A few days back we published the article The Great Chinese Dilemma in which we pointed out that the drop in Chinese stocks (about 30% then) was primarily due to Chinese inflation going somewhere (i.e. creating bubbles). Such a system is inheritably unstable and it is prone to inevitable busts and oscillations far beyond what we could “normally” expect. We say “normally” because although it is possible to calculate “market volatilities” and as such obtain a sense for what is “normal”, we must never forget that stock prices are ultimately prices and as such subjective.
In the same article, we also pointed out that the Chinese government had a choice; they could do “the right thing” (i.e. do nothing and let the market clean itself) or they could intervene (which will only complicate matters). Of course, as the Chinese government is communist, they intervened. They did so through halting trades first and when this did not work, they shifted to massive stock purchases to prop-up their prices to the tune of about 200$ Billion. This won’t work either (who can continue spending about 200$ Billion a week in funny stock purchases?).
So, onwards and upwards (or downwards) with the process. The Chinese government is now stuck with a declining stock market and they have been humbled by the awesome power of free markets. What to do? What to do?
We know!
Let’s shoot the messenger!
That’s an idea that solves all their problems.
Now, if we could only identify these messengers… But hold on… There are plenty of people that warned about this possibility… thats right!... instant messengers!
But who are those people?
They belonged to two groups: the media and traders.
The Chinese so-called “free media” is currently undergoing a crackdown due to their gall in pointing out the obvious; that printing 20% to 40% of new currency every year and not expecting anything to blow-up is downright stupid. Therefore, they must be punished! For the good of the Chinese society… you know. Because we all know that Chinese “government officials” (aka apparatchiks) are infallible! They have the master plan to build China into the awsomest and powerfulest and forcefulness empire… country… country of the world! … insert maniacal laugh here …
But this is to be expected. All so-called democratic (i.e. tyrannical) systems blame somebody else for all their mistakes. This is their modus-operandi because the democratic system is incapable of policing and cleaning-up after itself. Nothing new here.
Then we have the second group. Those trading bastards who traded based on their information about the stupidity of the Chinese government and made a fortune. Yeah… Let’s blame those who “destabilized the market” through exercising their duty as traders… Oh… wait a minute… that’s not right… allow us to put it this way…
The Chinese will persecute and punish those bastards who have taken advantage of government bailouts to make a profit and thus fulfill their roles in the market place…oh… no… wait… that isn’t either… let’s see…
The people of China will vigorously persecute those people who have “obstructed” government action to support the failing stock market. Yeah… that sounds better… yeah… let’s go with this one.
Thus, the Chinese government will “punish” (single bullet in the back of the head anyone?) about 22 people for “insider trading”, “market manipulation” and “spreading market rumors”. All of them clearly “illegal” activities.
Allow us to remind you, dear reader, that “insider trading” is simply trading with better information than your competitor. Period. There is nothing evil in this practice; see The Evil Scourge Of Insider Trading. The idea of “market manipulation” is ludicrous as the biggest market manipulation is the Chinese government… to the tune of 200$ Billion a week! And the concept of “spreading market rumors” is downright laughable. Every market since the dawn of history has had rumors because every market participant has their own point of view. Heck! There are very profitable FOREX traders whose entire strategy is based on following rumors!
Basically, all these people will probably pay with their lives as an example of Chinese government stupidity, idiocy and incompetence… oh… wait…
Let’s put it this way. These people will be punished as the Chinese criminal code demands for crimes against the Chinese society. Ahh….. much, much better now.
But… but … what about the “messenger” thing?
Simple, dear reader.
If you remember a few days back, we published the article Economic Information Warfare where we explained how market participants embed and alter critical economic information in prices. Information that is vital to your wellbeing. Yet, in this case, such traders will be punished for doing just that. They will be punished for pointing out government stupidity through their market actions. They are the messengers bringing the message that the Chinese government is a bunch of incompetent apparatchiks and couldn’t be trusted with a Monopoly board game, much less running a country. And this is a cardinal sin. They won’t be forgotten. They are right and politicians are not in the business of being wrong… at least when it concerns their public image.
This is the reason why free markets are so revolutionary as to be subversive; because they throw the truth into your face whether you like it or not.
And so we end this article with the revolutionary notion that the Chinese government discovered: if you shoot the messenger you don’t have to deal with the problem… until the problem overrides you. As far as we can tell, it did not work neither for the Greeks nor for the Romans. But who knows! Maybe the parallel universe where the Chinese government seems to operate things are different… yeah… “this time is different”… right? right?
Because if you believe this, if you truly believe the Chinese government, then things truly are different. You will be going broke far sooner than expected. Enjoy your revelation!
Note: please see the Glossary if you are unfamiliar with certain words.
