Are the markets a ticking time bomb? We discuss that, the Shanghai situation, and Lehman’s timeline in this issue.
Warning Signs in Global Markets
If you’re old enough, you might remember the toy called Time Bomb.
You’d wind it up and start tossing it around in a circle, then when it “blew up,” someone was out of the game. Today’s markets are kind of like that.
The only difference is, there’s no wind-up mechanism. The bomb could go for years and not explode… or it could go off tomorrow. Oh, and there’s one other difference. Because when the global markets time bomb goes boom, millions of regular Americans are going to go bust.
Canaries in the Coal Mine
Back in the day, coal miners used to take a canary down into the mine. This wasn’t so they could hear the cheery chirping of the little bird… Tweety served as an early warning system for dangerous gasses building up in the hole. If the canary keeled over, the miners dashed for the surface.
Today, we have several “canaries” warning us that there’s something foul in the air down there. Here are two we are watching:
1- Global food supplies.
We’ve talked recently about how the war in Ukraine is already disrupting supply chains in many commodities. While traders tend to focus on the price impact of such disruptions, there is a profound human consequence, as well.
Chart provided by statista.com
Many of the world’s poorest people are in grave danger of famine as a result of this war, and even the richest nations may face food shortages in the months to come. That does not bode well for stability, and markets don’t do well in unstable social conditions.
2- Increasing bond volatility.
Interest rates are trending up in a big way, with major implications for stock markets The first chart below show the rising price of bonds, mirrored by the MOVE, which measures interest rate volatility.
Chart courtesy of themarketear.com
And this is the MOVE vs. the VIX. With such a wide gap, the question is whether bond volatility will go down, or stock volatility will go up. Although of course the gap could continue to widen, as well.
Chart courtesy of themarketear.com
Again, volatility signals uncertainty and instability in the markets. With bond markets on edge and inflationary pressure impelling interest rates – hence, bond prices – higher, it is difficult to see a way out of this vise grip of bearish forces. As a result, the downward pressure on stocks is bound to continue.
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And then there’s Shanghai
Shanghai is the most modern, Westernized city in China and a global financial hub.
Recent events surrounding the lockdown of Shanghai, ostensibly as a precaution against a new outbreak of COVID, pose dire questions about the future of that nation, and world markets.
Two years into the pandemic, we now know a lot more about COVID than we did two years ago. It has proven to be a mostly non-lethal disease that does not pose an existential threat to human health in a general population.
In light of the planet’s extensive experience with lockdowns, vaccines, and other draconian social controls, you’d think we’ve moved past this kind of reaction to another outbreak.
Substack analyst Quoth the Raven suggests that Something is Rotten in the State of Shanghai’s Latest COVID Lockdowns. It’s an interesting read, but the TL:DR version is this:
If I had to bet it all today on why China is locking down the way that it is, I would take one of these three scenarios over actual implementation of the world’s most irrational health policy:
- The CCP is simply trying to usurp more power
- There’s something about Covid that China knows that the rest of the world still doesn’t know
- China is looking for an excuse to slow its production to put pressure on the Western world at a time when it is trying to separate further, economically, from the West
Let’s break these three possibilities down in terms of market impact.
- Power grab. The Chinese Communist Party has a whole lot of power already… if there’s a power grab, it can only be aimed at external power holders, like the banks and other international financial interests headquartered in Shanghai. Could this be a harbinger of greater disruption in global markets?
- COVID coverup. IF there is some previously undiscovered “greater downside” to COVID and the Chinese are withholding that information from world health authorities, it would constitute criminal wrongdoing of the highest order, and would be tantamount to an act of biological warfare.
- Economic pressure. These lockdowns seem like an extreme way to impose an economic slowdown. How much simpler would it be to just raise interest rates and send the economy into a recession? And deliberately plotting to tank the Western economies by imposing extreme suffering on your own people seems unbelievably cruel, even by CCP standards.
Revisiting the Lehman timeline
Back in November we commented on the Evergrande real estate debt crisis in China. Here’s what we said: When this story hit the news a couple weeks ago, there was a momentary panic. Pundits started talking about a “Lehman moment,” referring to the collapse of investment giant Lehman Bros, which signaled the onset of the global financial crisis in 2008. But the Lehman moment, when the biggest-ever bankruptcy was filed on September 15, 2008, was not an isolated event.
In other words, Lehman was in trouble long before the bankruptcy that led to the 2008 meltdown. And just like in the months leading up to the Lehman collapse, there’s no shortage of politicians and policy-makers assuring us that “there’s very little chance of contagion at this time.” Hmm.
What will it mean for markets as the Evergrande debacle – which also involves dozens of other deeply indebted real estate firms in China, and their lenders — unfolds in the months ahead?
As the eyes of the world have been elsewhere, the real estate crisis in China has deepened. Due to the opacity of the system, it can be difficult to ascertain the true financial health of the dozens of real estate developers who are under water in China.
However, it is possible that the horror in Shanghai is giving us a preview of what the Chinese government is prepared to do in case the whole ship goes belly up. Maybe what we’re seeing is the first signs of how the CCP will respond to events that threaten the collapse of the national economy and even the political regime.
We know for certain that the CCP will do whatever it takes to remain in power. If that means economic warfare against the West or crushing repression against their own people, you can be sure they will take those steps. And, as much as one might relish the idea of regime change in China, the disruptions that chaos in China will impose on the rest of the world will be truly staggering.
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