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Market Crash: China Market Manipulation

Posted by kdadmin on August 25th, 2015.

Market Crash: China Market Manipulation

Given the global market’s determination to rationalize every damn thing, you would think that the best investment managers would be board certified, industrial psychologists. But, contrary to a psychologist, my job isn’t to quell the hysteria that breeds rationalization. My job is to exploit it for money.

I love my job… 🙂

The graph above tracks the movement of several of the major stock market indexes over the last year. The color codes are: USA, China, UK, Germany, France. I addedGoldas a currency reference. Now, what do you see?

  1. For the most part, the USA and the UK track pretty evenly against the gold market.
  2. Germany and France track a bit higher, and more volatile, against the gold market, but pretty close.
  3. China is nearly entirely uncorrelated to the rest. Except recently…

As in since July for Germany and France, and since last week for the USA and the UK. So, the real question is how much we are going to allow the China debacle to impact our thinking about theUSA’s market.

Well, today, China ended up in near “limit down” territory again while many of the rest of the world’s indexes finished several percentage points up. However, the USA managed to give up any and all gains made intraday, and finish down. So, that clouds the picture. The “N” word I referred to yesterday, regarding the Chinese market, was “nothing.” Yesterday, the Chinese government did nothing in the face of its market crash. Today, however, the Chinese government both pumped a huge amount of currency, the Yuan, into the market AND dropped the bank rates. Most global markets appreciated the gesture. Just how much this gesture will solve the global economic problems is anybody’s guess.

The real issues here are three fold:

  1. Will the financial turmoil delay the Federal Reserve’s intent to raise the Federal Funds Rate in September?
  2. What impact will this current market crash have on the long term market picture?
  3. How could China’s economic woes kick the legs out of our USA, and global, markets.

I spent some time this afternoon on a conference call about exactly these issues. (Thanks to those of you who rescheduled your meetings so I could attend.) My main takeaway was, “maybe.” It’s so annoying. Most of those of us who study economics would give our left arm for a concrete fiscal answer. Well, maybe a colleague’s left arm… The worst case scenario model, presented on the call, showed a rising unemployment rate, a faltering inflationary number, and a massively stalled GDP. It painted a woeful, recessionary picture. Of course, it was for illustrative purposes only. But I have to thank the modeler, none other than Joel Prakken of Macroeconomic Advisers, for offering the long perspective of our worst case scenario fears. There is something very comforting about playing out an anxiety. Relatively quickly, most people realize that it’s just nonsense, and get back to the real work at hand.

So where do we go from here?The S&P 500’s call option premiums are all wonky (the ETF price goes up by $70 midday and the option prices go down), the volume is low, and the Vega (measure of implied volatility) is low. We’ve shown a penchant for a bounce but it hasn’t really materialized. For a review of this phenomenon, read my recent post,Market Crash: Christmas Morning.In other words, unless you make your living by trading excruciatingly volatile markets, you’re better off enjoying the warm, and glorious, last days of summer, outside. In other words, I’m staying in cash.


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