Regular readers of this blog will note that Paul predicted the end of the world as we know it for 11 November 2015. The good thing about this prediction is that we will be here to observe it and can potentially take action to ameliorate it (unlike the prediction that the sun will burn up the Earth in 5 billion years, or that the run-away expansive force in our neck of the universe will ripe atoms apart in 100 billion years).
So the question is, what exactly is predicted and how sure can we be of the end. Certainly the market volatility of this week would have had many preppers bundling the family into the armored car and heading off to their bunker in the woods. The world stock markets lost 5 trillion USD in one day. Where did it go? Was every member of the human race suddenly is debt to the tune of 1000 USD? How much CO2 was pumped into the atmosphere by the cremation?
The fact is that while a lot seemed to happen, in fact very little did happen. The world of finance is based on valuing everything so that everything can be compared. But there is no text book that one can look up that gives you the value of anything. So markets are invented and the value of something simply becomes the cost to acquire it. If one day enough people wake up and decide that, like the plastic toy your kids desperately needed last week, they just don't want something any more, the cost to acquire it goes down. The toy itself is in no way changed, is not different, does nothing less. It is just able to be purchased for less. Of course, every sales person in the world knows that if you want to move some stock that no one buys, offer it at 20-50% less (preferably in big red letters). That is when the bargain hunters step in, or as the finance dudes call it, the level of support. This looks like an indication that the product is now undervalued, but it is not. It simply means that the bargain hunters have seen these cycles for a while, and they are confident that the price will rise again, at which point they can cash in, and maybe go on the lecture circuit.
Are the bargain hunters right? Not always; many do go bankrupt. However, unlike a medical trial, there is no mandatory reporting, so I could not tell you how often the bargain hunters are right, but using the line of reasoning based on Darwinism, enough must for them still to exist.
So what does this have to do with the price of rice in China?
China
China stock market has been in "freefall" for some of this week. This comes after several months of decline for Shanghai Composite Index. (A stock market index is a clever calculation to assess how a stock market is going. It is usually an aggregate of the values of indicative stocks traded at that market. The Dow Jones is a more meaningless form of index where every indicative stock is presumed to have one share. The All Ords is an attempt at an improvement, by taking the volume of shares times the price. This means, though that an usual day for one high volume stock, or a "two speed economy", makes it move a bit bizarrely.) In China there are many indices, but we westerners like the focus on the Shanghai Composite Index, perhaps because the stocks there are more related to the global economy, but probably also for a similar reason that we call the country China (probably from the Qin Dynasty); a lack of willingness to understand the whole nation. (Interestingly, the Arabs call us Ferengi because we look French, so probably are. So next time you talk about the Chinese, remember the Bastille.)
The Shanghai Composite index is down because that part of the Chinese economy is being valued less by financial traders. This will continue until bargain hunters step in and push it back up.
A quick glance at the chart on the right up to mid year would leave you the impression that something unsustainable is happening. Now we are back to the value for April of this year. It looks sharp, but consider you owned an house and it doubled in value over the last three years; you would be pretty happy. Suppose is doubled again in the last two months. You would say that was B*** S***, and you would be right. Now it as gone into free fall and is worth just double again. Most of us would say "Well, I have to live somewhere, and it is still worth twice the price three years ago, and it hasn't changed, so I'll stay". This is what the business people will be doing. The traders are the ones who are suffering - they are paying off their Rolls Royce on the idea that the growth would continue and then they could buy Bill Gates outright in 5 more years, but they have just too much cocaine in their blood stream.
There is a good article in the economist (The Great Fall of China) that makes the following good points:
- China is still mostly a command economy, so behaves differently to market economies, and even those behave bizarrely at times
- The property market in China dwarfs the equity market, and it is doing OK
- The Chinese economy is changing towards a service based economy, much like ours did earlier. Change = pain.
- The government are making errors. Errors are not uncommon in all governments, and even in ecclesiastical bodies
- The right choice versus the wrong choice is only known in hindsight.
So what does this mean for the man on the land?
Australia
Modern China is very good and very bad for China. it is very good because it has an enormous appetite for commodities, and we have lots of those. This means that money keeps coming into Australia out of proportion to the effort put in - iron was created by a supernova that seeded our corner of the galaxy. All we need to do is get the stuff onto boats. Unfortunately, lots of other countries saw that we were making money and built their own iron ore mines. The world is awash with ore now, so our price is down. (Still the same iron, just at a lower price.) We are a bit addicted to the old price, and to the mass of investment that happened during the mining boom. (Ask the US market traders how depressing life becomes when free cash is turned off.) We are now suffering withdrawal symptoms; like a crack addict, nothing else seems to matter except getting the fix again.
China is also very bad for Australia (and the rest of the first world) because most manufacturing jobs are heading there because of worker income disparities. It is even cheaper to get your frozen berries from half way across the world than from the NSW south coast. While this does make me worry (particularly given that I play my wargames in a macro economic fashion, and avoid any foreign dependencies), it is as relevant to my life right now as the Roman occupation was to Jesus: It is a bit dangerous, but there is little point stressing over something that I have so little control over.
It means that the future for Australia is in the services industry, at least until the standard of living rises in the emerging economies to make our workforce competitive.
So after a massive waffle, a prediction:
Prediction
In my view, stock and bond markets are currently valued on the level of money that the governments are willing to pump into them. I think this pumping will mostly cease around the world early next year if not before. (The Japanese will never cease doing it!) This will lead to a dampening of values - a correction of about 10%-20% between February and Easter.) I think this will become positive for people, because the traders will stop investing in companies that collect money from government pumps and resume investing in companies that actually do something, and to do something you need workers.
For me personally, that means that I have shifted my super into cash and mean to keep it that way until such time as I see a decent market shock, or until my birthday. (If it does not happen by then, I am in error.) However, I have a stock portfolio for my son and I am leaving that in place because the pain of capital gains tax overrides my good intentions. Better to have a day in the sun and a son who is 10% poorer than to spend s week in front of the computer stressing about the errors I am making.
At least I know what the 'clever cartoon' meant now ...
(sorry to be so thick)
Posted by: Thygocanberra | Monday, 31 August 2015 at 09:11 PM
As predicted, the question is not answered.
Posted by: Paul | Sunday, 30 August 2015 at 06:50 PM
Some quick answers:
1. Markets never were free. They have been freer than they are now, but like universities, they are now quasi-essential services and hence quite regulated. If you want a free market now, get a bit-coin and enjoy the ride!
2. Traders have always used borrowed money. Traders have always taken high risks for big returns. If it pays off twice in a row, they call it market practice. Investment companies that did something would not be investment companies. But stock markets do not work without them - they link buyers and sellers by taking on risk.
3. Central banks can keep printing free money, but they all agree that now is a good time to stop. This year I went into debt over 100% of my income. The family needed an important structural reform. I am expecting a long tern return on the investment. The bank has accepted my platitudes. While I do not welcome extra debt, austerity and educational failure were a worse option.
4. Derivatives are a worry as they cover vastly more of the world's value than exists. However, they serve as in interesting instrument. If they fire en masse, we will have another financial crisis ala 2009, but I don't think that will happen.
5. the twentieth century was the least violent century (in terms of premature death from violence) in history. Trends for the 21st century suggest it will be less violent again. Still no cause to stop prayer, but there are now fewer nations that can start World Wars, and less benefit from them. I discount a World War in my lifetime.
6. Most of the loss of value of last week has been recovered. It was not a correction because nothing fundamentally changed. China changes will continue and will shake the world. However, the big issue is the addiction of investment markets to free money. That is the major reform that is now due to happen. China blips will continue even after that reform.
After writing this blog, I did the best possible thing to ameliorate the risk. I walked the dog around the block, absorbed some sunshine and felt less stressed. Alas, the lack of the turn on my return undid some of the goodness.
Posted by: PythonMagus | Sunday, 30 August 2015 at 05:23 PM
As always, I admire Python's optimism.
I completely disagree that all that awaits us is a 10% correction.
I'm not sure that Python has included in his calculations;
1. The markets are no longer free or even markets. The extent of central bank manipulation (whether the Plunge Protection Team' or precious metals short selling based on paper where there is 120 times more paper gold than real gold) has totally distorted values. Shares and property is artificially and unsustainably over valued.
2. Python's 'traders' are trading on borrowed money, not their own. With zero interest rates it is all risk without consequence. There is no mechanism to encourage investment in companies that actually do something.
3. There is no ammunition left for the central banks. The Fed has deployed a zero interest rate policy for seven years and has already printed $3.7 trillion to boost markets and GDP growth. And U.S. debt to GDP is over 100 percent. Japan’s debt to GDP is at 230 percent and the Bank of Japan is printing 7 trillion yen ($58 billion) per month of QE. The European Central Bank is printing $67 billion a month and the European Union has negative interest rates. But all this easy money and deficit spending aren’t helping these economies move much off the flat line. All this money did not generate real economic growth or productivity. It only generated bubbles which burst. The central banks are so devoid of options now that they are talking about extending negative interest rates and the abolition of cash. This is the end of both any form of market economics and a civilisation that values liberty and choice. This is simply defeat, and a last ditch attempt to lock in the top 1% who own almost everything when social order disintegrates.
4. The levels of debt, and hidden beneath this derivative liabilities of many times the world's entire GDP, has grown to a level which can never be repaid. What happens when debt cannot be repaid? The debtor and the creditor both lose. The bigger the debt, the more catastrophic the consequences. The current world debt - private and public - is beyond belief. There is a simple question that anyone who does not believe there is going to be a crash needs to answer: how will the debt be repaid? I am waiting for an answer from any central bank, government and the Python and I have not received an answer.
5. Historically, economic crashes normally cause major wars. World Wars are themselves economic crashes with mass killing and widespread asset destruction thrown in. The signs of the desperation of Wall Street to start a big war with Russia, China or both are everywhere. Personally I think World War 3 is a really bad idea and I pray this will not happen. If it does, whoever starts to lose will throw nukes around and then you have an economic crash for 500 years.
6. We have already had the correction (last week). So Python's real hypothesis is that we will have two corrections, and the second one before Easter 2016.
Posted by: Paul | Sunday, 30 August 2015 at 04:48 PM