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China Crash and the Extinction of Markets

Stock-Markets / Market Manipulation Jul 20, 2015 - 02:59 PM GMT

By: Michael_Pento

Stock-Markets

China's four-week-long stock market rout wiped out nearly 30% off the Shanghai Composite Index since its highs of June. To stem those losses the Chinese government has formulated an interesting hypothesis: stocks won't go down if you ban sell orders.

Working off this proposition Beijing has ordered shareholders with more than a 5% interest to stop selling shares; directors, supervisors, and senior management personnel are also barred from reducing their holdings.


China has also launched investigations on those it believes engaged in malicious short selling. The threat of imprisonment has proved an effective deterrent to those who may have been contemplating a short in the Chinese markets.

And even if you don't fall into either of the above categories of sellers you still will have trouble getting your money out of shares because two thirds of the stocks on the exchange have been halted.

It should come as no surprise that the Communist government of China has fallen off the free market wagon. After all, the government is of the belief that economies grow by building empty cities. So why shouldn't they think markets work best when not allowing participants to sell?

The reaction on Wall Street has been just as alarming. Deutsche Bank and Bank of America Merrill Lynch have applauded the Chinese governments for doing everything necessary to keep the bubble afloat.

But Wall Street's counterintuitive and ironic bullishness on China is most evident in the powerhouse investment firm Goldman Sachs. Goldman is urging investors to buy stock in China right now!

In Observing 40 years of statistical history the Goldman team in China believes "...the market is currently experiencing a standard bull market correction, not a transition into a bear market." This is eerily reminiscent of the Wall Street models that concluded housing prices could never go down on a national basis.

First, I would like to know how anyone could get forty years of honest and consistent data from China. Then tell me where else in that forty year history of data did China expand its debt by $20 trillion dollars in the space of just eight years, as they have today?

Statistical analysis such as this can offer a complement to fundamental analysis in making market predictions. However, this assumes the exchanges where China trades equities bears any resemblance to a market.

A market is a place where a multitude of buyers and sellers freely meet and price is discovered. What China has now created is a roach motel where money moves in but it can't easily move out-if at all. Therefore, all technical and fundamental analysis goes out the door. And those who choose to participate in this charade are left waiting for Beijing's next decision on how to direct the market move.

This is the antithesis of capitalism and how free markets work. That's why it should be shocking to see Wall Street, the supposed bastion of capitalism, embrace such measures. But the sad truth is there are no free markets left in this world, and it's becoming increasingly evident that most on Wall Street prefer it that way. We have grown so accustomed to market manipulations that we have completely lost sight of how the free market is supposed to function.

In this new market dystopia stocks never go down, companies never fail and countries never default on their debt--central banks just print all the problems away. And where counterfeiting money and lowering interest rates doesn't solve the problem, governments are trying to demonstrate that market regulations will lead to success.

We can all sleep well knowing that a small group of plutocrats who now control the global economy will make everything turn out right. Genuine market analysis has been supplanted by the need to parse the words of statements from central bankers like students at a bible meeting.

And when you really think about it, why bother analyzing their words anyway. Central bankers don't understand how markets and economies work; all they have shown the proclivity to do is print more money. So we can all continue in our dystopian slumber.

But the victory over command and control economies by free markets has been decided long ago. However, these hard-fought lessons seem to have been too easily forgotten. Even the Pope has joined on the Capitalist bashing band wagon. Referring to it as ideological idolatry which leads to wage slavery, vast communal dislocation and commodity-market driven hunger. But perhaps he should take a drive on the Pope mobile down the streets of Cuba or Venezuela to witness the living standards of the poor that exist without the "ideological idolatry" of Capitalism.

The truth is there is no place where people live better than in a free market Capitalist economy. And it is only when you stray from this model, as we have for the past seven years, that you see the spread between the rich and poor blow out.

Freedom should have vanquished Egalitarianism forever with the fall of the Soviet Union in 1991. But if those at Goldman still see the merit of investing in a tyrannical command and control economy, perhaps North Korea is the next logical investment to make. I am sure Kim Jong-un has a bridge to nowhere he would be happy to sell them.

Nevertheless, economic freedom and prosperity is rapidly being replaced by markets that are driven by the edicts from autocrats, which is leading to the evisceration of the middle class. People have willingly abandoned most of their freedoms. Why? Because they have been dumbed down dramatically. How else could they have handed over the markets, economies and, most importantly, the structure of the family to governments with such ignorance and alacrity?

The abrogation of markets leads to stagflation, economic collapse and chaos. Sadly, this is the ultimate fate of the entire developed world.

Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2015 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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