Watching the stock market on a daily basis is a good way to go insane. If you doubt this, all you have to do is read the various explanations for the daily gyrations – which rarely make much sense. Nevermind them. Since the start of 2016 the market’s been in a serious funk, which is to say it’s had a major urge to get down.
The official explanation is “China”. Something about China, at least. We’ve never bought that here at Barataria, focusing instead on the positive news that surrounds us every day. No, we’re not joking. There is indeed positive news and the market reflects this – sort of, at least.
Like good funk, the story of the stock market today comes with a backbeat and a solid bass line. It’s all about how the vagaries of international finance flow through the news and the market with a beat that so infectious ev’rbody has to dance.
Every story on China has to have a scary looking soldier for a pic. It seems vaguely racist.
The disturbance that roils the world markets from China is fascinating. It’s not that anything has actually changed in China, but the perception of the country certainly has. Where it once was a land that any serious business had to invest in to cash in on the 8% annual growth, it’s become a place to flee away from because they have a paltry 7% annual growth. The real difference is tiny but the perception is huge.
Slower growth means that growth isn’t going to continue forever. The Yuan, aka Renminbi (RMB) is not going to increase in value and not everyone can get rich at once. In the last month I’ve seen at least four references to a “Chinese Wall” of money coming our way, something we’ve talked about in Barataria for a solid year.
What’s crazy about all this is that there is almost nothing in the way of bad news for the US. It is true that as the US Dollar increases in value our exports become more expensive and our manufacturing loses out. We’re losing the Currency War, without a doubt. But we’re not losing it as badly as many fear, as shown in this chart:
The US Dollar Index (USX) since 2000.
The biggest rise finished a year ago, and hit a level much lower than it was between the official recessions and far lower than it was in 2000. Note also that it’s turning down recently, which is to say that it may be over-bought.
The main reason? A predicted rise in interest rates. That makes US Dollars, the currency that makes the world go ‘round (rather literally) more expensive.
These days, it’s Downtown that’ll funk you up.
This is where everything gets a funky backbeat. Fed Chair Yellen has become much more cautious about a rate rise, stressing that their keeping an eye on things and removing the word “balance” from her statement. It’s calmed the markets, for now at least, but they hardly needed calming. The S&P500 never closed much below the 1858 low of last August, meaning there is a solid floor to this market.
That’s the bass line that keeps the market solid.
In the middle of all this, consumer spending went up in January, signaling that everything really is goin’ along well at least here in the US. The benchmark 10yr Treasury Bill has hit an interest rate of 1.75%, down from 2.32% in December, meaning there is indeed more money available for consumers as the job market plugs away nicely.
The good numbers are always buried.
Where is this all going? The short answer is sideways from here. There won’t be any significant rise in interest rates and everything will indeed settle down. Give it another quarter, as we predicted at the start of the year. The market is gettin’ down because the market wants to get down, and there’s no better reason than that.
What will happen to China? Who really cares? Once it all settles out the serious money will realize that the rest of the world is investing in the US and we should, too. It’s a matter of confidence – and the need to get out on the floor and dance. There might be a good reason to be shy right now, but this is a beat that will be infectious in a few months.
As long as the Fed keeps the party going, there will be a party. This one will be more fun than most, is all.
Barataria - The work of Erik Hare 
Not a beat you should dance to! Good blog. Things are better than the market thinks.
That’s where I’m at.
Now I don’t want an answer to this comment from anyone, including you, Mr. Hare, but:
If an 8 ounce glass has 4 ounces of water, is it half full or half empty.
I mean, c’mon, today’s blog has left me speechlesss. My jaw has been lowered a full 3 inches!
; )
Any engineer will tell you the glass is twice its optimal size!
Don’t sit there breathing through your mouth and catching flies – get up and dance!
Very good.
Someone told me long ago there’s a calm before the storm
I know, it’s been comin’ for some time
When it’s over, so they say, it’ll rain a sunny day
I know, shinin’ down like water
I wanna know, have you ever seen the rain?
I wanna know, have you ever seen the rain
Comin’ down on a sunny day?
Yesterday and days before, sun is cold and rain is hard
I know, been that way for all my time
‘Til forever, on it goes through the circle, fast and slow
I know, it can’t stop, I wonder
I wanna know, have you ever seen the rain?
I wanna know, have you ever seen the rain
Comin’ down on a sunny day?
–song by John Fogerty
If the S&P500 breaks the support, that will be a storm. But it has really met strong resistance. That tells me that the market is pausing, not contracting.
It will take news to change this. Probably big news. There’s always a chance of that – look at the mess Syria is becoming, after all. But things really aren’t that bad.
If the argument is that a globalized economy moves but doesnt wholly determine in a unilnear fashion national economies then I think I can agree with that.
Sure, let’s go with that. 🙂 Seriously, it’s become very hard to tell when effects are global and ripple through the domestic economy and when they are isolated.
My best guess is that anything extra-national that really spooks the markets – currency valuations, foreign exchanges, etc. – has a longer term effect on us but little to nothing short term. Then again, if foreigners are buying long-term treasuries like mad our rates go down and there is an immediate effect. So it’s really hard to tell.
What I see coming off the China meltdown is really nothing but positive – unless the USD really gains value. But even that is probably a longer-term problem much more than a short one. And we have so few employed in manufacturing that the effects there aren’t going to be large.
Thanks for this blog post regarding the tumultuous nature of global stock markets; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on financial markets and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.
Good luck to you, I’ll check you out!
Thank you so much 🙂
Reblogged this on PenneyVanderbilt.
You have some pretty amazing calls through this chaos. So far they look very good. A great achievement. Cheers!
Thank you! I’ll stay on it. Looking good so far. As long as it doesn’t actually fall apart between now and the end of the year I think we’ll be fine.
Things are just not that bad. The stock market is totally insane usually. You say it works out in the long run but I don’t even see that. It’s a casino from what I can see.
It does work out in the long run. It is a casino in the short run, for sure.
I want to point out gently that Barataria participated in the general observations about the rise of China and the fact that they are catching up in economic size to the US and are therefore competition to the US. The general direction of this thought is uh-oh the US has serious competition and the US better get its act together. When a nation grows a lot they also engender admiration for what they are doing–which was investing and building manufacturing capacity and public and company infrastructure.
Am I wrong about Barataria’s previous excitement about China and the fact that they were on the verge of challenging the US as the world reserve currency? There was a sense of shame on the US for foisting its dollar onto the world as a reserve currency.
Now China is hapless, polluted and investing in unneeded infrastructure.
China may need to take a pause, but the march towards being a superpower is real. The Yuan should indeed be a reserve currency – but that means they need to give up their desire for complete control over it. They aren’t going anywhere with this until they understand they can’t have it both ways.
But today’s growth is still impressive no matter what. What has changed is only the perception of China. It was over-bought and everything got crazy, yes. It still has a primitive banking system and lacks a lot of key infrastructure. But they will get there.
Pingback: The Only Thing We Have to Fear | Barataria - The work of Erik Hare
Pingback: Fed Futzes, Fuses Financial Fracas | Barataria - The work of Erik Hare
Pingback: Risk Aversion | Barataria - The work of Erik Hare
Pingback: Other People’s Money | Barataria - The work of Erik Hare