The Secrets of 'The Big Short'
Last night, I watched The Big Short. I carefully read Xiao Gang’s speech at the “2016 National Securities and Futures Regulatory Work Conference” and came across news that Shenzhen housing prices had doubled in 2015. I reached one conclusion: financial crises have never been far from us.
In The Big Short, there’s a scene from March 4, 2008, just before the subprime mortgage crisis hit. Mark Baum and Bruce Miller discuss the state of the economy. As Bear Stearns’ stock price plummets and Baum gives his speech, the audience starts leaving the room to manage their own accounts. The market is ruthless. People are driven by fear and greed. As the structure begins to collapse, everyone scrambles to protect themselves, leaving no one interested in Alan Greenspan’s keynote on the framework of the U.S. economy.
On January 16, 2016, for many Chinese investors, Xiao Gang’s speech became more significant than the opening of the Asian Infrastructure Investment Bank. In over 16,000 words, Xiao opened by addressing the volatility in the Chinese stock market during the second half of 2015. It was an attempt at introspection, but not deep enough. Xiao spent much of the speech reflecting on regulation—or the lack thereof. However, much of the China Securities Regulatory Commission’s (CSRC) energy in 2015 had been spent intervening in the market rather than regulating it. The CSRC’s actions were often erratic.
Two details from the speech stood out. When discussing the relationship between the virtual economy and the real economy, Xiao focused on the nature of stocks and the stock market. At the highest-level securities meeting in China, the chairman of the CSRC had to explain such basic concepts to other departments. It raises the question: was the chairman only recently enlightened about the essence of stocks, or was this an attempt to educate his management team? The media often talks about improving investor education in China, but perhaps Xiao knew that the ones who most needed education were his own subordinates.
When addressing the suspension of private equity companies from listing, Xiao mentioned that the PE/VC financing model seemed like “playing for self-entertainment.” Currently, China’s A-share market does serve the real economy, but mostly for state-owned shares or well-established private enterprises. Wouldn’t it be better if some mature venture capital institutions could use financing to fund innovative or future-focused business models? Such companies represent trends that drive innovation and development.
In 2015, I paid little attention to the real estate market. Yesterday, I stumbled upon a news story about Shenzhen sales offices setting up emergency medical stations, which led me to realize that housing prices there had doubled in 2015. Meanwhile, wage levels had not kept pace—the national average increase was just about 6%. Stimulated by the “March 30 Policy,” the housing market became a paradise for speculators. But are homebuyers really as financially capable as they appear, or are they like the stripper in The Big Short who was simultaneously paying mortgages on five houses and a condo? Perhaps only the banks know the truth.
The housing market has become a game of “greater fool theory,” where everyone thinks they’re the smartest and can find the next person to take over. The 2008 U.S. subprime mortgage crisis and the 2015 Chinese stock market crash have proven once again: when the market collapses, no one is spared.
