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Monday, July 27, 2015 2:08 PM

Witch Hunt is On; Foolish Ideas on Stopping the Shanghai Carnage; US Bubble Will Burst Too

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Nearly 1,800 stocks, over 60% of issues traded on the Shanghai and Shenzhen stock exchanges fell by the daily limit of 10% and were halted according to a Financial Times report.

When contacted by the Financial Times, the China Securities Regulatory Commission refused to answer any questions.

The amusing comment of the day comes from Zhu Ning, deputy dean at Shanghai Advanced Institute of Finance: “If [the government] does nothing then all its previous efforts will have been wasted but if they continue with the rescue efforts then the hole will get bigger and bigger. We hope the regulators will respect the market and the rules of the market.”

In reality, previous efforts were wasted the moment they were tried. Price discovery is now lacking, and that is a huge problem in and of itself.

Absurd Cries for More Intervention and Liquidity

On Monday, Zhu Baoliang, director of the economic forecast department of the State Information Centre, a government research agency, told Reuters the stock market crash was having a deep impact on the real economy and that it was "essential for the authorities to cut interest rates and loosen monetary policy further."

Bear in mind that it was excessive liquidity that created China's property bubble followed by the stock market bubble.

Thus, Zhu Baoliang is another charlatan promoting the inane notion that the cure is the same as the disease. In effect, Baoliang wants to give alcohol to alcoholics.

Witch Hunt is On

The witch Hunt is on. That means the ridiculous notion of blaming the shorts is in full swing.

Chinese regulators even launched a website encouraging people to name the shorts, further stating those found guilty will be "dealt with severely".

Loss of Control

ZeroHedge discusses shorts in What Loss of Control Looks Like.

Actually, regulators were never in control in the first place. It only appears that way when things are going well.

Shorts Not the Problem

Shorts are not the problem here. Nor were shorts the problem in 2000 and 2008 in the US. Indeed it was the shorts who understood the true nature of the stock market:

  • Dotcom companies in 2000-2001 with no earnings were absurdly priced.
  • Financial corporations, home builders, etc. were in the same situation in 2008.

"Real Economy" Worries

Chinese officials are worried the crash will hurt the "real economy". That's something they should have worried about before they blew the bubble.

Moreover, the notion that the "real economy" was doing well in the first place is silly. Rather, speculative activities, and unrealized profits on those activities only made it appear the "real economy" was doing better than it really was.

It's too late to do anything now.

The only policy that makes any sense is to stand back and do nothing. Doing anything else just fosters more "moral hazard" speculative behaviors.

Pointing the Finger in the Right Direction

The Fed had a direct role in fostering US speculation in 2000 and 2008, just as the Chinese "regulators" fostered speculation in real estate and stocks in China over the past few years.

US stocks are back in bubble territory and the only reason why that is not perfectly obvious is the crash has not yet started here.

US Bubble Will Burst Too

When the US bubble bursts, we will see more blame the shorts mentality here, just as we see in China now, and also as happened in 2000 and 2008 in the US.

The Fed will never point the finger where it belongs: At themselves.

Mike "Mish" Shedlock

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