13th July 2015

Rigged
One woman, who declined to give her name but said she is almost 80, invested RMB 20,000
($3,200) when the market was at 5,000 points. Ive lost two thirds of my money, she said, her
voice cracking. I really want it back and when I get it, I will never invest in the stock market
again.
..These elderly investors were entering the back half of their lives at the moment when China
began to embrace reform. Old people often dont understand economics, says Nie Riming, a
pensions expert at the Shanghai Institute of Finance and Law. They are easily duped.
- From A bull market with Chinese characteristics in The Financial Times, by Tom
Mitchell, Gabriel Wildau and Josh Noble, 11 July 2015.
A man may be extremely intelligent, but mankind, as a whole, is pig-ignorant. We are all fools.
To put it another way, we can, as individuals, gain much knowledge and perhaps even wisdom
during a lifetime, but the likelihood of that knowledge and wisdom persisting through generations
may well be vanishingly small.
How else to explain the festival of incompetence currently barrelling its way through the financial
markets ?
It couldnt happen here, conclude western investors as they watch the increasingly desperate
machinations of the Chinese authorities, for example, as they attempt to put a floor under stock
prices. Desperate, as in ridiculous, desperate, Basil Fawlty-ish lengths to prevent reality from
crashing in upon a deflating stock market bubble.
Government buying stock to support the market ? Check.
Government halting trading in half the stocks on the market ? Check.
Government banning large shareholders from selling for six months ? Check.
Government suspending any further IPOs ? Check.
Government slashing interest rates ? Check.
Government ordering companies to buy their own shares ? Check.

The FTs James Kynge reports:

On Sunday, the new graduates of Tsinghua University are set to gather in their smartest attire to
celebrate degrees from one of Chinas most prestigious institutions, a place that has fostered
generations of political leaders. Just after the ceremony starts according to a written agenda
the graduates must follow the instruction and shout loudly the slogan,
revive the A shares, benefit the people; revive the A shares, benefit the people.
It couldnt happen here..
Apart from western governments bailing out their own bad banks, or creating trillions of dollars,
pounds and euros of ex nihilo money and using that money to suppress interest rates and bond
yields and currencies, and boost their own stock markets..
Nobody knows anything, was William Goldmans sardonic assessment of Hollywood in his
classic memoir on the movie business, Adventures in the screen trade.
In finance, things are subtly different. Nobody learns anything, appears to be the mantra. If one
generation happens to stumble upon knowledge probably involuntarily, and learnt at great cost
then the next generation scampers blithely away from it and on towards some fresh disaster.
From Americas Great Depression by Murray Rothbard:
Mr. Hoover met the challenge of the Great Depression by acting quickly and decisively, indeed
almost continuously throughout his term of office, putting into effect the greatest program of
offence and defence against depression ever attempted in America. Bravely he used every
modern economic tool, every device of progressive and enlightened economics, every facet of
government planning, to combat the depression. For the first time, laissez-faire was boldly thrown
overboard and every governmental weapon thrown into the breach. America had awakened, and
was now ready to use the State to the hilt, unhampered by the supposed shibboleths of laissezfaire. President Hoover was a bold and audacious leader in this awakening. By every progressive
tenet of our day, he should have ended his term a conquering hero; instead he left America in
utter and complete ruin a ruin unprecedented in length and intensity.
What was the trouble ? Economic theory demonstrates that only governmental inflation can
generate a boom-and-bust cycle, and that the depression will be prolonged and aggravated by
inflationist and other interventionary measures. In contrast to the myth of laissez-faire, we have
shown [here] how government intervention generated the unsound boom of the 1920s, and how
Hoovers new departure aggravated the Great Depression by massive measures of interference.
The guilt for the Great Depression must, at long last, be lifted from the shoulders of the freemarket economy, and placed properly where it belongs: at the doors of politicians, bureaucrats,
and the mass of enlightened economists. And in any other depression, past or future, the
story will be the same. [Emphasis ours.]
Theres a line in Macbeth when the protagonist, beginning to understand the havoc he has caused,
starts to succumb to exhaustion:
I am in blood
Steppd in so far that, should I wade no more,
Returning were as tedious as go oer..

Precisely as Rothbard predicted, the politicians, bureaucrats and enlightened economists of the
euro zone are now coming to terms with their own terrible legacy in the form of Greece. Return,
or go on ? Either choice requires wading through an unconscionable deal of blood.
Mario Draghi at the ECB gave us the phrase whatever it takes. Now the policy chiefs of China
are running with it.
This is the most absurd global financial situation we can remember. There may have been wilder
outbreaks of mass fatuous behaviour as Adam Smith could easily have said, theres a great deal
of absurdity in a market. But we have long held that if you dont understand the rules of the game,
best not to play the game. Doing anything in credit markets today involves making a macro
market call that is fundamentally impossible. All debt markets have become speculative arenas
courtesy of central bank activity. Participating in stock markets today absolutely requires a margin
of safety (and a strong stomach). But value, we believe, does exist out there provided you have a
manager with the geographical flexibility and mandate to look for it. If your fund manager simply
tells you that stock markets are too expensive, hes looking in the wrong places; time to find a
new manager.
Tim Price is Director of Investment at PFP Wealth Management and co-manager of the VT Price Value
Portfolio (www.pricevaluepartners.com).