Don't Mind If I Do...

With Bev unable to produce an article tonight because, I am told, Obama himself came to her house and did his best to inspire her and now she's super depressed and contemplating emigrating, I figured I'd share two thoughts I had today. :) This whole stock market thing has actually shaken up the political race in a big huge way that no one has yet put together, plus China is exposed.

Thought One. Here's the deal: believe it or not, people equate the stock market with the economy and prosperity. This is because it is the only visibly measurable proxy available for the economy. In other words, you can't see hiring, you can't see under-employment, you can't see lack of pay raises or lack of investment. You can see it in your neighborhood or your own life, but you can't see it nationwide. You can, however, see the stock market. And by and large, the stock market is seen as a relatively trustworthy number which represents the national economic situation because it tracks the health of the nation's biggest companies.

When the market crashes, people see this as an economic disaster. They see this not only as evidence of a bad economy that has hurt these companies, but as evidence of future bad times and sometimes even of the good times having been faked. Said differently, when the stock market crashes, people feel that something significantly disastrous has finally been exposed and they expect problems.

And to a large degree, they are right to do so. For one thing, when the market crashes, consumers feel a lot poorer and will stop spending. That is devastating for a consumer driven economy. For another, when the market crashes, these companies generally go into survival mode instead of expansion mode and that means an end to hiring and promotions and usually a round or two of layoffs and cutbacks. Again, that hurts the economy. Third, there is an "elan" factor (as the French might say) in that when times are bad, people simply aren't willing to take risks. That means fewer companies being formed, fewer new products being offered, and fewer new projects being started.

Now we get to the point...

Before the market crash, the Democrats could reasonably argue that they had turned the economy around. Sure, it took 8 years and it's the weakest recovery ever, but there was a sense last week that we were finally moving beyond the economic troubles we've had for a very long time. That meant that the economic issue was at worst a neutral for them. But with the market crashing... and crashing in such a massive manner, people will now feel that the economy is headed straight back into recession if not depression... less hiring, lower housing values, less opportunity. They will think that the economic policies current in place have "failed" and they will turn away from the party that has "failed" them, and that is the party of the President.

I would argue that this massive pullback will have the effect of driving the final nail in the Democratic coffin, no matter who they choose. Barring some miraculous turn around early next year, the public will now decide to give the other guy the chance to fix things... and that means a Republican president.

What will be interesting now will be watching to see if any of the Democrats who were starting to circle the wounded Hillary still jump in or if they all read the tea leaves and bow out.

Thought Two. My second thought is this. I've been saying for some time now that China is a paper tiger. Their economy is much weaker than conventional wisdom will have you believe, their currency has risen too high for them to continue their growth, their demographics are a nightmare unfolding, etc. Well, people want to believe the opposite because they love to live in fear. Some have even gone so far as to invent a fake measure of economic activity to claim that China's economy is larger than ours even though it is only about 60% of ours at best.

Well, there was an interesting analysis by Merill Lynch the other day which compared the value of the stock exchanges of every nation out there. See the chart below where each country's size is represented by the value of its stock markets.

Notice that ours is first by a mile with 52% of the world's wealth ($19 trillion). Can you really doubt that's true? I would hope not. Then came Japan ($3 trillion), England ($2.7 trillion), France ($1.3 trillion) and Germany ($1.2 trillion)... France being ahead of Germany actually makes sense when you realize that France consists of multinational companies and Germany is built around "mittelstand" companies (medium-size closely-held businesses). China was 8th at $889 billion. What does this tell us? It tells us that we remain ultra-dominant, something reinforced in dozens of way. It further tells us that China's economy may appear strong, but it lacks the underlying wealth to back up the supposed economic story. This is a bit like seeing someone who appears to own a mansion but upon closer inspection has no furniture and lives paycheck to paycheck. Consider that we have the wealth to buy China 20 times over.

And this isn't the only proof of this. The exchange rate which China has devalued twice now in two weeks also tells us that China is worth only about 60% of what we are as an economy. And the fact they had to devalue tells us that their growth story is fraudulent. Add to this their lack of advanced technology in almost every field, their lack of powerful multinational companies, their inability to build a competitive military despite a decade of huge spending and their seeming impotence against "tiny" countries like Japan and Britain, and you are starting to get a glimpse of the reality of the China story.

So forget China ever being our masters. And I would say bet heavily against the Democrats winning the White House.

Thoughts?