It was another eye-popping night of activity for markets.
Despite the ever-growing number of COVID-19 cases and deaths, Wall Street was rallying. The NASDAQ even reached new record highs (again).
Europe wasn’t far behind either, also delivering some strong returns.
But the real story was in China.
The Shanghai Composite recorded a 5.7% charge overnight. Its best one-day gain in five years.
Clearly the Middle Kingdom isn’t worried about this pandemic anymore. Or at least, that’s what they’d like you to think…
The reality is, there doesn’t appear to be much substance behind this rally. At least, not from a fundamental perspective.
We can’t even blame it on the central bankers this time, either. Because unlike the RBA or Fed, China’s central bank is actually starting to ease its monetary support.
So, what was the reason for the massive spike in trading?
The simple answer is propaganda.
You don’t need QE or yield curve control if you’ve got the ability to influence a billion people. Which is precisely what China’s state-run media has done.
We’ll let you know when to buy
See, driving this incredible one-day result was a flood of retail investment.
Everyday people in China are rushing to get into stocks. Following the guidance of their beloved leaders.
According to early reports, a front-page editorial in the China Securities Journal is the culprit. A state-owned mouthpiece that posited local investors should embrace the ‘wealth effect of the capital markets’ and a ‘healthy bull market.’
Now, generally speaking, if someone has to tell you it’s a ‘healthy’ bull market — they’re probably lying through their teeth. In fact, healthy is probably the most unlikely attribute we can give to any aspect of the world right now.
But I digress.
The tale of the tape is the CCP told people to buy stocks, so they did.
I’m sure you can already tell that that is a disaster waiting to happen.
It reads exactly like your typical pump-and-dump scheme. Tapping into investors’ fear of missing out and encouraging them to pile in and drive valuations higher.
And as you’d expect, there will be plenty of losers when the bubble pops. How do I know that? Well, it’s because we’ve seen this exact same scenario before.
Back in 2015, China tried the same tactic. Goading people to jump into the stock market to help the economy. And for a while, it worked.
From June 2014 to June 2015, the Shanghai Composite rose by roughly 150%. A staggering return for a 12-month time frame.
But it was all just asset inflation. The real economy wasn’t actually growing.
So, once the cat was out of the bag and there was no more pump left, the market tanked. Falling by over 40% in the span of three months.
It was a classic market bubble.
One that burned plenty of investors in China and abroad. Because just like we saw overnight, the Shanghai Composite does influence other markets.
Government approved Ponzi schemes
Now, I’m not naïve enough to tell you that China’s share market is in a bubble right now.
Because the fact of the matter is, no one knows that for certain. All I can say is that they’re treading down a path that they’ve walked before…and it didn’t end well.
To this day, the Shanghai Composite hasn’t come close to nearing its 2015 peak. If this state-endorsed rally continues though, that might change.
Then, the real question will be whether the CCP has a plan to prevent another crash.
It will certainly be fascinating to see how this plays out.
However, as an investor it also presents an opportunity.
Like it or not, China’s market rally will influence ours. Even if there is little rhyme or reason behind the rally.
In fact, what it should tell you is that the CCP is trying to juice the system. Suckering in their own people to help provide a capital bonanza.
Think about it.
By flooding the market with equity, rather than debt, it provides risk-free money.
Because even if a company goes bust, it doesn’t have to pay back its equity. Instead, the value of that equity simply craters to zero.
Effectively, they are tricking investors into funding businesses, not banks.
Obviously, that’s a terrible deal for investors. At least it is when the money stops flowing.
Like I said, it’s a typical pump-and-dump.
However, for the companies collecting all this capital, it provides plenty of versatility. Giving them more money to spend on ways to grow their business.
Some of that money, whether China likes it or not, will eventually flow to other markets. Such as importing raw materials from Australia, for example.
No one knows if this bubble, or melt-up, or whatever label you want to give it will last. But it should get you thinking. Because one way or another, it could be quick way to make some incredible returns.
Regards,
Ryan Clarkson-Ledward,
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
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