Flash Crashes, China’s Currency Devaluation & the Global Economy, by Al Martin

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by Al Martin

Flash Crashes, China’s Currency Devaluation & the Global Economy

(8-31-15) The recent market declines represented a tremendous shorting opportunity for investors and brought the markets from what had clearly been an overbought condition to something more correct around the S&P; 1850 level. We now have substantial bounce off that level thanks largely due to the effects that the global central banks led by China have had.

China reduced its interest rates again and reversed its ban on short selling. We saw similar moves to increase market liquidity from the ECB and this was able to turn the markets around. This also points out the fundamental problem in the global economy that these dynamic sell-offs are going to continue because the global economy is recovering without continuous quantitative easing from the central banks.

It’s the same problem again and again: the global central banks are full of economic academics and not real world business people. That has been the problem in the entire post war regime.

People have asked -- was it a “real” crash or was it a “fake” crash? The central banks have done a good job in maintaining a state of overvaluation in the planet’s equity markets. You have these intermittent flash crashes which have nothing to do with economics and everything to do with technical glitches.

Was it market manipulation? Not really. They can’t get markets open because market makers have not modernized their computer systems enough deal with all of these modern derivative and micro-second trades also known as High Frequency Trading or HFT. The technology to deal with this is lagging.

High Frequency Trading and quant and matrix algorithms have everything to do with it and the computer technology has not advanced enough to handle the volume of trades that these new electro-phenomena create. Then you get these temporary periods of illiquidity where markets can’t open issues which then creates these temporary air pockets so to speak known as “flash crashes” and then it takes a number of seconds or a number of minutes for the flash crash to get reversed.

So what’s the connection between China’s actions and the markets? The devaluation was a smart thing for the Chinese to do. They didn’t want to do it because they know that devaluing the RNB (Chinese currency) is going to cause some political heat, particularly in the United States and Germany. But they had to do it in order to take the pressure off of their own markets. This was a key point in taking pressure off of their own markets by devaluing the RNB. This is what countries always do. By doing that it suddenly made Chinese equities more attractive to foreign investors.

And what about the Chinese peasants who have become wanna-be middle class investors? They’ve all gotten hurt because the Chinese government encourages the peasants to buy stocks on margin. That’s never a good idea. They did this in order to create a sense of false prosperity – or a false uptick in GDP. Why? Because the Chinese are so desperate to maintain a 7% GDP rate that they were willing to create the biggest speculative bubble ever created on the planet in anybody’s equity market. And now that speculative bubble is getting unwound. Concurrently the Chinese had never really put the mechanism in place necessary to unwind the speculative bubble in an orderly fashion. Thus these tremendous moves in the Shanghai composite index where night after night saw as much as a 10% move in either direction in the Shanghai composite.

The Chinese government’s response to this was for the government through the central bank to keep buying stocks on the way down. Eventually after spending the equivalent of USD 300 billion, they figured out that wasn’t working. So they got smart, devalued the RNB. They also cut their Triple R Reserve Rate which reduced the amount of money the banks had to hold as security against deposits which increased the bank’s ability to lend into the Chinese economy.

But as usual the Chinese did as little as possible because they make the mistake of acting incrementally – like most of the central banks make the same mistake. Instead of acting in a bold stroke, reducing the Triple R rate by 200-300 basis points which would have created a tremendous rally in their markets, they acted incrementally. This is a mistake that all central banks make.

So what can we expect? A continuing increase in volatility in the planet’s equity markets at a time when the commodity markets are already under pressure due to falling economic growth. The central banks’ inability to create inflation as you can see in the Japanese inflation numbers just released, Japan has pumped more money into its economy through Quantitative Easing than has any other country. Meanwhile its inflation rate fell to zero.

The inability of the central banks to create any inflation simply by turning on the spigots as they say or turning on the printing presses has got to tell them that something is wrong. They know what is wrong – that the planet’s economy as we have stated before is beyond the point of no return fiscally speaking – and the only way you keep the planet’s economy alive at a 2% annual GDP globally is to adopt a “Grey Skies” economic policy wherein global GDP is being maintained through a policy of perpetual Quantitative Easing by the principal central banks

Then it becomes a matter of how do you package this up and make it politically sellable to the Unwashed because what the governments keep trying to do is say – the central banks are wrong with Quantitative Easing and don’t worry-- it’s just a temporary measure and don’t worry – savers will be rewarded and once again we’ll create inflation, But none of that is happening. The only way this ends is for the principal governments to stand up and tell the governed the truth. And that ain’t going to happen.

We now need a new post-war economic regime. It’s got to change. There has to be a global “Grey Skies” policy and there becomes a target of 2% annual global GDP, a global inflation rate of 1% -- and the only way this can be accomplished is through continuous Quantitative Easing by all the planet’s central banks and by having negative interest rates.

The central banks are doing their job in keeping the dead horse, so to speak, on life support and it is the governments that are the problem because they prevent central banks from telling the public the truth. Governments by their refusal to tell people the truth become the instigator of a global crash.

And that’s current global economic situation in a nutshell…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

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