	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 6-Jun-07
Chinese officials alarmed with fear of stock market panic

Web Log - June, 2007

Chinese officials alarmed with fear of stock market panic

Sharp falls in Shanghai and other Chinese stock markets are causing great concern among Chinese officials that the huge stock market bubble that's been building for months is about to burst -- causing widespread money losses among ordinary Chinese people.

Up until Wednesday of last week, Chinese officials were looking for ways to cool down the bubble growth, hoping that it would be deflated slowly and carefully (as if that were possible). On Wednesday, Beijing tripled the tax charged on people buying or selling stocks, hoping that it would slow things down slightly.

Instead, it triggered a sharp fall of 15% in four sessions, the biggest drop being 8.3% in a single day.

The Shanghai stock market has fallen sharply in the last few days.

The Shanghai stock market has fallen sharply in the last few days.

Now the Chinese are trying to reverse themselves, although it isn't clear what they can do. They're considering more "jawboning" (which always works great, of course), and a reduction in last week's tax is also being considered.

Stocks recovered 2.6% on Tuesday, giving everyone a euphoric feeling of relief that another crisis had past, and everything can go on as it was.

From the point of view of Generational Dynamics, the Chinese economy is is out of control and is headed for a major financial crisis, with 100% certainty. This will be triggered by a panic that might occur tomorrow, next week, next year or thereafter, but the situation has gotten so bad it will probably happen sooner rather than later.

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I want to say a word to investors who have been "going short."

When you go short on a stock, it means the following: You borrow shares of the stock (from your stock broker) and sell them, keeping the money in an escrow account (held by your stock broker). You agree that in three months, you'll purchase shares of stock at the price at that time, and pay back the loan. If the price of the stocks have gone down in the meantime, then you make money, because you buy stocks at a lower price than you sold them.

This is the opposite of what investors usually do. Usually, you buy stocks today and sell them sell a few months later. If the price of the stocks has gone up, you make money.

Going short means that you sell the stocks today, and buy them back a few months later, so you make money if the price goes down.

Now, what I'm about to say is not a Generational Dynamics prediction; it's only a gut feeling on my part, based on what I've seen happening the last few months, and on Generational Dynamics theory.

The concern is that selling short is going to lose money either way, no matter what happens. Selling short makes sense when you think the market is going down, but it's been increasingly clear the last few months that the market is going to continue going up, for the reasons I've described on my web site: Debauched and abusive use of credit in America, China, India, and other countries around the world and this money gets pumped into the stock market bubble (I mean this as a figure of speech, not literally) and the other bubbles. This is something that didn't happen in 1987 and hasn't happened since 1929.

As long as this process is going on, investors will lose money selling short.

What Generational Dynamics IS predicting is that at some point there'll be a worldwide stock market panic, and a complete loss of confidence among investors.

Bankers will be calling loans, and credit will become unavailable. Interest rates will increase, and there will be a worldwide collapse in liquidity. Stock market bubbles, including the huge Wall Street bubble, will collapse, and stocks will fall sharply and won't recover.

You might think that this is good news for investors who sell short, since they'll make a lot of money, but there's a big problem: The sharp contraction in liquidity will force many bankruptcies, and even escrow accounts will be depleted, depending on how they've been set up.

That means that even investors who went short will lose money all their money in this case as well.

It's not guaranteed that this scenario will occur, but right now it appears to me to be one of the scenarios most likely to occur.

As I described at length several months ago, I continue to believe that the best thing to do is keep cash or short-term (not long-term) treasury bills. This does NOT mean corporate bonds; it does NOT mean mutual funds; it does NOT mean money market funds. All of these funds are, in the end, backed by stocks. I mean either cash or short-term treasury bills. (6-Jun-07) Permanent Link
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Generational Dynamics Web Log for 6-Jun-07 Chinese officials alarmed with fear of stock market panic

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Generational Dynamics Web Log for 6-Jun-07
Chinese officials alarmed with fear of stock market panic