Monday, August 31, 2015

Tumultuous August ends with Dow decline

Tumultuous August ends with Dow decline

Biggest monthly loss on Wall Street since 2010

NEW YORK – U.S. stocks were down again Monday, with the Dow Jones Industrial Average losing 114.98 points to close at 16,528.03 as a wild month of trading on Wall Street, dominated by fears over China, came to an end. The Dow suffered a monthly loss of about 6.6 percent, the largest loss since May 2010, the Wall Street Journal reported at the close of trading Monday.
The roller-coaster ride in August rekindled investor fears that the economy at the end of the Obama administration is about enter a recession even deeper than the financial crisis of 2008, when Obama entered office.
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With the Dow dropping as much as 1,000 points in a few opening hours of trading, “mom and pop” investors have pulled out of mutual funds in droves.
As WND reported Friday, Credit Suisse has found important evidence that middle America is leaving both the stock market and the bond market in numbers that have not been seen since 2008.
Household investors, who constitute 90 percent of U.S. mutual fund investors, pulled billions out of both stock mutual funds and bond mutual funds for two months in a row, first in July and now again in August. It’s a phenomenon not seen since the fourth quarter of 2008, when the global economy entered a prolonged worldwide recession.
Bloomberg Business reported last week that Credit Suisse’s estimate was correct: In July, $6.5 billion left equity mutual funds, while $8.4 billion was pulled from bond funds.
Investment Company Institute data suggest the mutual fund withdrawals continued through the first three weeks of August, when investors withdrew yet another $1.6 billion from stock funds and $8.1 billion from bond funds.
China leading global stocks downward
August 2015 seems destined to go down in financial history as the month in which China’s stock market led global stock markets into a steep downward correction, wiping out trillions of dollars in investors’ capital across the globe.
China’s Shanghai Composite index traded down 12.5 percent in August, marking its third straight month of declines. After trading above 5,000 as recently as June 15, it dipped down to 3,000 last week.
The Shanghai Composite Index suffered its own “Black Monday” Aug. 24, when the index dropped 8.5 percent, its worst single-day loss in more than eight years.
The Wall Street Journal estimated that China’s “gang of bailout entities” known as the “national team,” consisting of banks, brokers, pension funds and government agencies, spent 900 billion yuan ($141 billion) in August buying falling Chinese stocks to stabilize the market. Meanwhile, the government sold more than $100 billion of U.S. Treasuries in an attempt to boost the value of the yuan.
When state-owned “private enterprises” in China are added to the “national team” that has been forced to buy Chinese stocks at high values in a sinking market, as much as 3.5 trillion yuan ($548 billion) may end up being pumped into the Chinese stock market, with no assurance the downward correction can be stopped.
Losses on those stock purchases could end up being 40 to 60 percent of the initial purchase price. Some $3.5 trillion yuan ($548 billion) of stock purchased at top price could fall in only a few weeks to between 2.1 trillion yuan ($329 billion) and 1.4 trillion yuan ($219 billion).
Daniel Altman, senior editor of economics for Foreign Policy magazine, published by the Council on Foreign Relations, and an adjunct professor at New York University’s Stern School of Business explained how China’s stock market became yet another financial bubble phenomenon.
“Because rates in China’s regular banking industry are heavily regulated, banks have been offering high-yield alternatives to regular deposits,” Altman wrote.
He described “shadow banking” as a leveraging phenomenon that allowed average Chinese workers to buy stocks at high margins, simply by investing in high-yield speculative alternatives offered by brokers to compete with regular, low-yielding bank deposits.
“By promising high fixed returns, they attracted billions of dollars from Chinese savers, and much of this money went into the stock markets,” Altman continued. “But in the process, the banks created a huge amount of leverage that has made the post-bubble markets uncontrollable.”
For his article in the current edition of Foreign Policy, Altman interviewed Viral Acharya, his colleague at the Stern School of Business, who estimates the consequences of the meltdown in the Chinese stock market may end up being as severe as the collapse of mortgage backed securities in the United States at the end of George W. Bush’s second term.
“Shadow banking in China has grown tremendously in dollar terms, to more than $2 trillion,” Acharya explained. “It is made up of attempts by regulated banks to issue deposit-like products – but not actual deposits – and offer higher interest rates to investors, given that deposit rates are regulated and suppressed.”
The end result, Acharya explained, was that the Chinese began gambling in the stock market, with institutional buyers acquiring the more risky components of structured securities backed by buying speculative stocks that produced high-yields only while the bubble continued growing.
Altman estimates the Chinese stock market will collapse another 35 percent before the leverage added by “shadow banking” gambling with high-yield speculative Chinese stocks comes to an end.
Copyright 2015 WND

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