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July 2, 2015

Forget Greece… China Is the Real Threat

By Bill Bonner, Bonner & Partners

There’s a time for calm, rational behavior… and a time to panic.

Yesterday, investors in U.S. stocks decided not to panic.

Monday’s sell-off halted. But it did not reverse. And it left the street with its worst half-year performance since 2010.

Gain for 2015 so far?


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

When the ATMs Went Dark… 

Fox News reports that Greeks are eyeing Bitcoin to protect their savings.

At midnight last night, the Greek government defaulted on a €1.5-billion loan repayment to the IMF. And it has imposed a 60-euro-a-day limit on cash withdrawals.

This leaves many Greeks short and looking for alternatives. Pity those who were last in line at the ATMs before they went dark.

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’ve been pointing out, money in the bank is not the same as money in hand. The first is just a loan to 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 Greek butcher… also to Associated Press:

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. 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 stocks. The Athens Stock Exchange peaked in 2007. It’s down 95% since then.

And the yield on 2-year Greek government debt has a rare distinction: It is racing neck and 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.

Huge Debt Bubbles

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 kit and caboodle of financial disaster.
Chinese grannies day-trading at lunch break, Reuters

Shanghai stocks surged more than 5% on June 30 – the biggest one-day gain since 2009.

But this comes after the Shanghai Composite Index fell 20% from its June 12 peak. And it comes only after the People’s Bank of China cut interest rates and reserve requirements for banks, to boost lending.

We urge readers to beware. We wouldn’t put it past the feds – in China or in the U.S. – to juice up the market even further when they get really 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 U.S. bubble is a volatile mixture of consumer, corporate, and government debt. Companies owe about half of China’s debt. And state-owned businesses and property companies owe most of that amount. Banks lent mega amounts to overdo it on factories, offices, malls, and housing complexes.

Now, total debt in China – including government, corporate, and household debt – is about 280% of GDP. That’s still a ways off the 331% total-debt-to-GDP in the U.S. But it’s a lot higher than other developing markets.

Hairpin Meets Fat Derriere

What will happen next?

We don’t know, but across the Sea of Japan is an instructive example. The Nikkei peaked in 1989. Twenty-six years later, it has recovered only HALF those losses!

Pity the poor Japanese investor who was last in line to sell.

But Chinese investors learned nothing. This year, they bid up Shanghai and Shenzhen stocks to levels last seen in Japan in 1989… or U.S. stocks in 1999.

Attracted by the commotion, rookie investors opened brokerage accounts in record numbers. They invested their savings. Then they borrowed money so they could gamble more.

In May, the hairpin found its fat derriere. First in line to sell were the insiders. Reuters reports that corporate insiders were selling at a record pace: three times as many in May as in April.

One of the sellers was Li Hejun, the chairman of Hanergy Thin Film Power Group. Li shorted his own company’s shares.

He did very well. Trading at nearly $1 on May 18, Hanergy shares are worth about $0.25 today.

Courtesy Bill Bonner, Bonner & Partners (More by Bill Here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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