Global Markets Addicted to Central Bank and Government Manipulation

Video above--Europe Stocks Rebound as Chinese Selloff Halts--August 27, 2015: European stocks joined a global relief rally as Chinese shares snapped a five-day losing streak. Shares rose in Europe and Asia after the biggest advance in U.S. stocks in four years on Wednesday helped restore some appetite for riskier assets. Developing-nation currencies rebounded from a record low and a surge in the last hour of trading in Shanghai sent Chinese stocks to their biggest gains in seven weeks. 

The REAL Liquidity Trap: Global Markets are now addicted to Central Banks and Governments intervening and manipulating everything from interest rates to currencies to equities (stocks).

Want proof?

Seeking Alpha: "Shares across the globe are skyrocketing after Wall Street cracked a six-day losing streak with its best rally in nearly four years. With momentum turning to the upside, investors seem to be covering their positions, while long-term bulls snap up perceived bargains. The rebound is also being attributed to falling expectations the Fed will soon raise interest rates. On Wednesday, NY Fed President William Dudley said a September hike seemed "less compelling" given recent global economic uncertainty."

China Intervened Today to Shore Up Stocks Ahead of Military Parade - Bloomberg"China’s government resumed its intervention in the stock market on Thursday and has been cutting holdings of U.S. Treasuries this month to support the yuan, according to people familiar with the matter. Authorities want to stabilize equities before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, said two of the people, who asked not to be identified because the move wasn’t publicly announced. Treasury sales allow policy makers to raise dollars needed to bolster the yuan after a shock devaluation two weeks ago, according to different people familiar with the matter. China revived its equity purchases after the government’s absence from the market earlier this week contributed to the biggest two-day selloff since 1996. Under a new exchange-rate regime announced Aug. 11, the central bank relies on intervention to manage the yuan instead of its daily fixing. China’s surprise policy shifts have jolted markets worldwide as investors struggle to gauge their impact on the world’s second-largest economy."

China’s Stocks Surge in Late Trading to Halt Five-Day Plunge - Bloomberg"Stocks failed to sustain gains on Wednesday after the central bank cut interest rates and reduced the amount of required reserves for banks. The index tumbled 42 percent from its mid-June peak through Wednesday to erase more than $5 trillion of value as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook. Stocks on mainland bourses trade at a median 49 times reported earnings, according to data compiled by Bloomberg. That’s the most among the 10 largest markets and more than three times the 18 multiple for the Standard & Poor’s 500 Index."

Forget the headlines--nothing has changed from a few days ago--governments and central banks are intervening and actively manipulating global markets, even in secret, unannounced ways (see China stories above). This never ends well.

But when will it end? Probably when a sufficient number of market investors lose confidence in central banks' and governments' ability or willingness to continue to manipulate. Right now, enough "market investors" are still willing to be "market speculators" -- in effect placing casino-like bets on future "Fed policy" and "Chinese government manipulation." How high will valuations go in this giant global Ponzi-like scheme?

The "smart money" in China has already abandoned Chinese stock markets. Wealthy Chinese are moving money out of China. But the Chinese masses, and the rest of the world, are still "playing along" for now. When will expectations and speculations meet reality?

Domain Mondo archive