Chinese Markets Halted, Equities Plunge Another 7%
globaleconomicanalysis.blogspot.com
globaleconomicanalysis.blogspot.com
For a fully functioning stock market you need:
- capital, which they have
- speculators, to make trades happen, they have these
- transparency in how your market works, or atlest the appearance that the market is fair to all
- and you need stoggy old buy/hold/long only investors. China is missing these.
In most markets the latter is done by ETF retirement investment and pension plans who have to invest 100's of billions of dollars each year.
The scariest thing about this for the global equity markets is that in 10-20 years the top 3 markets could be China, India and the US.
Whether or not you like the US stock market, it is fairly transparent and not run by the whims of the government. The other two countries are about as opaque as you can be. Speaking as a person who actively invests money, that's a very troubling thought.
As one economic nobel prize winner put it... "China and India haven't put out a credible macroeconomic number in the past 10 years".
China is also loosing alot of money each month trying to support the yuan. I saw a credible estimate of about 100 billion a month since October.
1-2% gdp growth http://www.barrons.com/articles/anne-stevenson-yang-why-xi-j...
280% gdp/debt ratio http://www.forbes.com/sites/kenrapoza/2015/05/09/chinas-tota...
bankrupt shadow banks http://www.ft.com/cms/s/0/06cc9b9c-44c4-11e5-b3b2-1672f71080...
bankrupt state commodity firms http://www.bloomberg.com/news/articles/2015-10-14/the-next-c...
only a trillion reserve left http://www.businessinsider.com/china-burned-through-108b-in-...
$850 Billion Left China So Far This Year http://www.theepochtimes.com/n3/1882874-as-much-as-850b-left...
Manufacturing moving out of China http://www.forbes.com/sites/kenrapoza/2015/10/11/is-the-made...
Coupled with China's lack of global consumer brands, corruption, pollution, demographics issues, global slowdown, carry trade unwind, rising US interest rates...you get the idea
You don't need global consumer brands when your country is the size of China. They have 15% of the world's population and speak a language that few outside the country can speak and even fewer can read: nobody else is going to come in and take those customers except Chinese companies. Corruption is being cleaned up; but it's still a real problem at the local level. Again, pollution is a huge problem but China is betting the farm on "clean" energy tech and will be the energy leaders of the world in 20 years. If (or when) they figure it out, they're the only ones with the manufacturing skill and capacity to mass-produce.
The truth is, we've never seen what happens when a large country "awakens" in the age of globalization. Macroeconomic theory is largely based on the import/export balance, which is increasingly less important as borders become less meaningful (and import/export controls become increasingly difficult to enforce).
I have a feeling that China will surprise us - despite the fact that they will have negative population growth over the next few decades and an aging population, the fact that they are actively moving subsistence farmers to the cities may stall the effect of a shrinking population with the added consumption / demand from turning poor farmers into urban consumers. Their aging population is also accustomed to a lower standard of living than the up-and-coming generation. Population deflation has been especially damaging to Japan because it hit them after they had become a heavily industrialized country. Despite the huge progress China has made, hundreds of millions of people still live in poor farming villages. That's a source of potential growth that I expect the Chinese government to tap strategically.
- Chinese companies are the only ones that can serve Chinese customers: Yum brands (KFC, McDonald) 7000 restaurants. Starbucks 1600 stores in China. 7-eleven 2000 stores in China. H&M. BMW. Mercedez. Apple. Microsoft. etc. All top brands, and command a higher price point/margin than local competitors if any. Meanwhile, none of the Chinese brands can even get a foothold outside China.
- Clean energy in 20 years: in 20 years, most of the Chinese rich will have already left
- large migration from rural to urban: there's no jobs waiting for these rural farmers. Therefore they cannot generate value; they're merely drags on the system. In year 2016, with manual jobs being automated, a body is no longer an asset but a liability. The person would need to have the knowledge/skills to compete for global job scarcity. And Chinese citizens aren't trained in English to compete for global knowledge worker jobs.
Think Lenovo is doing a lot better in overseas markets than Yum Brands in Chinese markets...
I don't think chinese firms can't get a foothold abroad (see Huawei), it's just that they have less desire to.
http://www.wsj.com/articles/yum-brands-to-spin-off-china-bus...
Apple is the biggest success story, but that could change literally overnight. It's a big risk to have large foreign operations in China.
They would have massive civil unrest.
They not only have a desire but they also can get a foothold (look at how well many of their cheap phone brands are doing in developing countries). However, they do have a limited ability to do so when it comes to developed countries. Which isn't that bad since most of the big brands are manufactured inside their borders anyways. The calculus looks better for them than for, say, the UK.
1. KFC? McD? Yes, they have this. But they also have their own chains. That you did not hear about them, does not mean they don't exist. I actually really like the (Japanese) chain Yoshinoya here but there are enough Chinese alternatives. Starbucks? Yes, they have this. But they have their (I assume) own chains (I assume for example Holyland and 85 degree are Chinese brands).
Technology? Yes, the rich kids love Apple products. But they have Haier, huawei, Hisense, Xiaomi. Your ignorance won't make this brands disappear. And if you don't want to buy them, there are billions of people and the world that will. And don't forget. "Made in Germany" was a label forced upon products by England to suggest "inferior technology". How did this turn out?
Instead of Paypal they use alipay, instead of Whatsup they use the much superior WeChat. Yet, Baidu is very inferior to google. They have Alibaba and Taobao.
Yes, they have their BMW, Mercedes and VW. But they also have their Chinese brands like BYD etc.
They may have a recession/depression for some years but it won't stop the rise of the East. The world GDP has already shifted back to the East after it shifted to the west due to the industrual revolution. The economic future lies in the Eurasian continent with Russia/CIS, India and China. Europe has two options - associate with the US or with the Eurasian continent. The US is very eager to prevent this (e.g. TTIP). Don't forget, Chinese think very strategically and long term.
The long term problems are likely different. Besides over aging (which can be seen in the West too), believe of cultural superiority. While it has it advantages not to be flooded with criminal "refugees" like Germany, the closed society in China also keeps talent out. Most superpowers (Rome, UK, USA) were very open for talent and it was easy or at least possible to become a citizen. This is a problem. Corruption? This can be fixed. But the deeper tendency to be dishonest is likely the cultural problem. Similar to Arabs, Chinese don't trust each other.
Yes, I've been to China. Btw, have you ever read the thread? I was responding to OP's statement 'nobody else is going to come in and take those customers except Chinese companies'
> The world GDP has already shifted back to the East after it shifted to the west due to the industrual revolution. The economic future lies in the Eurasian continent with Russia/CIS, India and China.
Yeah that like sounds something out of Zerohedge. You're gonna have to provide some evidence.
But you haven't refuted that statement. You merely pointed out there is a tiny amount of "western" companies operating in China, with no numbers on the ratio of foreign to local operations. Which would be the real way to refute that point.
There are foreign brands sniffing around the edges. But mostly, Chinese spend their money IN china. The car companies are a good counter example, but that's mainly because China didn't have the Car manufacturing expertise in house, I believe this is changing. McDonalds and KFC are a joke in China for every one of them you see, there will be at least 10 chinese fast food competitors with more customers. (Turns out Chinese have a preference for Chinese food - Crazy huh?)
iPhone still only hold about a 30% market share. I think that'll change too, as Huawei, and Xiaomi have become significantly more competitive and are significantly cheaper.
Actually, the picture was similar (but better designed) to this one: https://dannyquah.wordpress.com/2012/05/17/how-we-miss-the-g...
I'd disagree that that depiction was better designed than http://www.dannyquah.com/Quilled/Output/2010.09.27-Danny.Qua... or the animation http://www.dannyquah.com/Quilled/Output/2010.08-Danny.Quah-w... It depends on what you're trying to understand. For what you describe, I personally don't like so much the McKinsey graphic. This is discussed in Section 8.3 (in Chapter 8) of my draft manuscript http://bit.ly/1KeSicU on Ordering the World.
But as a feedback
- What are the two extremes? I don't know the end points in your graphic.
- You graphic does not show how the center shifted from the East to the west after the industrial revolution. Because from 1500 to 2010 you actually have either hard data or past estimates.
- I would have put the distance of the dots (years) and a color legend in the picture.
- I am to stupid to understand what the different sized arrows mean in the graphic. What information do they provide?
I don't agree with this; but Chinese companies are in a much better position to do so, and China is where the growth is.
> Clean energy in 20 years: in 20 years, most of the Chinese rich will have already left
A bit hyperbolic; but we already have a global economy. Foreign companies will continue to invest in China (both in companies and in their own projects) regardless of what the Chinese wealthy do. There are 1.2 billion people in China. Most don't brush their teeth. Think how much more toothpaste P&G could sell there if people became even moderately wealthy and more concerned about dental hygiene.
> large migration from rural to urban: there's no jobs waiting for these rural farmers.
As long as the Chinese government is willing to sponsor public works projects, there will always be jobs. And China is not unique in the transition from a manual labor to a knowledge labor economy: they're actually probably in a better position than most because they can benefit from explosive growth whenever they choose to. And don't forget that the Chinese population is aging rapidly: there will be more people exiting the workforce through retirement and death than new entrants into the workforce. Ensuring need and training match up is a problem, but I don't think any government has solved that one; so I wouldn't call it a huge impediment to their growth.
No, that was your point. You said quote "nobody else is going to come in and take those customers except Chinese companies"
>Foreign companies will continue to invest in China
Sure they will, but it will be dramatically smaller. $850 billion a year outflow makes it so
>if people became even moderately wealthy
IF. These rural farmers have to compete with cheaper workforces in southeast Asia. And english speaking knowledge workers worldwide.
>As long as the Chinese government is willing to sponsor public works projects
The government did that already since 2008. All they got were 300% gdp/debt ratio and badly constructed roads/buildings. They can't borrow anymore money to do that, not with the carry trade unwinding and default rates going up.
This is too hyperbolic. They got airports and a large network of trains and high-speed trains. They also got the internet, electricity and smart phones all of which are still relatively new to China. The impression I got when I lived there was that the past decade has been all about developing infrastructure. Now there is a young generation growing up with more education, more technology and more opportunity than ever. China is a huge, complex country early in its development and it is hard to generalize about it.
>> "And Chinese citizens aren't trained in English to compete for global knowledge worker jobs."
There you go!
Edit: To clarify, I am supposing that perhaps more English-speaking knowledge workers would be trained in the future.
As a side effect of US immigration policy and the hot job market for knowledge workers over the last 20 years, an extremely disproportionate number of PhD candidates in science and business at US universities are Chinese nationals. So it's already happening -- and we're the ones doing it.
I think China is aware that Mandarin will not become a global language of trade -- it's simply too difficult to learn. But this likely suits the government just fine as it funnels all business deals through a (relatively) small group of people who are fluent in Mandarin and another language. And given the difficulty of learning to read Mandarin as opposed to say, French or English, I suspect almost all of those people will be Chinese.
"A growing influx of foreign PhD's into U.S. labor markets will hold down the level of PhD salaries to the extent that foreign students are attracted to U.S. doctoral programs as a way of immigrating to the U.S.. A related point is that for this group the PhD salary premium is much higher [than it is for Americans], because it is based on BS-level pay in students' home nations versus PhD-level pay in the U.S. . "
Basically the government wanted to allow more foreign students in to PhD programs to suppress PhD wages. They estimated without any policy changes, computer science Phd wages would be over 100k by the year 2000...
Bottom line, the Chinese nationals in your classroom and in your office are the result of a concerted effort by the US government and the tech industry to suppress wages.
We have to be very careful here: On the one hand, if talent is too restricted, prices will rise, but so will opportunity costs, suppressing R&D, or that R&D might simply move to where the talent is.
This isn't a zero sum game.
The average CS PhD is what? 36k/yr? That is only attractive to international students who place a lot of value in being on US soil. The smart domestic students will avoid PhD programs and CS altogether, which is precisely what the industry wants, the self full filling prophecy of the "talent shortage".
I made about $1300/month as a PhD student at the end of the 90s/early 00s. But in exchange, I got to do the research I wanted to, it was a fair exchange for me. If you are in it just for the money, I guess it doesn't make much sense, but then you don't need a PhD anyways. I'm also one of the odd balls who is an American CS PhD graduate working for an American company in...China. Turns out, those high-end research jobs really can move from the US to another country (before China, I was in Switzerland)!
CS grads already easily make the most money out of all STEM graduates except maybe medicine which requires a much larger time/money investment.
Where exactly do you see the extra supply coming from if, say, CS wages went up another 50%? Who would be incentivized to study CS who isn't already sufficiently incentivized today?
Need? I guess not. But I think the point is that those things manifest themselves in a healthy market/economy/society, a healthy innovative market. If you're not advancing technologically, then you have no hope for your future. And that's what companies like Samsung, Toshiba, and Sony all do (in the electronics industry). They innovate. That innovation breeds more innovation and lays the groundwork/framework for future innovation.
That's China's biggest problem right now; they relied so much on theft of IP that they lack the infrastructure to innovate on their own. They're stuck on a ledge and can't go any higher without either technological handouts or stealing more IPs. Unfortunately for China, companies are becoming much better at protecting themselves having learned from past mistakes.
China is essentially the world's factory. That's all, nothing more, nothing less. That's all they will ever be until they climb down from their ledge and start climbing up again (starting over from scratch).
> They have 15% of the world's population
And? not sure how this is relevant. If anything, it's even more incriminating; they have that many people but so little to show for it. So little genius, so little innovation, so little advancement... It's proof that their current social, economic and political system has been a failure. They should be trouncing everyone. But they aren't.
> Corruption is being cleaned up
Their "corruption clean-up" has been just lip service. You'll note it was published first from China's own government-ran news agencies (Xinhua).
If you look at transparency international's corruption index (here: https://www.transparency.org/cpi2014/results) you'll see that they actually dropped 20 places from 2013 to 2014. Their corruption actually got worse, not better.
> we've never seen what happens when a large country "awakens" in the age of globalization.
Unfortunately, China's a long way from awakening.
China has been quite innovative in the manufacturing arena. You know all those neat laser drills and 6 axis CNCs that mass-produce all the tech products we have? They were probably designed in the US; but the Chinese are the ones who know how to organize them to churn out 100 million iPhones.
> They should be trouncing everyone. But they aren't.
Look at your history; China was reeling from the collapse of its imperial government (largely as a result of the meddling of European powers) in the early 20th century. They were then invaded by Japan (which has always been a military-focused country, and thus had a very strong military when Western powers came calling and was able to resist colonialization). After its infrastructure was pillaged by a 15-year Japanese occupation, there was a power vacuum and a decade-long civil war.
China was kept in the stone age until basically 1954 by the meddling of outsiders. For all the awful, misguided things Mao did, he and the subsequent leaders of China set the country on a path for rapid modernization - modernization at all costs.
> Their "corruption clean-up" has been just lip service.
I don't know about that. The Chinese government is acutely aware that they need foreign investment in China, and that becomes very difficult to do when there are "hidden taxes" in the form of corruption.
> Unfortunately, China's a long way from awakening.
If that's true, then that's pretty scary given where they are now vs. 20 years ago.
Clothing is the lowest point on the value chain. They never meant to become a clothing manufacturer perpetually, they were using it as a way to leapfrog up the value chain.
They're pretty happy to let Bangladesh take over the manufacturing of clothes while they do electronics (and ultimately aerospace and CPUs).
http://www.scmp.com/business/companies/article/1863709/manuf...
Japanese companies (Toshiba, Citizens) head for exits as China loses steam
http://asia.nikkei.com/magazine/20150611-Something-in-the-ai...
I've studied China for 29 years, speak/read Chinese and Japanese well, and have lived there long stretches.
All his statistics are correct. Most importantly is the capital flight - of both Chinese individuals and overseas investors.
Don't forget, the market can stay irrational longer than you can stay solvent
(Background for non-investors: leveraged ETFs are intended to replicate intraday performance, and a long-term buy-and-hold strategy is always expected to trend toward 0)
Here are some examples of levered ETFs... sorry, it seems most web UIs are interactive and actively resist linking to a customized chart. I'll link to the benchmark. You'll need to click "Compare" and enter the two leveraged ETFs, be sure to check the "Display as a Percent Change" option, and then mess with the duration (from 1D through 5Y is illustrative). You can see that daily or short-term returns are inverted relative to each other, but long-term returns (6 months or more) are net negative across every pair of ETFs.
Crude oil: UWTI is 3x, DWTI is 3x inverse. USO is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/USO
Small caps (e.g. Russel 2000): TZA is 3x, TNA is 3x inverse. IWM is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/IWM
Financials: FAS is 3x, FAZ is 3x inverse. XLF is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/XLF
Bottom line: for buy-and-hold investors, leveraged ETFs are always a trap.
(For one thing, ETFs like to buy and sell whole sectors of the market: if Volkswagen has a problem, they sell Toyota. This strikes me as a good way to lose your money -- while not really understanding what's going on.)
* 1-2% GDP Growth that you cited is the opinion of one woman who makes a living selling opinions on the Chinese economy, it is anecdotal. * The article you posted states that central government GDP/Debt ratio is 64%, whereas local debt is 280% - so relative to the United States, with a total debt ratio of 332% China is still "flush with cash," in a sense and could stimulate out the 280% ratio, as the very article you cited notes. * Regards to Banks/Commodity firms - they are state owned, they could be privatized and this would improve efficiency. * You need to read the articles you post - there are $1Trillion in Foreign Reserves left to help the Yuan glide down slowly against a foreign basket of currencies, out of a total $4Trillion in foreign reserves. The US has $0.4T by the way, far less (this includes gold). * Epoch times is not a reliable source. They are just 100% anti-China, that is their reason for existing. * Manufacturing moves in and out of countries all the time, the net value of production in China is going up. * China does not require global consumer brands, it has 1.5 Billion people. China is flush with cash and can spend its way out of all of those issues. * No, we don't get the idea. You posted a bunch of links with very brief headlines on each. You didn't read many of the links you posted. Your post is a non-coherent shotgun approach.
The major issue facing China is the fact that it fundamentally a one-party controlled communist command-economy, and it has pegged its way into that political path, without a clear way to get its way out. They attempted to go the democracy route for a bit in the 80s, but things out out of hand and Tiananmen Square Massacre occurred, effectively erasing the Chinese political consciousness. Now they are kind of floating in this world where no one really cares about politics, they just care about making money and hope the government is nice to them. This is the defining challenge of China in the 21st Century.
The economy will go up and down but overall continue to grow over the next 20-30 years because they can buy their way out of whatever depression they need to. Things will probably get less polluted over time. If you look at the Shanghai composite, this has always been unstable and volatile and has had much worse crashes in recent memory. So every time the China stock market crashes, people come online and think they can become instant Sinologists and Peking Toms by posting a flurry of links. It doesn't mean anything --- it's a sputtering of irreverent neckbeardiness which does not further hacker news' understanding of the situation and actually makes people dumber for having read it, a la Billy Madison.
I'd qualify this with value orientation. To have a successful stock market you need the factors you mentioned plus long-term holding value investors.
To illustrate the difference, consider what would happen if the Warren Buffetts and David Teppers of the American capital markets put all their money into ETFs. You'd have no price discovery. Someone needs to be wiling to do their own research, reach conclusions with conviction, and trust in those conclusions through short- and medium-term wobbles.
Long-term value investors require capital. They also need transparent, liquid markets. China has capital and liquidity. It lacks (along with India, Russia, and a number of other "emerging" equity markets) reliable data and/or trustworthy institutions. This deters long-term value investors [1].
[1] https://www.scribd.com/embeds/294654490/content?start_page=1...
There are a lot of different ETFs, some much more broad than others. You don't need to buy the whole market. If you think energy is cheap you can buy an ETF of energy companies (say XLE) which is a useful way to diversify if you're not able to buy reasonable quantities of multiple names.
I disagree. ETFs just track an index. If you buy the ETF, someone else is buying the index (individual components of that ETF) for you...
If everyone buys indexed ETFs, the market stops discerning between the index's components. If everyone buys "China," the difference between "shitty thing over there" and "half-decent asset if not levered through the roof" vanishes. When the market starts falling "finger in the pie" syndrome sets in. Nobody has any idea what one thing is worth over another. Even if they do, they probably can't trust their data, and even if they can, they know nobody else can. So everyone dumps "China," punishing all assets alike.
This is already happening due to the circuit breaker actions. What happens is that the trust in the market mechanism gets eroded to the point where even those companies that were not the ones losing big time will get drawn into the next wave of sell-offs. It's basically a stay of execution at that point (if we haven't already passed it).
Even if 15% of investors are speculators, the price can still swing drastically, since price is a function of supply and demand, and the charts we're seeing are not volume-weighted.
Market price stability is a function of the uniformity of supply and demand over time. Buy and hold investors already own the stock so their preferences are not reflected in short term supply/demand uniformity (price stability).
What we're seeing in China is a lack of uniformity of views on the future price, and thus rapid fluctuations in supply/demand uniformity over time. Government instability plays into that tremendously.
What we're seeing is a lack of faith that many are finding disturbing.
That is a fairly unfalsifiable statement, and it is trivially true for nearly anything, b/c we all make all decisions today based on the faith/expectation that we will be alive tomorrow.
The notion that tomorrow will be substantially different from today makes nearly all planning useless, so it's trivial that all planning hinges on some notion of faith in the future.
But price itself is only a function of supply and demand. If I am selling bread and it's nearly time for me to go home and the bread will be stale tomorrow, I might offer the remaining loaves to the last few customers at a discount if I expect it not to sell otherwise, etc. Supply vs demand. Charted on a graph the price would take a nose dive at the end of the day.
If a short term investor feels that his position will not improve, it makes sense to liquidate. The more symmetrical market participants' views are, the more the price will change as a result of trading (why would someone sell when they expected the price to go up?. This illustrates the adage that one person's junk is another person's treasure) To be logical we must consider would-be buyers and would-be sellers of the shares.
Only in the rather peculiar case of significantly asymmetrical views of the future price will the price remain stable with lots of shares changing hands.
With regards to the Indian governments' fudging of macroeconomic stats, this article may be helpful: http://www.bloomberg.com/news/articles/2015-12-14/india-now-...
What indian economy lacks - 1. new credible entrepreneurs e.g. existing group co's have gotten into more new businesses and expanded into traditional sectors as compared to a handful of new names. 2. new business models e.g. most business are copying what has existed in US such as ecommerce, taxi aggregators, etc. 3. enhancing regulation in existing markets e.g. real estate.
"Data releases have become much less transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever increasing importance of China and India. China is the world’s second largest economy, but already much larger than the US in a broad swathe of sectors. India will be the world’s third largest economy within a decade. Unfortunately their rise is increasing the global cost of capital because an ever growing share of the most important data they produce is simply not credible. Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe."
http://www.businessinsider.com/nevsky-capital-closing-letter...
Aside from the fact that they are (a) both very large, and (b) both rapidly developing countries/economies, China and India share very little in common.
There are challenges to investing in either China or India, but the reasons behind those challenges are about as different as you can get. The underlying issues in the two countries are dramatically different.
> There are challenges to investing in either China or India, but the reasons behind those challenges are about as different as you can get. The underlying issues in the two countries are dramatically different.
I agree; and you probably know this all, so it's for others' benefit. China is a centrally-planned economy that has transitioned to a capitalist-style oligarchy. Culturally, they value society as a whole as being more important than the individual or individual groups. The Chinese government is still the ultimate authority, though many factions exist within the Communist party. Everything coming from the central Communist party is reviewed and OKed by a dozen officials to ensure a consistent story - so any bad numbers are a result of deliberate overstatement at some level. It also means that stakeholders at every level have the opportunity and incentive to falsify numbers (because missing your numbers means losing your job and ending up in poverty). It's not a giant conspiracy; but there is little downside to falsifying accounting numbers (which will get you a prison sentence in the US).
India is on the opposite end of the spectrum - it's basically a free-for-all with a bunch of very different groups of people pushed together to try to make it work. There are thousands of ethnic groups, many of whom hate each other. So in order to keep the peace, they have to allow each ethnic group a wide berth. This means that when you say "the Indian government" you're talking about an entity that is a multi-headed hydra (or even multiple hydras). There are many competing desires and biases present in the Indian government, and it's politically difficult to deal with those problems when your population is as fragmented as India's is (and why the election of a more modern leader with a global focus like Modi was a huge step forward).
I really do not understand how anybody with even a little understanding of the two countries can lump India and China together in the same political/financial group.
Are you asking how the term 'BRIC' came about?? If so, the paper where the term was first used is available online and it is remarkably readable. The pdf is located:
http://www.goldmansachs.com/our-thinking/archive/archive-pdf...
There were at least two follow up reports that I'm sure are also available online.
From the standpoint of an investment banker (which is where the term BRIC comes from) any differences between them are largely irrelevant - they all have a large population, a government that is stable enough to protect their business investments, and an improving distribution of wealth to ensure widening participation in the economy to sustain growth for decades (this is important when macro investing; a rising tide raises all ships, and macro investors are basically investing in all ships). But that's about where the similarities between these 4 countries end, so using the term "BRIC" to speak about cultural similarities is meaningless.
We dont have anything similar to EDGAR.
> Whether or not you like the US stock market, it is fairly transparent and not run by the whims of the government. The other two countries are about as opaque as you can be. Speaking as a person who actively invests money, that's a very troubling thought.
> As one economic nobel prize winner put it... "China and India haven't put out a credible macroeconomic number in the past 10 years".
This was one of the reasons cited for renowned hedge fund Nevsky Capital closing its doors. They are up 1212% since 2000. [1]
"Data releases have become much less transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever increasing importance of China and India. China is the world’s second largest economy, but already much larger than the US in a broad swathe of sectors. India will be the world’s third largest economy within a decade. Unfortunately their rise is increasing the global cost of capital because an ever growing share of the most important data they produce is simply not credible. Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe."
[1] http://www.zerohedge.com/news/2016-01-05/why-15-billion-nevs...
- Chinese investors have limited places to park their cash. Stock market and real estate are two major options, and real estate is seen as a superior investment (stock market has... problems, you could say)
- Chinese law prevents purchasing property without developing it.
- Real estate investments therefore require barebones property development--regardless of tenancy--in order to remain legitimate.
(edit: list formatting)
This.
This will be China's undoing. The hardest thing to try and control are open market forces - which China is clearly controlling and attempting to manipulate, with disastrous results.
That may be true. But I think they also see lack of stability as threatening their ability to remain in control. So in practice, they care a great deal about stability.
Revolutions grow out of revolts. Revolts grow out of riots. CCP is remarkably adept at managing riots. For riots to grow, you need revolutionaries to amass power. CCP is remarkably adept at policing this kind of action too.
The CCP isn't going away anytime soon. Xi Jinping has way more to fear from intra-party power struggles than from grassroots activism.
What about Brazil? (not that they are transparent/credible, but that they ought to have huge economic growth over the next ~20yr)
I don't think things are going to be very nice here in 10 years.
As to the US stock market being "fairly transparent and not run by the whims of the government", check your history man. The US stock market has seen some crazy wild, stock manipulation, insider trading, government manipulating, bucket shop, boiler room, "oops, we have too much paper to process so shut the whole thing down" days.
And, I should add, those days aren't over. The mess is still all there, it's just much more sophisticated and comes with a better staffed and better funded marketing department.
This comes in two pieces, first transparency and accuracy of the company: Who is enforcing accounting standards? Who is doing the auditing to ensure the said assets are really there?
The second, is the economy based on real demand or something temporary: Are profits dependent on the activity of government officials & central bank finance?
It would be very unfair to single China out in this regards, just look at what happened to Brazil.
I wish I could believe this, but after years of federal debt fueled Quantitative Easing and implicit guarantees of "too big to fail", I've stopped believing this is true.
I just finished Too Big to Fail by Sorkin. From that point of view, everyone was facing something that had never happened before, so it's hard to be predictable in that case. One day, they push J.P. Morgan to buy Bear Sterns. One day they let Lehman Brothers die. One day they nationalize the banks. It was just all over the map. On the other hand, they were facing something new, never really thought about before. It's hard to have policy for rare events, so they just kind of tried stuff and iterated on what worked.
It's kind of a testament to the quality of the US market that you can say for sure, 'i don't want any of that', because of a specific reason. That's very different, and far more valuable than 'i don't want any of that because it's incomprehensible'.
All I was trying to point out is that the idea that the US market is devoid of any government manipulation and shenanigans is fiction at best.
I don't want to dismiss your argument, moral hazard obviously had an effect - http://www.federalreserve.gov/pubs/ifdp/2012/1043/ifdp1043.p...
But, again, the beauty of our system is we have an idea about how the major players will act, it's not totally opaque and unpredictable like China. If there's another little bubble, it's pretty clear the fed will just let that industry die. If it's huge, at least some players will die. The rest, can either suffer on their own, or suffer as a nationalized entity.
http://globaleconomicanalysis.blogspot.com/2016/01/former-da...
> So why are people then trading stocks in China or India or
> wherever if they don't trust the system?
If the perception is there that people are trading in these markets, people will trade in these markets. But without fundamentals, the whole thing can quickly suffer from a collapse in confidence, followed by a "run."
It's no different than buying Bitcoins. Why speculate in bitcoins? Because other people are speculating in bitcoins.
Even if they retain control by selling to a trusted partner, the asset shift is painful. If you can imagine foxconn getting into that trouble, it's very easy to imagine them not being able to manufacture IPhones or Galaxys for a few months while they negotiate contracts with the new asset owners. Any idea what that would do to Apple stock? And, you know, your 401k?
This is an extreme example, but captures the spirit. when suppliers go out of business, or even run into trouble, all the companies that depend on them slow down, have to renegotiate new contracts, possibly miss deadlines. It can be ugly.
See http://www.nytimes.com/2015/11/29/business/international/chi... and its discussion https://news.ycombinator.com/item?id=10645768
Non-rich Chinese people are doing that because the government has been pushing it pretty hard (think the way state lotteries are pushed in the US, or fantasy sports, with pretty much the same returns, really).
Oddly enough, said non-rich Chinese people are also the ones China is trying to protect with its market stabilization efforts, or so it claims. I'm really not quite sure what they _think_ they're doing there.
Apart from that, it's pretty much all people looking to make a quick speculative yuan.
http://assets.bwbx.io/images/iIS_j8I_fYlI/v2/-1x-1.jpg Source: Bloomberg
The hedge funds who saw this coming are doing very well at the moment [0] [1]
[0] http://www.barrons.com/articles/hedge-fund-posts-strong-gain...
[1] http://www.bloomberg.com/news/articles/2015-11-17/hedge-fund...
http://www.usfunds.com/media/images/frank-talk-images/2012-f...
The current growth slowdown is largely due to decreased domestic consumption growth:
http://www.brookings.edu/~/media/Research/Files/Blogs/2014/0...
Of the top listed companies in Shanghai, most are banks, petro, insurance, energy, etc. that are domestic driven (the SSE website is down at the moment but the list is here: http://english.sse.com.cn/listed/list/)
I don't think there were many expecting that a public company investment in China would be supported by exports.
Edit: Found it myself: http://www.bloomberg.com/news/articles/2015-06-16/real-cost-...
The CSE page doesn't define how they compute average P/E, in principle they could be using some historical measure of earnings.
If you think you _may_ want to sell at all tomorrow but also think a circuit breaker could trigger, you're going to sell first thing in the morning. So will everyone else.
The circuit breaker can actually trigger a worse panic as investors all try to squeeze in sell orders at once. This triggers the circuit breaker, confirming everyone's fears, and starts again the next day.
NYSE, the largest in USA, has a combined market value of 20 trillion dollars, whereas the largest in China (Shanghai Stock Exchange) has a combined market value of 4 trillion. This is for two economies of about the same size.
This means that when the Chinese market drops (or raises) the overall impact for the wealth of the country is much smaller than a similar change would cause in the American markets.
The USA's net national wealth is about $85 trillion, while China's is about $22 trillion. I have a feeling that a much larger proportion of the USA's stock market is held by foreigners compared to China.
It is possible that drops (or raises) in the Chinese market actually affect Chinese wealth more than in American markets...
So... in about 15 minutes of trade in China, a whopping
$637 billion in market cap was wiped out.
[0] https://twitter.com/DavidInglesTV/status/684922104412672001
Both are measures of very different things, and both are very different to actual money.
I don't really agree with you.
GDP measures the value of goods and services produced by a country over a specific timeframe.
Market cap (in this context) measures the value of all companies listed in the stock exchange.
Both are ways to measure an economy, and both are measured in units of money. What's the difference between money and "actual money"?
Tourist walks through some distant mountain village and meets the villager shouting "My dog is for sale". So the tourist asks
"How much for your dog?" "$1 million", villager replies.
Tourist just sighs and continues his walk. Later the same day tourist is coming back. He meets the same villager, so he asks:
"Did you sell your dog?" "Yes,to my neighbor, for $1 million" "Really? And he paid in cash?" "No, he gave me two cats, but they are $500.000 each"
The market cap valuation works in exactly the same way.
Or am I wrong?
If Bill Gates wanted to liquidate his Microsoft stock, though, it's unlikely that his sale price would match the exchange. Once you get into trades of a significant portion of the company, there's not enough guaranteed to be enough liquidity at price listed on the exchanges.
Market caps for eg public companies are generally given legitimacy through trading, routine liquidity, auditing of financials, and dozens of other processes and regulations that companies must conform to. You can sell your Microsoft stock for a very well known amount of dollars, under very well known terms, essentially any time you want during market hours; you can never sell those cats for $500,000.
The difference between me claiming my right shoe is worth $50 billion, and owning all of Uber's stock and having that be worth $50 billion? People with a lot of money, and a lot of reputation, deciding that Uber is worth $50 billion, after typically having put their money where their mouth is and investing. To say nothing of Uber having a real business (meaning they can raise debt, have credit ratings, sales, cash flow, operating projections, et al), having a value that the IRS or an auditing firm or investors can actually assess, and so on. One is verifiable to some large degree, the other can never be anything more than an absurdity - I can very likely sell my Uber stock for a lot of value, even if I take a big discount; I can never sell my right shoe at even a 99.99% discount to the $50 billion.
No it doesn't, not in a functioning public market.
Just because the guy claims the cats are $500,000 each, doesn't actually make it so. The sole thing occurring there, is a person is claiming something (that is obviously false). No taxing authority on the planet would assess those cats at $500,000; no professional auditing firm would either. The entire bogus premise collapses instantly upon scrutiny.
In almost any market, a claim is worthless unless you can eventually cash it in for a large portion of that sum, typically in a currency that possesses real value. In your example, your cats can never be cashed in for a meaningful fraction of their proclaimed value under any scenario. I can sell my Tesla stock however, there is an extremely well established and accepted value placed on it. I can still pretend, and make an outrageous claim on what my Tesla stock is worth ($1 trillion!), however it is nothing more than a bogus claim and has no actual bearing on reality.
Suppose the government made a law saying that you cannot never sell KO (Coca-Cola stock). Today KO is selling for $41.62/sh. Tomorrow, is it worthless? No. It pays a 3.05% dividend, which it typically increases 10% a year. It is worth at least $1.27 (the first year's dividend).
Now to the question about cats selling for $500k. Would a sensible taxing authority or professional auditing firm assess a flower at $500k - $1 million? In 1637 a single Viceroy tulip bulb sold for 3000 - 4500 florins; a skilled craftsman made 300 florins/yr [1]. Assuming that a skilled craftsman would make at least $50k/yr (probably more, given that $50k is near the median US income), one tulip bulb cost $500k - $1 million. Not so different from selling cats for $500k, so you cannot attack the example for unreasonable prices (s/(dog|cat)/tulip bulb/). Now, was it worth that price? No, hence why it fell back to a much more reasonable level shortly afterwards. But during the mania, selling one tulip in exchange for two lesser-valued tulips would be quite valid.
You missed the point of the illustration, which was that price (market cap) has no relationship with value. Admittedly, the illustration was rather opaque.
That said, I do agree that GDP and market cap can't be compared in a meaningful way.
It's like saying that the ISS is about the size of a football field. Does this comparison help you to visualize the size of the ISS? Sure. Does this comparison help you to understand anything else about the ISS or football fields? No.
If I buy something from you for $10, and sell it to someone for $10 the GDP goes up by $20.
If on the other hand you sell it to someone for $10 the GDP goes up by $10 instead.
The value of money + value of tangible goods is the same in both cases, but the GDP is not.
They measure different things.
If the units are correct and the same, then the comparison makes itself. The distance between two cities and how far an electric car can go on one charge are vastly different things, but since both can be measured in the same units, the comparison makes itself.
A dollar of market cap is very different from a dollar of GDP, like a cubic meter of lead is different from a cubic meter of air.
What we're talking about is the value (or weight); the denomination (or volume) is irrelevant.
The value of a dollar GDP is considerably more tangible than a dollar market cap.
http://finance.yahoo.com/echarts?s=000001.SS+Interactive#{"s...
This is hardly some sort of disaster or the end of China's prosperity. Just a bump in the road for investors.
So now the average Chinese consumer will be double-hosed: once over by losses to their personal retail brokerage account, and again by losses sustained by their pension funds.
Hopefully enough Chinese consumers made enough money from the crazy ride up on the market that they cashed out periodically and invested in sensible hard assets such as homes and cars. Because the correction will probably be very painful.
[1] http://www.theguardian.com/world/2015/aug/23/china-to-allow-...
Price trends don't necessarily mean anything, and corrections are good as much as they are bad.
A correction means the previous price was incorrect, yet when prices fall humans sentimentally believe the old, higher price must have been correct. It's ridiculous.
Governments take extensive measures to control prices and to alter public perception of risk. Sometimes this adds stability to prices, but it often sets things up for a more drastic correction later.
Some investors are over-leveraged and must cash out to avoid ruin. Others are speculators trying to ride various trends, but in the end we all benefit from prices being corrected.
Only sellers believe this, buyers believe that the old lower price was correct and they are being gouged. (See anyone who tries to buy a generator after a hurricane)
Psychologically, if you know the markets will close if they drop too fast, it might actually encourage traders try harder and rush faster to be the first one to sell off more stocks that day before time runs out.
These companies' listed values might have well have been picked by a roulette wheel.
China has 4x the population of the US. How "big" would the intervention have to be to be stronger than anything in 2008?
At this point China has thrown roughly a trillion dollars just at trying to prop up their stock market [1]. That doesn't include what they've burned trying to control their currency, what they've spent trying to keep their real estate bubble from completely falling apart, and what they've spent dealing with zombie companies and their vast shadow corporate and muni debt, and so on.
[1] http://uk.reuters.com/article/uk-china-markets-rescue-idUKKC...
To digress a little bit, I know this may be heresy, but TARP was the single most courageous and under appreciated accomplishment of the G.W. Bush administration.
It's an economic miracle that when push came to shove, suddenly we were all Keynesians again.
The current Chinese government seems to have some other bright ideas though like trying to boost prices when there is a parade on (http://www.slate.com/blogs/moneybox/2015/08/31/china_s_stock...). Not sure that works long term.
I'm surprised there's no mention of the impact of recently rising Federal Reserve Rates[1] on the Chinese Currency or the fact that the Yen was recently added the IMF's Special Drawing Rights currency[2]. Since China's moves in August I think its fair to characterize this as a currency war. And it's Dollar Hegemony that's hanging in the balance[3]. Many have characterized it as a war for much longer. What's different now? The proxy wars between the United States and Russia are heating up and tensions between China and the rest of East Asia are heating up. Western sanctions on Russia for Ukraine pushed it toward China and that may just have been the tipping point[4]. I find it remarkable how able the performances of equity markets are to obfuscate the currency and bond markets that are driving them[5]. When equities move fortunes change, when currencies move, the balance of power on the planet changes.
[1] http://qz.com/588049/what-the-fed-was-thinking-when-it-final...
[2] http://www.globalresearch.ca/chinese-yuan-incorporated-into-...
[3] http://www.brookings.edu/blogs/ben-bernanke/posts/2016/01/07...
[4] http://www.economist.com/news/china/21650566-crisis-ukraine-...
[5] http://qz.com/588704/chinas-stock-market-isnt-the-problem/
China knows that when its markets plunge, the American markets plunge too.
Is there a way for China to create the illusion of its markets plunging, without losing real value (or at least profiting from the perspective of some influential power in China)? Perhaps they could accomplish such manipulation through a combination of 1) collusion between the CCP and the largest investors in the Chinese market, 2) currency manipulation, and 3) shorting of US equities?
I know this sounds speculative and vague, because honestly I have no idea what I'm talking about. But China certainly has the motive to manipulate American markets. And since the foreign investment is asymmetrical (e.g. the Chinese can invest in NYSE, but Americans cannot invest in Shanghai), China has an opportunity to "play both sides" of a Shanghai market crash and any corresponding American market drop, while American investors cannot do the same.
So... is it possible?
They know their history.
The world doesn't revolve around America. The Chinese government certainly cares a load more about its own economy doing great than how other economies are doing. They wouldn't sabotage their economy and destroy trillions of dollars in wealth to make a significantly lesser dent in our economy.
Makes you question weather they really in a bubble? It appears they could fill Ordos and 43 other new cities in the next 15 yrs! Perhaps they need to be putting these cities up even more rapidly.
[1]http://www.mckinsey.com/insights/urbanization/preparing_for_...
Right, like if you were predicting 40% city growth in the US, the solution would not be to build new mega cities in Utah (which has a comparable percentage of US's population as Inner Mongolia has in China).
The only thing that concerns me is that those market peaks/humps were due to humans getting concerned and changing behaviour. Maybe now that most trades are just computer to computer the Algos don't "know" to be "scared" and cool it we might keep going up till some epic event corrects it.
I am hoping it's a 1-2 year correction that goes down 50-60 percent. But, who knows.
Every owner of an equity is lining up to sell their assets to the big idiot with the giant flashing neon sign saying they will buy anything, knowing that the more they flood the market, the more the central committee will buy.
China, you just got played, welcome to the market.
This is China finally having their 2008 and it impacting the world.
Lastly the US CAPE ratio is pretty bad too.
Technicals = Star Signs in most cases.
The fact that people know this information, changes the outcome which is why markets are so hard to predict.
The fact is if you followed the indicators that I mentioned since 1950, your net worth growth rate would've increased at least 50% without even using leverage. Trends in the general stock market change slowly (the price doesn't look like random noise) and that's why it's predictable enough to beat a buy and hold strategy.
Well that's easy, the hard part is finding the indicators that will do that for the next 60 years, not the previous!
I'm long on the US stock market because if US companies are good at one thing, it's their 5% YoY growth.
It's not a perfect strategy by any means. But I think using indicators is superior to a buy and hold strategy. When you invest you are necessarily choosing between different strategies. There is nothing magical about buy and hold other than that it's simple, and a lot of people do it. Historical data shows that if you trade based on indicators then your returns are much higher. I think it's important to find what works the best through calibration and back-testing.
There are also risks such as survivorship bias that even applies to indicators, in addition to companies and economies. The best indicators survive in whatever system you use, and that doesn't guarantee they will actually work well in the future. Still I think it's better than the buy and hold strategy.
I can't guarantee the indicators will work in the future, but they worked in the past, and they make sense to me because the S&P 500 historically followed a momentum-like path. And I don't see why a 65 year trend based on mathematically simple technical indicators will suddenly change overnight just because it's the future versus the past.
If you don't use indicators, then you're taking the strong position that they don't matter, which is more contrary to the evidence than using them. Unfortunately you either have to use indicators or not use them. So an "I don't know" opinion is still a definitive decision that they are worse, which is probably an incorrect decision.
Bad compared to everything else in the current investment climate, not so much.
CAPE of 25 corresponds to a yield of 4% before growth in earnings is taken into account. That's still pretty good compared to the yield on treasuries and just about anything else right now.