On Stock Market Interventions; A China View; Fish and Diabetes Risk!

From: aditya rana 

Subject: On Stock Market Interventions; A China View; Fish and Diabetes Risk!

Hi!, The intervention by the Chinese government to support its stock market has attracted widespread criticism from the western financial media and analysts, as it has violated the basic tenet of free markets. However, as I have noted in previous letters, government (or private-public) intervention to support financial markets during periods of crises, has been the norm rather than the exception over the last two hundred years of global financial history. It is therefore useful to look at some similar episodes in the past in order to help form a view about the likelihood of success in the context of the Chinese situation. John Plender from the FT, and the market technicals firm EWI, have written pieces recently (combined with my own research) which provide some interesting information. To summarise: -The attempt by the Chinese government to put a floor to the market is part of a longstanding tradition in Asia. In 1964, the Japan stock market fell by over 25% after a sudden tightening of monetary policy. The Japanese government prohibited new issues (as the Chinese government has done recently), and a group of brokers coordinated to organize a rescue. When Yamaichi securities was on the verge default, the government stepped to organize a rescue. The purely broker led private intervention was initially unsuccessful and the market dropped by another 20% in early 1965, prompting a public-private agency to step-in to support the market in the summer of 1965. The market subsequently rallied by over 50% over the next year, ushering in in a 25 year bull market with a price gain of 39x (see chart below), eventually leading to one of the greatest stock (and property) bubbles of the modern era. -Subsequent to the bursting of the great Japanese property and stock bubble which commenced in December 1990, the somewhat feeble pension fund intervention in 1992 led to only temporary success, and it was not until 2013, with QE implement by the BOJ and its aggressive buying of ETFS, that led to a doubling of the stock market over two years. -During the Asian Crisis of 1997-98, a group of hedge funds simultaneously shorted the Hong Kong dollar and the stock market, betting on a break of the peg. The market fell by about 60% over a one year period, until the HKMA stepped-in to buy 11% of the stock market in the summer of 1998 (see chart below). This action attracted fierce criticism from the western financial media and notables like Alan Greenspan. The market subsequently rocket by more than 100% over the following year (causing havoc amongst the hedge funds), with the HKMA offloading their portfolio for a $4 BN profit. -Successful private-public interventions are not limited to Asia. The trust company panic of 1907 in the U.S. led to a 40% decline in the stock market, which prompted a private-public sector (led by JP Morgan and supported by the government in lieu of the Fed which did not exist at that time) intervention which proved to be successful with the market rising by 70% over the following year. -In contrast, attempts by purely the private sector (led by JP Morgan) to support the U.S. market in October, 1929 ended in failure (largely due to inaction by the Fed to counter the precipitous drop in money supply), as did the attempt by U.K. insurance companies to support the market after the U.K. market (and global) rout of 1974 with the U.K. market declining by 73%. What the U.K. intervention did achieve was to exhaust the selling, so when the market started rising in 1975 there was little selling pressure to prevent a surge in the market – which doubled in just 3 months and rose by 150% over the year. -Finally, during the recent Financial crisis of 2008-2009, aggressive monetary policy action by the Fed (having learnt its lesson from 1929) and fiscal support from the government were the key factors in eventually stopping the market decline in March, 2009 (see chart below) and the subsequent rally which continues until today. While the Fed (and the ECB and BOJ) interventions over the last several years have been via government bonds in the form of QE (thereby forcing private investors into equities and other higher risk assets) , on a risk (volatility) adjusted basis a $4 trillion balance sheet of government bonds would roughly translate into $1 trillion of stock equivalent (which is about 6% of the average capitalization of the U.S. stock market over the last 7 years). As the above highlights (and should be clear to students of financial history) determined intervention by the government and central bank is what is ultimately required to stem a stock market crisis. Whether the intervention is direct (in the stock market) or indirect (via the government bond market in the form of QE ), it almost always works and subsequently leads to a market rally driven by investor participation. While, investors may require some time to regain their confidence, past precedents point towards a rally within a time period of one year. -A recent report by Goldman estimated that the “National Team” of China, comprising public and private entities have bought about $150 billion of stocks and have another $180 BN in the war chest. The total equates to about 4.0% of the current stock market capitalization in China. Local media report that the total amount available could be as large as $800 BN which would equate to about 10% of the market capitalization. As I noted in my previous newsletter, the Chinese government is determined to stop the market decline (at around the 3,500 level for the Shanghai index), and promote a healthy stock market going forward, which is central to their medium-term goal of shifting focus to consumption as a driver of economic growth rather than investment. The Chinese government has ample resources to meet their objective. Stay long China, and if you do not have sufficient exposure and would like to add some, consider accumulating a position gradually. -I end with some insightful observations on China from the hedge fund manager – the irrepressible and verbally dexterous Hugh Hendry – in a recent interview with the FT: -“When reference is made to a CNBC analyst who recently compared China’s stock market to the Dow Jones crash in 1929, Mr Hendry says: “This big plunge in some of the racier domestic shares has been greeted by schadenfreude (i.e. harm-joy ) by those who missed the initial leg-up in the market.” -In Mr Hendry’s view, China is beginning to resemble “Fordism” in practice. This underpins his optimistic stance while seemingly everyone else is retreating from the country. One hundred years ago, Henry Ford, founder of the Ford Motor Company, decided he would double his employees’ wages. Rather than the company collapsing, the opposite happened. “The trick was he was giving a wage increase to the consumer who then went out and bought one of his cars,” says Mr Hendry. -Mr Hendry talks about a pivot in the Chinese economy. The fund holds a sizeable long position in Chinese stock futures. “The tail risk of China blowing up, in our view, has gone because of the power of central banking,” he says. -During the 1920s, the US experienced a huge productivity revolution. The Fed was awash with gold. Rather than creating credit and releasing it into the economy, it buried it under the streets of New York. “The US economy boomed but it should have boomed even more,” says Mr Hendry. -A similar productivity boom played out in China during the 2000s.“Obviously, the People’s Bank of China did not have a gold standard. Instead, they chose to redistribute upwards of 5 per cent of GDP away from the housing sector via three mechanisms: wage inflation that lagged behind productivity growth, negative interest rates (in real terms) and a tightly managed currency.” -This was nothing more than a suppression of wealth. That 5 per cent was used to facilitate a very long-term infrastructure strategy with no short-term payback. In other words “they were robbing Peter to pay Paul”, says Mr Hendry. That approach started to shift a couple of years ago. And although the signs of “Fordism” may be rudimentary, Chinese companies are growing and innovating and the CSI 300 index, despite the recent turmoil, is still nearly double what it was a year ago. The renminbi has appreciated 20 per cent against the euro since 2014. -If it chooses to, the PBoC can take overnight rates to zero, as happened in the US. “That, to us, is the attraction. It has a monetary authority with huge power and resources to resolve things,” says Mr Hendry. He adds: “We believe that if Chinese consumption to GDP can rise to the level of the Philippines, which is about 50 per cent, we think China can deliver approximately 4 per cent GDP growth endogenously.” Fish and Diabetes risk: Eating fish is considered to be healthy. Well recent research might seem to indicate otherwise: Michael Greger M.D., July 23rd, 2015 -In the past two years, six separate meta-analyses have been published on the relationship between fish consumption and type 2 diabetes. The whole point of a meta-analysis is to compile the best studies done to date and see what the overall balance of evidence shows. The fact that there are six different ones published recently highlights how open the question remains. One thread of consistency, though, was that fish consumers in the United States tended to be at greater risk for diabetes. -If we include Europe, then fish eaters appeared to have a 38% increased risk of diabetes. On a per serving basis, that comes out to be about a 5% increase in risk for every serving of fish one has per week. To put that into perspective, a serving of red meat per day is associated with 19% increase in risk. Just one serving per day of fish would be equivalent to a 35% increase in risk. But why might fish be worse than red meat? -Fish intake may increase type 2 diabetes risk by increasing blood sugar levels, as a review of the evidence commissioned by the U.S. government found. The review found that blood sugars increase in diabetics given fish oil. Another possible cause is that omega 3’s appear to cause oxidative stress. A recent study, highlighted in my video, Fish and Diabetes, found that the insulin producing cells in the pancreas don’t appear to work as well in people who eat two or more servings of fish a week. Or it may not be related to omega 3’s at all but rather the environmental contaminants that build up in fish. -It all started with Agent Orange. We sprayed 20 million gallons of the stuff on Vietnam, and some of it was contaminated with trace amounts of dioxins. Reports started showing up that veterans exposed to Agent Orange appeared to have higher diabetes rates than unexposed veterans, a link that’s now officially recognized. -These so-called “persistent organic pollutants” are mainly man-made industrial chemicals and are among the most hazardous compounds ever synthesized. They include dioxins, PCBs, and certain chlorine-containing pesticides, all of which are highly resistant to breakdown in the environment. -Initially condemned for their deleterious effect on reproductive function and their ability to cause cancer, there is now a growing body of evidence showing that exposure to these pollutants leads to metabolic diseases such as diabetes. This is a breakthrough that “should require our greatest attention.” -More on the changing views surrounding fish oil supplements in Is Fish Oil Just Snake Oil? Other foods associated with diabetes risk include processed meat and eggs, while Indian gooseberries and flaxseeds may help (Amla Versus Diabetes and Flaxseed vs. Diabetes). Here’s to limiting your fish intake to a minimum! I will be travelling over the next two weeks so my next newsletter will be sent out on August 29. Enjoy the rest of the summer! Regards, Aditya


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