China: Where the sun rises and stocks fall - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 July 2015
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China: Where the sun rises and stocks fall A  A  A

- By Bill Bonner

Bill Bonner
Baltimore, Maryland

Dear Diary,

There's a time for calm, rational behavior...and a time to panic. US investors decided not to panic yesterday.

Monday's sell-off halted yesterday. But it did not reverse. And it left the street with its worst half year performance since 2010. Gain for 2015 so far? Zilch.

But have we seen the top? We will have to wait to find out.

Meanwhile, in Greece, FoxNews reports that:

At midnight last night, the Greek government defaulted on its loan from the IMF. And it has imposed a 60-euro-per-day limit on cash withdrawals. This leaves many Greeks a little short and looking for alternatives. Pity those who were Last in Line at the ATMs before they went dark.

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Says a restaurant owner in Athens, quoted by the Associated Press:
    "You don't know what can happen. In my case, I have money, and I don't have money in a sense. I have it in the bank, but I can't get it in my hands. It's crazy."
As we keep pointing out, money in the bank is not the same as money-in-hand. The first is just a credit against what could be a bankrupt institution. It could be worth nothing. The second is cash - ready, handy, and extremely useful. In a financial emergency there won't be a liquor store in town that won't welcome you as a customer.

A butcher...also to AP:
    "I have no cash to pay for meat supplies for next week because of the capital controls. Sooner or later, probably in this month, I'll have to let 10 people go. The people are buying with cash, not credit cards, and the problem is the customers don't have cash.
The elderly have been especially hard hit, says AP. Often, they don't have cash and don't have any way to get it.

And pity the poor schleps who were Last in Line to sell their Greek investments. Greek stocks topped out in 2007. They are down 95% since then. And Greek 30 year bond yields have a rare distinction. It is racing neck-n-neck with Greek unemployment rates. Both are near 26%.

But let us leave the land of Aristotle and Pericles...and wander to the land of Confucius, where the sun rises and stocks fall.

If we were looking for an excuse to panic, we would look to Shanghai, not to Athens. The Greek crisis is small potatoes. A Chinese stock crash, possibly followed by a depression, is the whole kit-and-kaboodle of financial disaster.

Yesterday, both the sun and the Shanghai market were in sync, with a 5% increase in stock prices. But what kind of a bounce is that? Is the market changing direction? Or just bouncing down, like a dead political reporter on the Capitol steps?

We don't know. But readers are urged to beware. The central bank dropped rates to record low in an effort to turn the market around. And we wouldn't put it past the feds - in China or in the US - to shill up the market when they get desperate.

But what would you expect after two powerful groups of economists connive and collude to implement their central planning fantasies? They created two huge debt bubbles. The US bubble is a volatile mixture of consumer, corporate and government debt. The Chinese gas is mostly in the corporate sector - where mega amounts were lent to overdo it on factories, offices, malls, and housing complexes.

What will happen next? We don't know, but across the Sea of Japan is an instructive example. The Tokyo stock market topped out in 1989. Now, 26 years later, it is back to only HALF its value! Pity the poor Japanese investor who was last in line to sell.

But Chinese investors learned nothing. This year, they bid up shares on the Shanghai exchange to levels last seen in Japan in 1989 or American stocks in 1999. Attracted by the commotion, moms and pops opened brokerage accounts in record numbers. They invested their savings. Then, they borrowed money so they could gamble more. Stocks rocketed to 41 times reported earnings - more than twice the current US level.

Then, on May 19th, the hairpin found its fat derriere. First in line to sell, of course, were the insiders. Reuters reports that insiders were selling at a record pace, three times as many in May as in April.

One of the sellers was Li Hejun, Chairman of Hanergy Thin Film Power Group, who actually shorted his own company's shares. He did very well. Trading at nearly $1 on May 18th, Hanergy is about 25 cents today.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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