Notes

Amateurs Bet But Overlook A few Easy Things

I would recommend a simple value bet here, and would bet slightly more if there is any indication of a straight or flush draw on the texture of the flop. There are about three good weeks of fishing left. More commonly, the tropes of patriotic education are concerned with issues such as national unity and strength, socialist ideology, the recapturing of China’s past glories and washing away a century of shame inflicted by imperialist Japan and western powers. But the elevation of A shares into this rarefied pantheon of national priorities hints at the centrality of the battle that Beijing has joined to restore calm to its slumping stock markets and, in the process, revive its own credibility. So are we to believe that Chinese officials can control the stock market, control their Credit system, control the economy, control the media and “foreign meddling”, control financial flows, control speculation and, as well, control the currency peg to the dollar? The Chinese have certainly done their part, with their currency peg to the dollar ensuring easy speculative profits to anyone willing to short the dollar, yen or euro and use the proceeds to leverage in high-yielding Chinese Credit instruments and securities.

2014. China’s currency ended the week down a meager 0.06% to 6.2094. In spite of all the market tumult and uncertainty, the renminbi peg to the dollar has been as solid as a big boulder. The yen gained a quick 1.5% against the dollar during Wednesday’s nervous trading. Widespread trading halts and illiquidity. Perhaps Beijing can restore some semblance of domestic confidence in Chinese equities. 맥스벳 proved resilient longer than I expected, with everyone somehow remaining oblivious to the ramifications of the bursting of a major financial Bubble. I’ve expected the bursting of the Chinese Bubble to be “frightening.” It’s commenced. Could they crack? It’s been awhile since the last episode of serious currency market tumult. I have posited that a proliferation of global currency “carry trades” (borrowing/leveraging in devaluing currencies to speculate in higher-yielding instruments in other currencies) is the unappreciated key source of speculative finance helping to fuel the global government finance Bubble. From my perspective, the key issue is the impact the stock market dislocation will have on the broader Chinese Credit Bubble. The government will protect against broader economic effects. Tall order. But I fully expect foreigners will be looking to get out. Only a small part of the population will be impacted.

The factories once employed a small army of highly trained workers that would be the envy of many other places in the United States. As to the table, it's a standard one where you can see the Inside and Outside Bets, Dozens, Columns, and more. Let's see some lines and passages. Kuroda is going on three years of QE Fest, devaluing the yen and fomenting what I believe is one of history’s great speculative plays (“yen carry trade”). I’m not going to bother to count - this is law school after all, and we don’t do empirical research -- but I bet that more than half the cases I teach in my required first-year course were cases I first read as a 1L 25 years ago. Years of central bank market intervention, manipulation and monetization have cultivated a massive pool of global speculative finance. Another central norm is political balance. At this point, no one is questioning China’s commitment to its currency peg. I’ve seen a couple analysts question what China’s response to its faltering stock market Bubble means in terms of the ascendancy of the renminbi as an international “reserve currency.” This is an extremely important issue, although I’ll come at it from a somewhat different perspective: What do cracks in the Chinese Credit Bubble, the bursting of China’s stock Bubble and their heavy-handed and bizarre responses mean to the general stability of the Chinese currency?

I question whether currency markets are about to enter a period of acute volatility. While the crowd ponders buying the dip, I increasingly question whether China at this point is even “investable”? So much in China is Broken. Yet I’ve always believed this reserve position was much more vulnerable to disorderly “hot money” flight than commonly perceived. It was this “hot money” Bubble that had officials backtracking from their 2014 managed currency devaluation. And it was the combination of faltering apartment and “hot money” Bubbles that was behind policymakers rolling the dice on the reflationary wonders of the stock market (they saw it work in the U.S.!) It could all come crashing down. The general expectation is that stock market losses won’t have a significant impact on consumer spending or the overall Chinese economy. The government’s reflationary stock market gambit has been instrumental in sustaining rapid system Credit growth - massive ongoing Credit expansion required to keep a highly maladjusted and unbalanced economy levitated. If China’s efforts to transition to a domestic-demand led economy from an export engine falter, there is a ‘likelihood’ that China’s rulers would foster an external conflict to keep the country together and hold on to power.

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