Archive for the ‘Global Economy’ Category

In China, People Are Disappearing, but Problems Aren’t

Monday, January 25th, 2016

President Obama has to be at least a little bit jealous of the power yielded by China’s leaders.  He may use executive orders to get his way, but he has yet to follow the lead of Chinese President Xi Jinping.

In the U.S., we control the stock market by allowing the Federal Reserve Board to buy trillions of dollars’ worth of bonds and lower interest rates to zero.

China goes a bit further.  It not only duplicates the U.S. approach of using quantitative easing to manipulate its stock market and currency; when the market fails to obey orders and go only in the upward direction, the government makes people disappear. China

“In all, executives from 34 companies have disappeared, with only some reappearing,” according to The Wall Street Journal’s L. Gordon Crovitz. “Among those was Guo Guangchang, chairman of the Fosun Group, who is known as China’s Warren Buffett. His interests include Cirque du Soleil, Club Med and the former Chase Manhattan Plaza in downtown Manhattan. Brokers and hedge-fund managers are also among the mysteriously missing.”

We suspect that the potential of disappearing creates an even more effective performance incentive than a Wall Street bonus, but China’s leaders don’t stop there. (more…)

An IOU World

Monday, January 11th, 2016

Investment performance made most investors a bit grumpy by the end of 2015, given that virtually every asset closed the year down a bit.  During 2016, grumpiness is giving way to fear.

Here’s how the year began:

  • On the first trading day of the year, China’s Shanghai index fell 7% intraday. Traders fled, triggering circuit breakers after China reported a fifth consecutive month of weak manufacturing data.
  • Saudi Arabia severed diplomatic ties with Iran in response to the storming of its embassy in Tehran. Bahrain also cut ties with Iran. Oil prices rallied on the news, but stock prices fell.
  • Bad news in China plus bad news in the Middle East equals bad news everywhere and a sharp selloff in equity markets. European markets dropped more than 2% across the board, Dow futures were down nearly 300, and S&P futures were trading down more than 1.6%. Global Debt

Things have only gotten worse since then.  By the time the market closed on Thursday, the Dow Jones Industrial Average was down 911 points – a drop of more than 5% in just four days.  That’s the worst four-day percentage loss to start a year on record, according to FactSet stats that go back to 1897.  The Nasdaq index, meanwhile, was down more than 6%, its worst start since 2000.  (more…)

Place Your Bets

Monday, September 14th, 2015

“What mighty Contests rise from trivial Things … ”

                            Alexander Pope, The Rape of the Lock 

Let’s put this in perspective. If the Federal Reserve Board raises interest rates at its meeting this week, it will likely raise them by 0.25%.

That’s 25 basis points … a quarter of a percentage point … a hair’s breadth. In the 1980s, U.S. long-term interest rates approached 20%, which is 80 times higher than the post-increase Fed rate would be.Interest-Rates-US-Fed-Funds2

So what’s the big deal?

The big deal is that any rate increase, even one as slight as a quarter of a point, would signal a change in direction for the Fed. It would mean that the easy money days are over. The stock market would no longer be artificially inflated by Fed policy. Yields would rise. The Keynesian bubble would burst. (more…)

It “Eats Societies Alive”

Monday, January 5th, 2015

“Oh, no!” you’ve probably been thinking.  “The cost of filling my gas tank dropped again!”

Falling prices are a good thing for the cash-strapped American consumer, whose income on-average has fallen to where it was in 1994, as we’ve reported.  But behind every silver lining, there’s a black cloud and leave it to us to find it. Deflation

Deflation is typically a sign that all is not well with the economy.  Prices drop when the economy is so weak that consumer demand drops.  When prices drop, profits decrease, stock prices drop, and unemployment and bankruptcies increase.  Consumers put off purchases and wait for prices to fall further, which contributes to even further deflation.  Deflation was an issue during the Great Depression and every period of deflation has been accompanied by a recession.

Raúl Ilargi Meijer of The Automatic Earth says deflation “eats societies alive,” explaining that “Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power.”

(more…)