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The Reflation Game


The Chinese government is forcing deposit rates below inflation rates. If investors ignore risk, this forces them to speculate.

Chinese stocks are on fire. Take a look at some names and they are up 100% in last few days. The index relentlessly goes up. Once again, let's ask why.

The Chinese government is forcing deposit rates below inflation rates. If investors ignore risk, this forces them to speculate: they are losing value by earning interest on their "money" below inflation rates. They "rationally" take out money and buy things that act as hedges against inflation, like stocks.

This may be fine when the markets set rates since market participants allocate capital based on risk. In a market economy this would never happen.

But in a global economy in which one of the largest participants is a communist country that dictates capital flows and where central banks of other economies are becoming more socialistic as well, we can have a situation where the resulting imbalances can grow to monstrous proportions.

There are only two ends to this madness. Either markets are completely socialized where governments completely allocate capital and dictate to participants the right price for growth and risk, or the market will eventually eradicate the imbalances in a merciless way. But most likely a massive correction would be necessary for governments to complete their socialization process.

So as Chinese stocks fly just remember, it is not because the rally is rooted in better fundamentals, like companies earning more money through better production. It is the result of governments increasing imbalances.

Risk continues to grow.
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