Daily Agenda: Another Day, More Losses for Chinese Stocks

The bloodletting continued for equities in China today, with the benchmark Shanghai Composite index closing down by nearly 1.7 percent. Prior to the start of trading, an assurance by the China Securities Regulatory Commission (CSRC) that it would continue to buy shares through its investment vehicle. A fresh 50 billion yuan ($8.05 billion) liquidity injection by the People’s Bank of China also encouraged bullish traders but the resulting rally faded. On one hand, regulatory and policy leaders appear powerless in the face of selling pressure after they took it upon themselves to attempt to stall a market collapse. On the other hand, with markets up significantly for the year despite the recent pullback, the question of whether a further rout presents true economic risk or merely wounded pride is open to debate. As has been the case in recent weeks, the announcement today by a CSRC spokesperson zeroed in on “malicious short-selling,” saying that transgressors would face reprisals.

BP misses targets.London–based energy giant BP today reported second-quarter earnings that fell short of analysts’ forecasts, including a $9.8 billion charge relating to settlements with U.S. regulators over the Deepwater Horizon disaster in the Gulf of Mexico. Earnings season has proven difficult for an energy sector reeling fromdeclining oil prices. According to data provider Factset, U.S. consensus forecasts among analysts are for energy-company earnings to decline by 54 percent year-over-year for the period.

RSA stock soars on back of takeover rumor.In a signal that the M&A boom in the insurance industry knows no borders, reports that Zurich Insurance is mulling a bid for U.K.–headquartered rival RSA Insurance Group sent shares of the potential target up by over 11 percent in trading this morning. The Swiss company confirmed that it is considering the offer, which would allow it, the third-largest European insurer, inroads into markets beyond the U.K. including Canada and Scandinavia.

Volkswagen largest global car maker by volume.German auto manufacturer Volkswagenreached a corporate goal by outselling Toyota Motor Corp. with 5.04 million vehicle sales for the first half of the year versus the 5.02 million achieved by their Japanese competitor, according to data released today. Strong gains in the company’s European market share offset cooling demand in China.

NATO calls emergency session.In only the fifth such summit in the organization’s 66-year history, NATO leaders gathered today in Brussels to discuss security for memberTurkeyin the face of the threat ofIslamic Statetroops. The move by Turkey to call for a meeting under emergency provisions of the organization’s charter underscores the rapid deterioration of the security situation on the country’s southern borders.

Consultant advises clients to withdraw from Carlyle fund. According to media reports influential institutional consultant Cliffwater has advised clients to withdraw investments withCarlyle Group’s Claren Road Asset Managementhedge fund divisions. The firm, which oversees nearly $5 billion, posted a 10 percent loss last year in its flagship fund.

Portfolio Perspective: How the Credit Boom Helps Keep the Economy Slow—Brian Reynolds, New Albion Partners

The stock market has a little more work to do before moving onto new highs. We know that those new highs will come, however, as cities and towns keep putting more money into their pensions to meet their surging liabilities. In most cases, those extra flows are coming in the form of higher local taxes. At the margin, those higher levies help to keep the economy growing at a slower than normal pace for an economic expansion. As most institutional equity investors are fundamentalists, that subpar growth has helped to keep them underweighted in equities and ready to sell at the drop of a hat at the first signs of panic. That’s been a major factor in the underperformance of institutions during this credit-led bull market.

Sometimes those increased pension flows come because of a reduction in services, though, which not only helps keep the economy slow but is often just plain sad. In 2013, we detailed how the Chicago police were no longer responding to minor crimes unless they were “in progress.” Their massive pension deficit, and the need to service it, was a contributing factor in the cuts. On Monday, one of our sharp-eyed colleagues passed along a story about how Oakland is heading down the same path. Last week, that city laid off 80 police officers to help close a $30 million budget deficit. Starting next month, they will no longer respond to thefts and vehicle burglaries, among other crimes. Citizens can file online reports for insurance purposes, though there won’t be any follow-up investigations. Courts have ruled that pension payments have priority, so Oakland is going to continue making their $100 million — and growing — annual pension payment, which represent a stunning 10 percent of city revenues.

A few years ago,former Fed Chair Paul Volckerled a blue-ribbon committee that investigated the public-pension issue. They found what they estimated to be a $3 trillion gap. One of their conclusions being that they were only able to estimate the problem because it is so hard to get good pension data. Corporations must report their pensions according to GAAP, but public pensions view themselves as sovereign entities, so they report what they feel like reporting, which is often little. This gap is a reason why this credit boom is so intense, as pensions keep putting money into credit to try to fill the gap, even though the U.S. credit market is only $7 trillion in size.

In researching the Oakland story, however, we did find a study that looked at most California cities and towns and how stressed their pension systems are making many of them. Keep in mind that this is only for local pension contributions. Many cities and towns rely on their county for public safety. Those contributions aren’t part of this study, nor are state contributions, but it gives an idea of how money is being diverted to pensions from GDP-boosting hiring of more police, fire and education personnel.

Fortunately, we don’t need to know the exact pension flow numbers in order to determine that the credit boom is likely to continue and intensify, generating more financial engineering designed to lift share prices, but at the cost of a healthy economy.

布莱恩•雷诺兹是首席market strategist forNew Albion Partnersin New York.