China's stock market crash: A red flag
economist.com
economist.com
It astonishes me that in this day and age there are still so many arbitrary controls on marketplaces, such as the Greek stock markets shutting down due to their financial crisis. Isn't it important for the market to adjust and properly accommodate those events? (If the market simply cannot function due to the crisis itself, then that makes sense. I assumed it was shut down because people are afraid of how prices will change as a result.) Sure, some people might panic in an unreasonable way, and if they do, they will get taken to town by other people who go long during the same time period. Just like people who are overly confident will be taken to town by short sellers if there's a bubble and it bursts.
I understand why there are controls on the marketplace like around prohibiting naked short selling, or reversing transactions that were obviously erroneous, but controls like preventing short selling seem absurd. If someone wants to bet that prices will decrease, let them! That's an important signal and an important correction to the market. Perhaps we would have fewer market bubbles if there was more continuous correction.
Is anyone working on a bitcoin-based stock market with no limitations on trading? Could such a thing be legal? Perhaps actual shares of stock are not being traded, but rather some other kind of financial instrument that represents the right to the upside or downside of some shares without having to own them, but you own the upside or downside. Then the idea would be that anyone can buy these instruments using currency or bitcoin on a market that operates differently than today's conservative markets.
I imagine this is probably illegal for a variety of reasons, such as "know your customer", but it's interesting to think about. How would the stock market be different if trades were unregulated, in the sense that there are no limitations on buying and selling shares. It operates 24/7 and never shuts down no matter what happens, and never imposes constraints on selling or short selling. I imagine this market would need to operate as a central authority or federation of trusted brokers (someone needs to verify that the seller actually owns the shares they've promised to deliver), but the authority or brokers would be willing to transact in both regular currency and bitcoin. Would this be a more effective market, or a dysfunctional one, and why?
There are also cases where people individually rationally maximizing their individual financial interests is, collectively, devastating for society as a whole.
Continuous adjustment sounds great, but sometimes we get crashes, which aren't.
I dislike the idea of these market closures or limitations on short selling because it essentially implies that people can't be responsible for themselves and their own decisions. People have agency and can decide what's best for them. If that's following a herd or opposing the herd, so be it. Perhaps the world would be better off if our systems were designed to more fully embrace meritocracy, moral hazard, and responsibility for one's self.
My experience tells me that giving people more responsibility tends to help them grow: they make their own decisions and learn from them. Taking away that responsibility minimizes risk in the short term, but also minimizes growth and upside in the long term. Maybe this is true at a larger scale in our markets as well. Obviously it's hard to know for sure one way or another.
These last 40 years there has been a movement afoot, especially in the English speaking nations, to weaken the controls that limit the spikes, up and down, in the market. There may be some advantages to this policy, but there are also many disadvantages.
And your solution is having an elite class of Humans (again, not Econs) solve this problem by deciding what other Humans can and cannot do?
Great book on behavioral economics, and Thaler's academic career, for anyone who hasn't read it.
One problem that immediately comes to mind with such a market is insider trading - how do you prevent that?
Why bother? The presence of HFT shows that insider trading doesn't seem to have as much of a detrimental effect as people claim.
Now you may need a couple of laws about primary insiders (corporate officers), but otherwise, let it go.
The insider trading laws only punish the little people, the big fish are all doing insider trading anyway (see US Congressional returns on their stock market investments).
Do you have any sources on this? I'd be interested to read more
And nobody could trade since there were no sellers.
In the end, they had to allow the HFT guys in so that they could make the market.
Since, HFT is, by definition, insider trading, it clearly isn't all that detrimental.
It takes time and financial sophistication to understand that short-selling can be a healthy thing.
Although I'm not entirely sure why there was a sudden run-up and a sudden crash in the stock market in the story...
(For something you actually want to consume or corner, usually, if you buy 99.9% of all shares of something, the price of the lat 0.1% will be quite high. But if the market is frothy and people are bidding up shares irrationally/temporarily, while many others are just holding old shares and not paying attention, then the average price--once the excess buy-side money is spent, and there isn't excess cash available to bid for more shares-- will be lower
congrats. you have a few years of reading to do about how the world works before suggesting alternatives.
The Greek stock exchange is a different deal. The banks are closed, without a payments system I don't see how a stock market could operate.
As for the contracts you describe, they already exist in various forms (though not denominated in bitcoin): there are single-stock futures and CFDs, but the former are completely illiquid and the latter aren't a market of their own but usually a pass-through mechanism for regulatory arbitrage.
Out of curiosity, what do you mean by that ?
So I get that CFD are not traded on a central exchange, and are custom investment product provided by some financial institution. So indeed not really a market.
However, besides that they seems to be used by regular investor for, well, regular speculation.
I'd just like to ask why in situations like this, governments tend to intervene? In the long term, wouldn't it actually be better to let the market just naturally figure itself out? That way the end prices reflect the real value.
That's fine - I have a degree in economics, so let me take a stab at explaining this!
> why in situations like this, governments tend to intervene? In the long term, wouldn't it actually be better to let the market just naturally figure itself out?
As Keynes said, "In the long run, we're all dead".
The problem is that the "long run" doesn't actually correspond to any specific duration of time or point in the future; it describes the aggregate, idealized behavior over time. There may actually never be any point at which the trading price of $XYZ[0] actually matches the underlying value, as long as the price over time tends to track the fundamental value[1].
On the other hand, an overfocus on optimizing for the short term causes stunted economies that never reach their full potential (in the best case) and a downward spiral with a negative feedback loop (in the worst case).
> That way the end prices reflect the real value.
By the way, there's actually no such thing as the "end price", because nothing happens in a vacuum. Let's say Google launches a new product today. It may take two years to figure out whether or not that product is going to be a success[2]. If they did nothing else in that time, then yes, there would be an "end price" after this event, but the real world is a series of overlapping events that are all playing out simultaneously[3]. So the market never has the chance to converge towards the "end" value after event A, because by that time, events B, C, and D are all having an effect on the system as well. That doesn't mean that A's effect is negligible; it just means that it's never observed directly.
[0] By the fundamental theorem of calculus we would be guaranteed this at one moment, but prices aren't actually continuous so this doesn't apply
[1] The fundamental value, of course, can never be directly observed, as is often the case in statistics.
[2] Or even ten years, if we're talking about self-driving cars.
[3] The word "event" here is a technical one, not a colloquial one: https://en.wikipedia.org/wiki/Event_study
Is hype the `real value`?
I'm not an economist either, so consider this a case of blind leading the blind.
My interpretation is that market crashes lead to public turmoil; and given China's history of revolutions, the government isn't too keen on a large, unhappy public. I've read that a lot of people entered into the market late, and often borrowed funds to do so (I have no citation, unfortunately). I bet those people would be pissed if they lost all their money and then some.
Reminds me of the last dot-com crash. As the saying went, when grandmas start jumping into the market chasing hot stocks, it's time to get out. (No offence to any grandmas out there!). I have a feeling the same was happening in China recently.
Obviously. And it's the government that actually establishes the free market, regulates it, and provides all the surrounding infrastructure (roads, police, courts, ...).
A "free market" doesn't mean that you can do whatever you want - the name for that is "anarchy". Free market only means that everybody is free to compete under equal terms. Additionally, governments would step in if a single player got too powerful and would exert its power in ways that would undermine competition.
Because ordinary people likely gambled with their savings, and since they're not as savvy as the hedge-funds and professionals, they stand to lose quite a bit.
But yes, it would be better to let the market figure itself out. Valuations did get a little out of control, hence the large crash.
The CNN report based on official media reports from China strongly suggests many economic upheaval from the current intervention in the stock market in China.[2] The most dynamic and innovative companies in China are those most likely to be unable to raise further investment funds.
[1] "It's a bumpy ride for China's stock market investors"
http://www.latimes.com/world/asia/la-fg-china-stock-market-2...
[2] "Nearly 25% of Chinese stocks have stopped trading"
http://money.cnn.com/2015/07/07/investing/china-stock-market...
A lot of firms may be severely impacted by this share price collapse, both financial and non. More alarmingly, "shadow" bank failures may occur unseen, or structural problems that would normally be covered or speculated about by the media suddenly rear their head. We may only find that large sources of financing vanish long after the fact.
Many expect the CCP to swoop in and save the day, but perhaps it chooses to not do so, or do something more extreme than changing some rules or commanding the buying of shares in the big indexes.
Over the years I have used FXI to watch general stock prices in China. But FXI only indexes the large cap stocks listed on the Hong Kong Stock Exchange.
Since the mainland stocks began reversing after the extreme price rise, I found the Shanghai stock exchange composite to be far more useful than FXI. To get the current price, use "Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF":
https://www.google.com/finance?q=NYSEARCA%3AASHR&ei=Uj6cVcG4...
Any ideas about how to easily get the price on an index covering the Shenzen stock exchange?
No doubt, but the market in Hacker News Shanghai Composite side-bets is not big and liquid so you may not be able to find someone to offer you $7, and if you're that confident in your thesis you should be willing to accept $5 in that case. ;) It's OK though, I'll go to $7.
(I didn't downvote you btw.)
Assuming $2.50 market in upvotes, duly upvoted you twice! ;(I'll wear two downvotes if you want to be strict about it).
In my experience, they either latch on too late, or way too early.
If you really like to gamble you can buy puts on some of the bigger ones.
The ZAR angle gives you exposure to a possible slowdown in the huge Chinese investment in Africa, plus the dire politics in SA. The downside is people are already short the unit.
In hindsight, prices today might look like ideal entries for short positions months from now if this is just the beginning of a major decline. In markets like this, no action should be taken without a thorough fundamental and technical analysis. Making an ill-researched assumption one way or the other will cause a lot of people on both sides of the market to lose money.
If your point is that "it always goes back to the fundamentals" and therefore fundamentally-driven investors will always win in the long run, I put to you that there is so much accumulated capital over centuries in Europe, that the ECB can wield this to fight the fundamentals for far longer than you can stay solvent.
Consequently:
When we're in a regime-shift scenario, as now, fast decision making is a much better value-adding skill than weeks of fundamental analysis which can be swept aside at the whim of a policy maker.
Therefore I completely disagree with you. Those who are currently holding on to fundamental analysis are losing money hand over fist in a market which values connections and reading of policy maker tea leaves. I give you as evidence, the EURUSD exchange rate. Here is the most liquid series on earth, and one which is barely moving on fundamentals, namely the existential crisis which the euro itself is facing. It is manipulated and no amount of conscientous fundamental analysis will help. Instead fundamentals will just bog you down in irrelevant detail and a false identification of the drivers. Techs, positioning, and fast moving gut feel is what matters in this market.
Basically: there is no definitive winning formula in finance. You have to use your instinct and flit between strategies as the state of the world requires. Sometimes that's fundamentals. Right now it isn't.
You're being far too literal here my friend.
The instruments you use, your timing, horizon, leverage, money management, etc. all affect your ability to realize gains, even if your overall investment or trading thesis is correct. For instance, I could be on the right side of a trade but a margin call could screw it all up.
When all is said and done, people playing China long and people playing China short will both end up losing money during this volatile period. Not because they were all wrong about what was going to happen but because many of them won't be positioned perfectly or have the wherewithal to see their positions through.
> If your point is that "it always goes back to the fundamentals" and therefore fundamentally-driven investors will always win in the long run
I wrote "In markets like this, no action should be taken without a thorough fundamental and technical analysis." How in the world did that lead you to conclude that I was arguing "'it always goes back to the fundamentals' and therefore fundamentally-driven investors will always win in the long run"? Why did you completely ignore my reference to technicals? It seems you're searching for an argument that doesn't exist.
If it makes you feel better, the smart money is already out, that's what triggered the crash in the first place. Now everyone who took out margin is trying to get out, and eventually the market will level out. Probably much sooner than people expect.
amen to that quote...this one is a little too hot for me, might stick to the other ETFs mentioned below.
Do NOT day trade either (for the same reason).
Of course it will. It's not even down on the year.
It's profit taking which triggered a whole bunch of stop-losses, margin calls and panic selling. Wait for the volatility to die down, and buy H-shares (or A-shares if you have the stomach).
To understand why it's going down so fast, you need to understand how fast it went up. As it stands today, the SSE is still up almost 100% in the last 12 months...
China's current economy is built on the impact of its 1-child policy on its historical culture of children taking care of elderly parents: that's really really hard to do now, so everyone saves like crazy, and the government uses those savings (in state-run banks) to finance state-run industries with below-zero real interest rates, which are of course wildly profitable, and the plutocratic elite splurges on its take of the surplus.
But they really need to watch out for a number of shocks, of the whole scheme could fall apart badly and spark social unrest. In particular, inflation (eating away at those savings) sometimes leads to riots, and their monetary policy has been very extreme for many many years. (In different ways than US policies, but still, makes "Helicopter" Ben Bernanke's interventions look like the amateur leagues.)
Economists continue to worry and it's not 100% clear that China will continue to function after a real economic crisis. They might, but it's really hard to tell (they're so opaque it makes detailed analysis impossible).
Most of these pundits that run Western economies follow rules that they themselves make up, and then use those rules to control other people. But China don't play these games homie, China knows the game homie. China make its own rules.
I'm perfectly even-handed with that assessment... it 100% applies to any economy, of any form.
Are the Chinese working as hard as American workers? Are they productive people that produce a lot of economic output? If the answer is yes, then there is nothing reality can do for you.
If you are dismissive of reality's impact on, ah, reality, well, I appreciate your candor, but please don't be surprised that I just mentally dropped your credibility score to zero.
Honestly? I'd say to take the facile conspiracy theories and go home.
In a regime where money is only money because people believe it is money, and in which money can be created from thin air (either via printing or via lending), the money in the central banks is used for little things like maintaining price stability, and preventing total economic collapse.
This is actually one of the reasons why I think China is going to be worse off. More uncertainty means less foreign money coming in which is a bit of a viscous circle. Economies can't grow at a specific rate forever. There will be ups and downs, sharp rises and bubbles. As much as China tries to mitigate them, the can't fight it forever.
Also, the government has total control of their monetary system. While helpful in times of economic uncertainty (they can keep propping it up, even beyond what the U.S can/will do), it shows that China's Yuan isn't ready to replace the dollar. No country is going to want to go all in on a currency where the nation could pull the rug out from under you at any time. They would be beholden to China, and give up more 'power' than they do with their competitor, the U.S. China also ranks 100th on the global corruption index (http://www.transparency.org/cpi2014/results). There are 99 countries less corrupt than China.
It truly and really is like the U.S is a legitimate bank with rules and regulations while China is more like the Mafia's version of bank, where they make their own rules and have no regulations or checks & balances on themselves.
The stock crash is particularly dangerous for Chinese leadership at a time when people are becoming fed up with the wealth gap. Wiping out the wealth of its citizens will have catastrophic results for the communist party. Attempts to distract the public with territorial disputes will continue and eventually lead to military conflict should the leadership feel threatened by social unrest.
The mounting debt in China, corruption, social issues, stock crash is a perfect brewing for a pivotal change. Historically, such conditions have led to a military conflict, or invented threat to drum up nationalism. But none of this works if the people feel like they got robbed, which in this case, Chinese government has actively encouraged people to put their life savings into stock market and at high leverages where an enormous chunk of the population will become homeless overnight should the market crash.