Washington, DC -- (ReleaseWire) -- 07/22/2015 --Last week was one of triumph after triumph in the global economy, or so it seemed. Greece accepted a tough new austerity plan in exchange for the promise of a third bailout from their European brethren. China announced better-than-expected GDP growth for the second quarter, and stocks began once again to rise after steep drops since the last week of June. Equity markets across the world began to respond positively to these and other factors. All good news, right? Time to throw a party, right? The trouble is, these supposed triumphs will go down in history as colossal failures dressed up in shiny outfits. We'll look at three in particular: the recovery of Chinese stock prices, the Greek bailout deal, and the continuing high performance of US stocks.
Let's first look at China's triumph from last week. In mid-June, major Chinese stock indices were trading at a remarkable 85 times earnings, but a combination of reality, margin lending (borrowing money from both more- and less-reputable sources to purchase stocks, with the stocks themselves as collateral), and global market pressures led to a massive downturn over the last month. Stocks plummeted, with a precipitous drop of 32% for the Shanghai Composite Index and over 40% for the Shenzhen market from their June highs.
The Chinese government initially responded with fairly traditional (these days, at least) sorts of artificial stimulation. Interest rates and bank reserve requirements were lowered, brokerages were "encouraged" to buy up stocks, and the government itself even waded in to make purchases. When that failed, they reversed their course on the margin lending problem, not only stopping attempts to crack down but changing regulations to make it easier to make stock-purchase loans and accept any sort of collateral (even personal homes) for that purpose. Still no dice.
Then, on July 10th, China went all in to stabilize their stock markets, effectively closing the exchanges as nearly half of their listed companies suspended trading. Regulators banned major shareholders from selling any stock for six months, and the state security apparatus announced that it would arrest so-called "malicious" short sellers, which turns out to mean just about anyone whose selling gets in the way of the government's quest to raise prices. Brokerages and traders are now often refusing to take sell orders at all, just in case. Triumph, though, right? Gains are holding through today. But in what sense is the "market" that China has stabilized really a market at all?
Greece next. The ostensibly triumphant news from Greece last week was that, after their Parliament voted to accept stiff austerity measures imposed by the ECB and the eurozone, the way forward to a third bailout was clear. This triumph is in actuality a tragedy, though. Former Greek Finance Minister Yanis Varoufakis said, Prime Minister Alexis Tsipras was "given a choice between being executed and capitulating," and decided that capitulation was the only way open to him.
Varoufakis told the BBC last week that the economic reforms imposed on his country by creditors are going to fail. We can imagine why. Europe's master plan for Greece is basically to force them to sell close to $50 billion of Greek national property to foreigners. The country of Greece is going to be liquidated piece by piece to repay the ECB creditors and the IMF. In other words, the proceeds from the third Greek bailout isn't really going to the Greek people but rather to foreign creditors. Is this a triumph? The Greek economy is worse than ever, the Greek people are poorer than ever, and now they are permanent renters and debt slaves to Europe. As a matter of fact, Greece's unsustainable debt problem now gives them a debt to GDP ratio of over 200 percent after this third bailout. Overall Greece's net government liabilities are approximately at 1,000 percent of GDP. Is it time to break out the champagne?
Here's where it gets really scary. China's "triumph," the "triumph" of Greece and the eurozone? They're direct analogues of our own. The US market continues to outperform earnings, sheltered from economic fundamentals by the Federal Reserve's continued zero-interest, go-ahead-and-print-more-money policies. If Greece's net government liabilities stand at about 1,000 percent of GDP, our own are at 500 percent. If we don't learn from what we're seeing in the world, if we don't put the right people in place to take action in this crazy environment, then we are heading even farther down the road toward our own tragic "triumphs."
Case in point: US state and municipal pension funds are underfunded by nearly $2 trillion, according to recent reporting by Moody's. After the crisis of 2008, do to high volatility, Moody's stopped relying on investment return assumptions provided by city and state governments and started using their own models. It is probably not a surprise that the rating service discovered that their numbers showed significantly higher shortfalls than those of the governments. Since last month, it has been made clear that Houston faces a possible downgrade. In May, Chicago's debt was reduced to junk status, forcing the city to pay almost 8% on taxable bonds maturing in 2042, when homeowners are paying half that for 30-year mortgages.
So, where are we? Like Greece, our country as a whole has massive unfunded debt at every level. Like China, we have policy makers actively intervening in the operation of the markets. Once we have this level of intervention, do government and central banks have to keep intervening forever? If the stock and bond markets are no longer vehicles for price discovery, it seems clear that there is no way to invest rationally based on sound economic principles and research. The market is not a free market, but an engineered mechanism run by central banks and governments as a means to their ends, not yours. As investors, as citizens, we must all be aware of this and protect ourselves from false triumphs and real tragedies alike.
All data sourced through Bloomberg
Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or dbennett@bennettgroupfinancial.com