The China Bubble is Bursting, Halleluyah!

I’ve been writing about this for a year and a half. It is finally happening. Chinese stocks are down another 7% today.

The last time I covered this was June 1 at TheStreet in an article titled Chinese Chinese Stocks Headed For a Bust:

Despite huge gains today (June 1), the Chinese markets may have topped and are prime for a bust.

In short, the People’s Bank of China seems to be tightening the reins on the money supply, which could lead to continued slowing in the Chinese economy.

Last Thursday, Bloomberg reported that the People’s Bank of China sold $16 billion worth of short term debt to select financial institutions as a way of draining excess liquidity. Central bank jargon calls these “repurchase agreements” but what it basically means is the PBOC is giving debt contracts to banks, and the banks give the PBOC money in return, which is then taken out of the circulating money supply. This shrinks the money supply overall.

When governments shrink money supply after years of inflationary expansion, busts must happen by logical necessity.

There’s still time to get in on the short side here. I own 2017 puts on FXI. I think I have to put that legally or the government will fine me for saying things. And that I am not an investment adviser and I’m not making any recommendations. Or something like that. Am I yotzeh?


The Black Swan’s Wings Over Switzerland

Nicholas Taleb’s book The Black Swan has this chart at the beginning explaining what the Black Swan is. It’s a chart of the life of a turkey up until the day before Thanksgiving. Here’s the chart.

Turkey Chart

Here’s an eerily similar chart from January 15th of the Euro traded in Swiss Francs.

Screen Shot 2015-01-18 at 11.41.59 PM

The point is, when central banks do something unexpected, the markets can flip in ways that will shock you.

The Swiss National Bank decided it was too expensive to keep a 1.20 Euro to Swiss Franc peg. In order to maintain that they had to buy a bunch of Euros and take them out of circulation with Swiss Francs they would print and put into circulation. Basically absorb the inflation that the European Central Bank was creating and stick it on its balance sheet.

By November 2014, the SNB had absorbed 475B Swiss Francs worth of foreign currency. At that point they decided it was too much. So all they did was say they were no longer buying Euros, and the Euro fell through the floor.

475 billion. That’s it.

Do you know how many US Dollars China has on its balance sheet, sopping up American inflation like a neverending sponge that just will not saturate? Almost $4 trillion. That is about 8.5x the amount of Euros the SNB had when it announced it was no longer buying Euros, and the Euro fell 30% in a day.

Can you IMAGINE what will happen to the US dollar when – not if, but when – China says it is no longer buying?

And keep in mind that the SNB never said it was selling any of its Euros. Just that it would stop buying them.

Now, here is the $4,000,000,000,000 question. Can you fathom what would happen to the US dollar, the US economy, treasury bonds, the Federal government, if and when China announces not only that it will no longer buy US dollars, but that it will actually sell them? Try to get something for its paper they’ve been stacking there for decades?

Here is the simple truth. Economic armageddon is in the hands of the People’s Bank of China. All it has to do is announce they are selling their dollars, and the game is over. That’s it. The only thing stopping them is that for some crazy reason, the Chinese think that it benefits them to import American inflation.

When they figure out that it only hurts them, they will simply stop doing it.

The Swiss National Bank already figured it out. It now looks like the Danes are next.

Pretty soon, China will figure it out, too.

Get ready. The Black Swan cometh.