“In most of the
cities and towns of this country, this Wall Street panic will have no effect.”
- Paul Block, editorial, November 15, 1929.
What a weight of
global expectation hangs on the shoulders of the Chinese and Indian peasantry.
With US service industries contracting at their fastest pace since 2001, with
UK consumer confidence falling to its lowest level since 2004, and with a
strong euro and Jerome Kerviel hampering the euro zone, just who is going to be
picking up all the slack ? Answer: the likes of Chen Zhi, a farm worker in Zhejiang
Province whom we just invented. Admittedly, Mr. Chen’s earnings of roughly one
dollar per day are unlikely to offset US household spending of c. $9 trillion –
he’ll just have to work that much harder to afford all those yachts, cars,
condominiums, lattes, HDTVs and handbags that will otherwise go unsold this
year. The good folk at LongOrShortCapital
express the sentiment slightly more brutally (and also hint at the late stage
frothiness of the Chinese stock market) as follows:
“I get it. China
is big. There are a lot of people there and they are increasingly buying stuff.
So when you present an investment to me, it’s not useful to tell me how many
people there are in China. You see, I know that already. That’s why I own some
Chinese companies already, before you came in here. So when I ask you why I
should pay 50x earnings for this company, it’s singularly unhelpful to start
off by saying, “Did you know there are a billion people in China ?” It doesn’t
make me want to buy the stock, it makes me want to punch you in the mouth or
“decouple” your head from your torso.
“I’ll tell you
what China also has. A BILLION POOR PEOPLE. A whole billion of them.. all
looking to buy no things with their no money. Stick that in your model and
regress it.”
On the topic of
Chinese market overvaluation, a comparison with previous market peaks and
collapses is instructive (see enclosed PDF).
As Patrick
Perret-Green points out, the similarity in chart patterns between these markets
is striking,
“especially when
they finally peak, fall sharply, bounce significantly and then embark on the 3rd
wave death plunge. Shanghai looks to have embarked on that.”
Which is not to
say that the Chinese economy will necessarily flounder even if its embryonic
and foamy stock market succumbs to the law of gravity. In fact, the more likely
“decoupling” this year will not be Asian markets mysteriously holding their own
in the face of an Anglo-Saxon economic slowdown; rather, it will be the Chinese
economy continuing to grow well by comparison to the West, even if its own
stock market collapses. This is still a nominally Communist country, after all.
And no matter
what happens in Asia this year, its long term prospects look an awful lot more
attractive than those of the Anglo-Saxon economies. Woe to a developed market
economy when both its property market and its financial services sector
start to sink beneath the water line “As two spent swimmers that do cling
together / And choke their art”. Notwithstanding last week’s continued equity
market volatility, western shareholders continue to operate in baffled denial
of what the global financial crisis means for the banking system: the colossal
unwinding of a decade’s uncontrolled leverage; a critical (voluntary)
retrenchment of lending; intrusive (involuntary) regulatory oversight of a
sector that is incapable of policing itself; in short, the key driver of
economic activity in the western world has gone ex-growth for the foreseeable
future. That is without further revelations of bad debts, malfeasance,
connivance at misselling, and worse. We are entering a New Era for finance and
nobody can say yet what it will look like with any confidence, but it doesn’t
look like being terribly expansionist.
John Brooks, in
his excellent study of 1920s and 1930s North American markets, ‘Once in
Golconda: a true drama of Wall Street 1920-1938’ (1999, John Wiley) cites John
Maynard Keynes writing of what happens “to respectable and responsible people
in times of excessive speculation”:
“Amidst the
rapid fluctuation of his fortunes, [the businessman] loses his conservative
instincts, and begins to think more of the large gains of the moment than of
the lesser, but permanent, profits of normal business. The welfare of his
enterprise in the relatively distant future weighs less with him than before,
and thoughts are excited of a quick fortune and clearing out. His excessive
gains have come to him unsought and without fault or design on his part, but
once acquired he does not lightly surrender them.. With such impulses so
placed, the businessman is not free from a suppressed uneasiness. In his heart
he loses his former self-confidence in his relation to society, in his utility
and necessity in the economic scheme.. He of all men and classes most
respectable, praiseworthy, and necessary.. was now to become, and know himself
half guilty, a profiteer.”
The roaring
twenties ended with the sudden demise of a sub-set of the US population who
believed they had stumbled upon a formula for instant wealth. The gaudy boom of
the naughty noughties has ended with the sudden demise of an even more limited
sub-set of the global corporate structure – trading-oriented banks – whose
executives possessed more confidence than competence in their assessment of
highly complex and fundamentally flawed financial instruments. The crowning
irony is that while hedge funds have long been pilloried for supposedly piling
up risks beyond all compass, and have been consistently harried by traditional
fund managers urging all forms of oversight and regulation upon them, the real
systemic risks were being taken, and hugely underestimated, by banks – entities
in the full view of the regulators. Quis
custodiet ipsos custodes ? It is perhaps not a pure coincidence that those
assets now generally rising in price – gold, oil, soft commodities – can be easily
priced and, even more importantly, easily understood.
Download Can_Chen_Zhi_save_the_world.pdf
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