Shoeshine boy trading club, China chapter
There’s an old Wall Street legend about Joseph Kennedy, bootlegger and head of America’s original
soap opera political family. At the height of the stock market mania in the ’20s, he received a stock tip from a shoeshine boy. It goes something like this:
But the boy was not of the timid kind. “Oh yeah,” he yelled back at Kennedy, “well, I got a tip for you too: buy Hindenburg!” Intrigued, Kennedy turned around and walked back. “What did you say?” – “Buy Hindenburg, they are a fine company,” said the boy. “How do you know that?” –- “A guy before you said he was gonna buy a bunch of their stocks, that’s how.” – “I see,” said Kennedy. “That’s a fine tip. I suppose, I was a little harsh on you earlier,” he said, pulling off a glove and reaching in his side pocket for some change. “Here, you’ve earned it.”
Little did the boy know that Kennedy, a cunning investor, thought to himself: “You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.”
This is supposedly how Joe avoided the financial ruin of the crash. He was probably too busy stockpiling whiskey to really care very much, but it does make for a good story.
We’re reminded of this old saw today with some distant rumblings in the markets. Last week I was wondering what might cause our stock market to break out of its summer doldrums. Over the past few days we may have gotten the answer. While everyone was looking at the Greek crisis, China’s stock market has been crashing.
The Shanghai Composite Index more than doubled in the last year up until a few weeks ago. All that time it was rising, economic reports indicated the Chinese economy was slowing. Since the peak in mid June, it has dropped over 30%. Last night it was down another 6%, and it would have been more if not for the Chinese government halting trading in most of the stocks. Bloomberg is reporting that Chinese regulators have banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months.
Investors with stakes exceeding 5 percent must maintain their positions, the China Securities Regulatory Commission said in a statement. The rule is intended to guard capital-market stability amid an “unreasonable plunge” in share prices, the CSRC said.
This rule sounds like it’s meant to ban bigwigs and fatcats from bailing out on the economy. However, like Kennedy in the ’20s, all the big money already exited and left regular citizens holding the bag. The Chinese always had a high rate of savings, but recently they have been putting more of it into their stock market using margin to to double down on already precarious positions.
Chinese brokers have extended 2.1 trillion yuan ($339 billion) of margin finance to investors, double the amount at the start of the year. But this often-cited figure is only part of the mountain of debt taken out to finance share purchases. Another 1.7 trillion yuan may have flowed into stock market investment from wealth management products, online lending sites and other sources, according to a Bloomberg survey of analysts.
This was a good old fashioned bubble, and now it looks like it’s bursting. This will have repercussions all over the world. As of this morning, US stock markets are down over 1%. With the reliance of our industrial and financial industries on the hyper-interconnected global markets, this one probably won’t go down quietly.