Forced HODLers vs Forced Buyers

Big Brothers and Big Sisters

“Markets stop panicking when policy makers start panicking” - someone smart

We like to keep things simple around here at Shrubstack.

When it comes to China, we identified that the pain threshold for Chinese policy makers to act is if HSI drops 15,000 (here and here). Therefore their reaction function has now been solidified as such:

“ HSI BELOW 15,000 —> ACT!!!”

Things got so serious, that Xi is meeting the Chinese Regulators to be briefed on the current stock market rout. Now this is so simple that even a shrub can figure it out: Xi is not one to care about the stock market usually (see history of crack-downs of big tech) and so far it was Premier Li who was handling it. So for Xi to get involved, that means we reached “Boss Level Panic Mode”. And a “Boss Level Panic Mode” usually means a pretty good short squeeze to follow. No wonder HSI is +4% today. That’s a +8% buffer from the “CCP’s RED LINE” of HSI 15,000.

I think they’ll manage to defend it. The main question is how high it can go once they defend it. As we have established, the American Tamagotchi wants to create “Wealthflation” whereas the Chinese Tamagotchi (ie reaction function) just wants to stop a crisis. They have yet to embrace Yellen’s Yolo nature, for better or for worse.

Which brings me to an interesting observation.

The current measures taken by the Chinese Regulators to arrest the stock market rout involve banning certain short sales, preventing long sales from certain managers, “encouraging” buying from other managers etc etc Basically, the regulators are trying to turn everyone into a HODLer, whether they like it or not. A “Forced HODLer” if you will.

The irony of course, is that with the Chinese Stock Market near multi-decade lows, this may turn out to be a good thing! i.e. Big Brother may actually help these panicky traders to make money in the end by forcing to hold on through the lows (Or they may get Gazprom-ed. But that’s a different story).

Cross to the other side of the Pacific Ocean and something similar is happening but unbeknownst to a larger degree to the participants:

Big Sister Yellen is “encouraging” everyone into stocks, but this time at all-time-highs! To be clear, the 401k contribution system is a financial superpower that creates Wealthflation (and we Europoors are deeply jealous of it). But the Passive Flows are just that: Passive and “Forced” into the Market, for better or for worse.

Now look at this wild chart below:

• From 1990 to 2020, the US and the HK markets were almost synchronized! They were both up 10x in that period.

• From 2020 onwards, a significant decoupling took place: The US market almost doubled since 2020 whereas the HK almost halved. That changes the maths like this: from 1990 to 2024, the US market is up 15x whereas the HK market is up 6x ! This is an insane outperformance that erased in just 3 years a synchronicity that took place over 3 decades!

I don’t need to explain why this happened: De-Globalization, Trump, Covid, Xi, Putin, FOGG (“Fear of Getting Gazpromed”). You name it.

And to be honest, these are difficult trends to change and it would be foolish to bet on that. But that’s not what this piece is about. So back to the question:

Will the Chinese Forced HODLers be better off than the American Forced Buyers?

I don’t know. All I know is that buying at multi-decade lows when policy makers panic is usually an ok entry, as long as they remember that the “safe word” is “HSI 15,000”. Otherwise, run.

Disclaimer:

This isn’t financial advice. This is the equivalent of reading MAD magazine but for finance but worse: This is the trading blog of a shrub.

Don’t be Stupid. Seriously. How many times do I have to repeat this ….