I am sure that you have all been watching the meltdown in the Chinese stock markets. I posted a blog (in the China Ad Nauseam section) on May 6 about the Chinese stock market, finishing up with the statement that “this is going to get really ugly.” It looks like the ugliness is here.
I claim no particular prescience here and I certainly wouldn’t want anyone to mistake my writings for investment advice. With this one, the only question was when it would blow, not if. My own investment abilities are largely encapsulated in the famous saying that “the graveyards of Wall Street are filled with the bodies of men who were right too soon.” But this is still better than being right too late.
I won’t bother to repeat all the statistics about the meltdown, which are readily available elsewhere. I just want to make two points.
The first is the implication of what is happening in China for asset prices around the world. The Chinese government is doing everything possible to prop up the market at this point: cutting interest rates, reducing reserve requirements, providing central bank liquidity to brokers, directing government entities to buy shares, organizing “private sector” (as if that phrase means anything in China) stabilization funds, restricting IPOs, loosening margin requirements, restricting short selling, and suspending share trading. By allowing investors to post real estate as collateral for margin loans, they have literally thrown the kitchen sink at the problem. And still it is not working. Sure, there are occasional up days, just like there were in 2008 and 2009 with the US markets when the US government was throwing spaghetti against the wall in the hope that something would stick, but the overall trend is relentlessly downward.
So the point is this: When the market turns, no one should assume that “the Fed has your back” nor should they count on a “Greenspan/Bernanke/Yellen put.” When fundamentals re-assert themselves and bubble sentiment disappears, no government – not the US, not Japan, not China – has proven to have the willingness or the ability to stop the bloodletting. Unless you are willing to believe that a government would endlessly print money and use it to buy shares and other risky assets directly – since any form of indirect action will still rely on the intermediation of investor sentiment – then the Fed most assuredly does not have your back.
The second point is probably even more disturbing. The Communist Party of China (“CPC”) has few claims to legitimacy, the most important of which is its alleged wise stewardship of the Chinese economy. The CPC has, quite correctly, judged that there is no material retail demand for democracy in China so long as the economic pie continues to grow. They have even seen that, so long as this condition is met, the Chinese population is willing to endure a large presence of corruption and a large absence of the rule of law, although the long-term dream of the CPC is to become a kind of Singapore writ large: a country where good governance and strong growth have anaesthetised any desire for political expression.
All of which makes the Chinese government’s role in the recent stock market bubble even more breathtakingly stupid. In the interest of making it easier to raise equity, hopefully to pay down some of the country’s enormous debt load, government officials and the government-controlled press have been pumping the stock market for over a year. This has created in the retail investor, very inexperienced and recently emerged from a world in which the Party attended to every need, an expectation that the government will always make things right. The CPC has therefore become a hostage to fortune: much of its credibility is tied up with a stock exchange over which it actually has little control. And unlike the last time the Chinese markets plunged in 2008, this time the damage and the loss of face will be much more widespread. All of this will also likely occur against a backdrop of a weakening economy, since the debt-fuelled stimulus used in 2008 and 2009 is no longer an option.
The CPC really only has one other claim to legitimacy. I think that we all know what this is – it is the last refuge of the scoundrel. If the stock market meltdown begins to undermine one support for the CPC, then we can reliably predict that it will try to crank up this other one. In fact, we are arguably already seeing this in the country’s increased aggressiveness in the South China Sea. As I have said before, the economic incompetence of the Chinese government would be the occasion for some heartfelt Schadenfreude if it weren’t for the collateral damage it will cause. If the loss of legitimacy leads the CPC into foreign adventures, then the term “collateral damage” may very well justify its military origin.
One of the reasons for my low blog production lately is that we are dead in the middle of the tennis season. And now I will probably make my boldest and most controversial statement: tennis is the greatest spectator sport in the world, as perfectly shown by the Wimbledon match last night between Richard Gasquet and Stan Wawrinka. There is no other major sport, with the exception of boxing, that features one-to-one combat the way that singles matches in tennis do. Combine this with a scoring system and a length of play that allow the momentum to shift dozens of times in the course of a match, and then add players who have to display speed, power, agility, creativity and instantaneous decisiveness in order to succeed. Finally, consider that tennis is a sport that requires the sustained mental concentration of golf with the physicality of football (soccer), and there is nothing that can compare. Opinions to the contrary? I am waiting for the comments.
What would a blog be without mention of Greece? I actually intend to write something longer on this subject soon, specifically about the fault lines the Greek crisis is revealing in Europe, but in the interim I can recommend an article entitled “Help Greece Leave the Euro” by MIT economist Eric Beinhocker in BloombergView. This article contains a lot of common sense and, among other things, points out the mistake in believing that entry into the Eurozone would allow Greece to overcome its fundamental problems of “enormous inefficiencies, corruption, capture by special interests and incompetent governance.” In other words, the Greece crisis is the result of another kind-hearted but soft-headed attempt to be helpful.
Roger Barris, London
I Wish I Had Said That (And Sometimes Not)….
“We are our choices,” as seen on a T-shirt worn by a girl in France, but it turns out to be a quote from French philosopher and author Jean-Paul Sartre. Which means that I have to modify my opinion of Sartre. Previously, I thought that he only said one intelligent thing – “Hell is other people” – but it turns out that he said two.
“The Mahmood family have a message for any young person attracted to Isis, they say there is no honour, no glory, no god at work in the cowardly massacre of holidaymakers,” from a statement made by the family of an English woman who travelled to Syria to marry an ISIS fighter, after she posted a statement on her blog praising the terrorist attacks in Tunisia
“Ideologies are not defeated with guns, they are defeated by better ideas. We will never be at war with Islam,” from President Barack Obama, who apparently believes that reason can be used to overcome irrational theocracy. This reminds me of the cocktail party scene from Manhattan when they are talking about a neo-Nazi rally. One of the partiers talks about a devastating editorial against the rally in the New York Times, while the Woody Allen character talks about the persuasive power of baseball bats
“Let our answer be this – America… in the assembly of nations, has invariably, though often fruitlessly, held forth to them the hand of honest friendship, of equal freedom, of generous reciprocity. She has… without a single exception, respected the independence of other nations, while asserting and maintaining her own. She has abstained from interference in the concerns of others, even when the conflict has been for principles to which she clings.
“Wherever the standard of freedom and independence has been or shall be unfurled, there will her heart, her benedictions and her prayers be. But she goes not abroad in search of monsters to destroy. She is the well-wisher to the freedom and independence of all. She is the champion and vindicator only of her own. She will recommend the general cause, by the countenance of her voice, and the benignant sympathy of her example.
“She well knows that by once enlisting under other banners than her own, were they even the banners of foreign independence, she would involve herself, beyond the power of extrication, in all the wars of interest and intrigue, of individual avarice, envy, and ambition, which assume the colors and usurp the standard of freedom. The fundamental maxims of her policy would insensibly change from liberty to force. The frontlet upon her brows would no longer beam with the ineffable splendor of freedom and independence; but in its stead would soon be substituted an imperial diadem, flashing in false and tarnished lustre the murky radiance of dominion and power. She might become the dictatress of the world: but she would be no longer the ruler of her own soul…”, the former Secretary of State John Quincy Adams in 1821, when the US was called upon to help the Greeks throw off the Ottoman Empire