Monday, August 24, 2015

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?

23 comments:

Anthony said...

The failure of the economy doesn't bode well for the Dems, but I don't underestimate the ability of the Republicans to miss an opportunity to miss an opportunity.

When Mitt Romney declared to a bunch of fat cats behind closed doors that the poor were dust beneath his feet, quite a few high profile voices in the party defended his statement. When choosing between incompetent and hostile voters are more likely to go with incompetent.

However, given the tone the Donald has set, I judge such bridge burning unlikely this time around.

Anthony said...

In a contest between humans making a sincere effort to connect with other humans, I don't think Hillary Clinton is going to beat anybody despite the fact she has been dead broke recently :) .

tryanmax said...

I just hope the GOP candidates have the wherewithal to label Obama's recovery as phony and take down the ludicrous notion of a jobless recovery, and then, of course, tie those economic policies to the Democrats running.

"Obama faked the recovery, and Hillary, Martin, Bernie, and all the rest of them would've done the same -- because they don't get that a real economy is built on jobs!" (hold for applause)

Critch said...

I was a stock/commodity broker with Dean Witter Reynolds in October of 1987 when the DJIA fell 500 points from a high of 2200...22% drop,,it took place over a few days,,,on the second day of the fall myself and two other brokers showed up to work in flak jackets and helmets that we stenciled COMMANDO BROKER across the front. Wasn't much you could do but tell people to stay calm and hang in there...which they did and it worked..this drop is different from that one...recovery is going to be slow.

But hey, Crazy Uncle Joe and Fa-ka-hontas are gonna save the Dims..

BevfromNYC said...

Obama himself came to her house and did his best to inspire her and now she's super depressed and contemplating emigrating.

OMG, Andrew, how did you know?? That is exactly what happened!

Oh, and yeah, it looks like Joe Gaff-I-lot will be saving the Democrats from themselves. That is really sad that he is their best hope. Or maybe just the sacrificial lamb. And when did Liz Warren get so much power in the party?? She won one Senate race from a carpet bagging incumbent.

AndrewPrice said...

Anthony, Sadly, that is true. The GOP is very tone deaf when it comes to voters (which is why it's no coincidence that our platform is meaningless fringe stuff) and they are therefore very capable of snatching defeat from the jaws of victory.

We'll see how they do this time. Compared to Trump, they are all silver tongued, but that can change once the clown act ends.

AndrewPrice said...

tryanmax, I hope so. Even before this market crash, the economy wasn't offering much to average people. The GOP needs to hang the lack of jobs (and especially good jobs) on the Democrats. Unfortunately, they are wasting time bashing immigrants and Megyn Kelly.

AndrewPrice said...

Critch, If there's one thing I've learned, it's to just close your eyes and let it ride at moments like this. If you start trying to move money in and out, you will only make it all a lot worse.

AndrewPrice said...

Bev, I knew it! :D

I just can't believe anyone would view Biden as a plausible candidate. The man truly is a fool. I seriously hope they run him.

BevfromNYC said...

Andrew and Critch - Yeah, I agree. Just ride the wave. I am more concerned about China calling in our loans. Though I think we should just give them the state of California/Jerry Brown and al. and maybe throw in Detroit.

Critch said...

I pulled all of my 401K out of the market about 3 weeks ago, and put it in cash, I'm waiting for a bottom....I may go back in with stocks that pay dividends instead of just growth..where I was for 30 years. I'm too old to make it back and I need the income, or will when I retire.

What could China do if we didn't pay them? We used to say that if you owe the bank $10 million, you own the bank...we own China...

AndrewPrice said...

Critch, I pulled a third of my money out two days before thing started going down. I did it because I know that September always brings an ugly decline so I wanted to get ready for that and then I go back in November. I wish I'd pulled the rest too, but oh well, that's life.

I agree on China. Bev and Critch, the problem with all those debts is that they are basically worthless if we don't pay. And we are too important for anyone to hold a default against us even.

I think the stuff above really does expose just how fake the "the US is becoming second rate!" crowd is every time they raise it. I still remember how we couldn't compete the awesome unified Soviet machine, the German work ethic, the sneaky Japanese and now the all-powerful thinking-one-million-years-at-a-time Chinese. It's never been true. Our economy could be better, but there is nothing else on this planet that compares.

AndrewPrice said...

So today was fascinating. The market started with a strong up... and then it collapsed into a strong down day. Gettin' uglier all the time.

Meanwhile Joe Biden's son Biden 2 was caught on Ashley Madison and he's trying to lie his way out of it... apparently someone used his name, address and credit card details without his knowledge. Are we really supposed to believe that? Oh wait... Daaaaaad!!!!

AndrewPrice said...

Sort of Related: I read a couple of fascinating articles today about Russia's military capability. Wow! They have become a joke.

Here's an article on the utter failure of their main battle tank and how it got crushed the only time they used it in combat. LINK The end of the article when they start talking about Chechnya is where it gets interesting. It also explains how their three battle tanks are crap (they explode because of how they store propellant) and how they lost all their factories to make them anyway when the Soviet Union broke up.

Here's an article: LINK, which explains what for a joke the Russian navy has become. They haven't built a big ship since they were the Soviets, their aircraft carrier brings along a tug boat because its engines are unreliable and apparently it is no longer seaworthy, and they lost all of their shipyards when the Republics split off so they can't even build replacements. They tried to kickstart that capability by buying French technology, but that all fell apart. LOL!

AndrewPrice said...

Add this too... it's a darkly funny take on the aircraft carriers of the world and how most are utter failures: LINK

To give you a sense, the title of the article is "You Aircraft Carrier Is a Piece of Crap" and here are some choice moments...


The Admiral Kuznetsov, Russia’s only aircraft carrier, was launched in 1985 and joined the fleet in 1991... One of Admiral Kuznetsov’s major problems is her powerplant. The vessel is powered by steam turbines and turbo-pressurized boilers that Defense Industry Daily generously described as “defective.” Anticipating breakdowns, large ocean-going tugs accompany Admiral Kuznetsov whenever she deploys.

Almost 2,000 men. Twenty-five latrines. Do the math....

And even when the ship functions as intended, her design limits her utility. Admiral Kuzentsov does not have steam catapults like American flatttops do.... English Russia summed up the Russian aircraft carrier’s fundamental limitations succinctly. “Actual aircrafts visit this ship pretty rarely.”

...Admiral Kuznetsov’s ill repute did not deter the Indian and Chinese governments from acquiring second-hand Russian carriers. China’s Liaoning, a rebuilt sister ship of Admiral Kuznetsov, began limited testing in the summer of 2012... Outfitted with the same faulty powerplant and performance-limiting bow ramp, Liaoning is unlikely to venture far from shore or send her lightly-loaded J-15 fighters—copies of Russian Sukhois—into serious combat.

BevfromNYC said...

But...but..but, Putin takes his shirt off and bears his manly chest! That's better than a working aircraft carrier.

AndrewPrice said...

Bev, That he does. LOL!

Seriously though, this stuff is damning for Russia's status. Their military borders on incompetent and pathetic. Their equipment and training is third rate at best. Their economy is the same. Notice that their stock market is about the size of Turkey.

I've been reading articles on China which say that while they have bought lots and lots of tanks and planes, they have no equipment to fuel them or transport them. And their economy is buckling right now as all kinds of things they've done are coming back to expose them.

America, despite our problems, really is the only world class country out there.

Kit said...

China's military build-up strategy is best described as "shop-till-you-drop."

AndrewPrice said...

Kit, China is more like one of those weight lifters who works hard on his pecks and his biceps and totally ignores his legs and his cardio system because his goal is to impress the chicks.

Kit said...

Re the Kuznetsov, the US has TEN Nimitz-Class Supercarriers, as well as several smaller Wasp-Class carriers used for Amphibious operations.

AndrewPrice said...

From the sound of it, the Kuznetsov will sink all on its own soon.

Koshcat said...

The current stock market drop has been expected for awhile. Several people have been worried about China buying a lot of our debt. The last numbers I saw were they owned about half of the foreign debt which is about half of the debt held. I appreciate the concern some have but the other way to think about it is what China is saying to the world: investing in the US is a safer place to park your cash.

My point is (did I have a point?) while the US economy is not humming on all 12 cylinders, it is still essentially racing along compared to all the other countries in the world. Some tweaks such as easing off some regulation because there is so much cash being held will cause it to go into overdrive, which comes to the harsh criticism lashed out at the FED by the WSJ over the weekend. They are sooo cautious and Kensian that when that happens they are going to freak out and try to over-correct with a huge jump in interest rates.

This is my prediction and I will have you know that I am slightly more accurate than a chicken arbitrarily pecking at one.

AndrewPrice said...

Agreed. The fact that people use the dollar as a reserve currency and that we can sell so much debt is a testament to how strong our economy really is compared to the rest of the world. The US really is the world's economic engine. And this idea that China is overtaking us is just silly.

You never know with the fed. I'm shocked they've kept rates this low this long.

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