about this: Cumulatively, companies with a primary listing in China saw their values increase $6.7 trillion in under 12 months. In June, Bloomberg reported that all publicly listed companies in China were, for the first time, valued at over $10 trillion. Bloomberg reported that:
"The gain alone is more than the $5 trillion size of Japan's entire stock market. The U.S. is the biggest globally, at almost $25 trillion."
And that,
"Valuations are now the highest in five years and margin debt has climbed to a record, all while the economy is mired in its weakest expansion since 1990."
The signs of a China stock correction were everywhere, including in its GDP which has been declining or flat for the last two years.
Yet when large investors in China wanted out because they thought the markets were overheated they were persecuted and punished. Zerohedge wrote on September 9th that:
"...China has thrown virtually everything at the market in order to halt the ongoing market crash, including arresting "malicious sellers", journalists, and suspicious hedge fund managers, blaming HFTs for daring to sell in addition to buy, and even making trading index futures practically impossible..."
Things got so bad in July that China had to suspend trading in about 50% of listed securities, or at "least 1,430 of 2,800 companies traded in China".
source: http://money.cnn.com/2015/07/08/investing/chi...suspended/
While China's market has now lost over $5 trillion and is at a more realistic level, the promise by the People's Bank of China (PBOC) to use its balance sheet to support equity prices guarantees further manipulation should stocks decline.
China's declining GDP
chart source: Statista
So, from 1,000 point plunges on the Dow and emergency stock-buyback programs in China, even ZIRP and various QE programs around the world are failing to spur global growth and optimism. The below pie chart from Bloomberg is from September 7th and documents global stock losses since mid-June:
Betting on Central Banks
The unprecedented global stock bubble has been driven by loose monetary policy and the actual buying (propping up) of equities and/or bonds by institutions such as the Fed, BOJ and China Securities Finance Corp.
Expect interest rates to stay low for years as the Financial Repression model, which we wrote about last week (click here to read), is carried out. That said, eventually deflation will threaten once again, at which point the Fed and other central banks will have to up the ante by implementing new, more aggressive QE programs to devalue their respective currencies and boost asset values.
Being long many leading equities, at this time, is essentially betting on the power of central banks and their ability to manipulate markets. It has little to do with traditional fundamentals.
All the best with your investments,
PINNACLEDIGEST.COM
