The stock market wakes up to global risk

Surprisingly–to me, at least–the market has finally woken up to global economic risks.

The signs were there before: commodity prices tanking, emerging markets in heavy decline, state interventions in Greece and China, accusations of broad corruption in places like Brazil.

The question investors will be asking themselves over the weekend is: is this the beginning of a bear market or just a brief pullback to be bought into?

I’ll spoil the suspense: no one knows. Only in hindsight is it clear when bear markets begin versus temporary pullbacks.

What I do know is that a significant pullback or a bigger bear market are both opportunities for investors. During such times, psychology takes over as some people panic, and that means something is being sold too cheaply.

To benefit from such situations, the goal is not to pick the absolute bottom in the stock market or a particular stock, but to know what specific securities are worth–after arduous research–and then to buy accordingly.

When people ask me if such pullbacks scare me, I always say “No!”  Such times are great opportunities to benefit from the panic of others.

In other words, I’m excited to go shopping.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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The stock market wakes up to global risk

China’s transition

Outstanding article on China from Stratfor.  The image that many have of China’s economic growth and political freedom are at odds with the facts.  This article does a great job of showing where things have been, where they are now, and where they may be going.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China’s transition

China is looking increasingly desperate

Paper was first invented in China. So was paper money, and thus runaway inflation. It is interesting to see China return to its historical roots this week with the significant devaluation of its currency, the renminbi.  

China’s actions make it look desperate. The Chinese economy is slowing down, perhaps more rapidly than the communist party in China would like. They have tried spurring stock market growth, and then propping up the stock market to prevent it from falling. Now, they are devaluing the currency to try to get the economy jump-started.

Real economic growth comes from productivity, not from printing currency, redistributing wealth, spurring stock market speculation, or punishing those profiting from stocks falling. All of China’s, or Europe’s, or America’s, or Japan’s attempts to get growth from someplace other than productivity (which isn’t in the government’s wheelhouse) are doomed to failure.

Devaluing the renminbi is an attempt to make Chinese goods cheaper for foreigners to buy. That “works” as long as no other country decides to devalue their currency, too. And, it assumes that market participants are too stupid to adjust prices based on currency manipulation, which history and academic research has been shown not to be the case.

It should come as little surprise that communist dictators misunderstand how a free market works. China is running the risk of not only disrupting the world economy with its actions, but also definitely proving to Chinese people that they don’t know what they are doing. The risks and the results are real, and will be felt worldwide.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China is looking increasingly desperate

China and Greece: sound and fury signifying nothing?

Just a couple of weeks ago, you couldn’t look at the news without seeing dire predictions about Greece leaving the European Union or China’s stock market tanking. Now, it seems like these perils have passed and there’s nothing to worry about. That’s unlikely the case.

I’m an optimist by nature, and I tend to think things will work out in the long run. That does not, however, make me a Pollyanna. I don’t think that problems in Greece or China are the end of the world. But, I also think it’s naive to think that such issues were insubstantial and likely to fade with so little hardship.

Greece still can’t pay back its loans, and they are still demonstrating little desire to reform. European lenders still want their loans repaid, and seem unlikely to grant Greece forgiveness for large amounts of debt. In other words, the situation hasn’t really changed, and therefore still requires careful observation.

China’s stock market did not tank because of some bizarre conspiracy. Like all markets that have been artificially pumped up, it must necessarily deflate. Any attempts to defy that natural process are doomed to fail one way or the other. The underlying issue of China’s economy slowing down has not changed. The political and economic consequences are non-trivial and demand watching.

Markets have a natural ebb and flow, just like nature. And, just like nature, those ebbs and flows are largely unpredictable over the short term. That doesn’t mean you can’t see broader themes evolving. It was easy to see that the tech bubble of the late 1990’s would pop, but impossible to predict when. It was easy to see that the housing market of the mid 2000’s would burst, but impossible to predict precisely when.

Greece and China have real problems that will eventually reverberate throughout the global economy. I don’t know precisely when these issues will loom large, but I do know they haven’t been resolved. This is not a good time to ignore those risks.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China and Greece: sound and fury signifying nothing?

Athena Capital Client Letter

Athena Capital’s latest client letter is available.  In it, I cover client investment performance, what I think is happening with the economy and markets, and an after action report on one of our successful investments: Ryanair.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Athena Capital Client Letter

China: more important than Greece

While most of the world was overly focused on Greece, bigger things were afoot in China.

First, the Chinese economy is the 2nd largest in the world. What happens in China matters for the world economy. In contrast, Greece’s economy is but 2% of the European economy. Although Greece’s problems are likely to become broader problems in Portugal, Spain, Italy and France, by itself Greece doesn’t have a big impact on the world economy.

Second, China’s economy is still essentially run by a communist central planning authority. They are giving some free market principles a try, but they have maintained a firm grip on the most important things. How they react to the inevitable ups and downs any economy faces is important for understanding how the world economy will do in coming years and decades.

Over the last year, the Chinese government has been showing they aren’t ready for prime time. First, they have reacted to economic slowing–inevitable in any economic system, whether capitalistic, communistic, socialistic, etc.–with attempts to prop things up. As usual, such attempts look good in the short term but fail over time. Governments just aren’t any good at allocating capital.

Second, they are misreading market reactions and have basically lost their cool. After trying to use free markets to boost their economy, they are now trying to prevent markets from clearing by forcing large stockholders to hold instead of selling. There is nothing that spooks markets more than a government’s attempts to force the outcome they want instead of the natural equilibrium that would otherwise exist.

This a classic reversal of cause and effect. Stock markets, like all markets, react to news by adjusting prices to make supply and demand match at market clearing prices. Any attempt to prevent that mechanism from operating in the short term leads to disastrous effects in the long run. Markets are effects, not causes, contrary to how many politicians and historians like to interpret the facts.

The more the Chinese government continues to overreact and try controlling outcomes, the more world markets will overreact as a result. Such impacts will be much worse than letting markets find equilibrium. Just witness commodity price swings in reaction to Chinese intervention and you can get a flavor for how nasty things can get. 

I think what is going on in China should be watched much more closely than what is happening in Greece. The stakes and consequences are much greater.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China: more important than Greece

It’s all Greek to me

It’s been five years since I’ve written about Greece. Given the market’s current infatuation with that subject, it’s not a bad time to revisit the topic.

To recap: Greece borrowed a lot of money that it can’t currently repay (some would say: can never repay). The Greek government, I’ve read, pays out three euros for every one they take in as tax, so the basic math is unsustainable.

Five years ago, many thought that Greece defaulting would cause a cataclysmic market failure that would lead to a domino effect in multiple markets. At the time, the recency of the 2008-2009 economic collapse made this possibility seem very real and scary. So, Greece was bailed out and given more time to work out its issues.

Greece has not made much headway. When people get used to not paying taxes, they don’t eagerly jump into paying them again. When people get used to receiving government checks, they don’t willingly stop cashing them just because they’ve heard the government doesn’t really have the money. That’s just how most people function.

When a lender lends money, both the lender and the borrower end up with some responsibility. Greece is clearly responsible for paying off its debts. At the same time, the lenders are responsible for lending money to a country that–without massive structural changes–can’t repay those loans. Both Greece and its lender may be indignant, but they’ve both played a part in creating the current crisis.

The basic math says that Greece can’t repay its debts, and that it shouldn’t get additional loans until it reasonably commits to specific measures that will enable it to sustainably pay back its loans. The negotiations between Greece and its lenders that keep failing are about which side has to give up the most.

Greece’s leader was recently elected to make European lenders carry more of the responsibility. He has carried through on his campaign promises by defaulting on loans in order to force a better deal. He has also put Europe’s terms to the test by putting them up for a popular vote on Sunday. I don’t think anyone knows the outcome of that vote.

What is different now from five years ago? There’s been five years for people to alter contracts, make contingency plans, and just get mentally prepared for Greece to default and to potentially leave the euro currency, European Union or the European Community. The damage now wouldn’t be as great as it was five years ago.

The scarier prospect is that Portugal, Spain, Italy, and perhaps even France may end up in the same situation several years from now (they all have structural problems that haven’t been fixed, though none as bad as Greece), and that the European currency/Union/Community could completely come apart. This would not be the end of the world, but it would create a lot of inefficiencies that would slow global growth permanently.

There is always some possibility of a greater market contagion. For example, suppose some bank or government or hedge fund owns a LOT of securities that head south if Greece defaults or dumps Europe. Suppose also that they bought those securities with short term debt and they have to sell other securities to repay their loans, thus forcing down the prices of other, non-Greece related securities. Then, those price declines lead other indebted securities holders to have to sell their securities, etc. You get the picture. I don’t think that is likely, but market contagions have occurred in the past on just such similar lines.

The more important point of Greece’s situation is that governments and people aren’t above the laws of economics. They may not like economic laws, but they can no more be avoided than the laws of physics, chemistry, etc. 

Governments, just like people, can’t spend more money than they take in. 1) Printing money 2) shifting budgets, 3) giving away other people’s money doesn’t create economic growth. Only production creates growth, and governments aren’t productive. The laws of economics will hold up whether anyone likes it or not. The sooner people face that reality, the sooner we can all go back to being productive and growing again.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

It’s all Greek to me