What an incredible spectacle. The world financial system apparently teetering on the abyss over the failure of China to live up to the economic expectations of the pundits; and all this during the dog days of summer when not much is supposed to be happening.
Watching the stock markets collapsing around the globe, a spectator might be excused for asking who is in charge? Or has it really come down to an interconnected world where one spark can ignite the whole shebang.? The answer depends on who you ask.
The traders employed by the bankers will tell us that indeed it is an interconnected world where trillions of dollars in derivatives are sloshing around waiting for the hair-trigger fingers of algorithms designed by quants. This is the scary world that few understand even though it accounts for the majority of trading volume on the worlds exchanges.
A more rational explanation might be that asset values (stocks) driven up by years of zero interest rates (easy money) were just looking for a return path to sanity. All that was needed was the excuse, that in this case, happened to be China.
I have written before about China’s need for continued growth as a way for the Communist Party to control the proletariat. I do not think this has changed. But I suspect that controlling the levers of power is proving to be easier said then done. The very thought of a tightly controlled economy with massive State Owned Enterprises placed along side of rampant capitalism boggles the mind. There is absolutely no precedent for such a hybrid and consequently it is very difficult to figure out what is going on. I doubt however, if the lofty growth rates thrown about by the Communist elite, bear much resemblance to the Gross Domestic Product numbers used by the rest of the World.
The Baltic Dry Index (a measure of what shippers are prepared to pay for shipping capacity) has been falling for two years, and is now near an all time low. The Commodity Index has also been in free fall leading to the inescapable conclusion that World Trade has been slowing for some time. If it were not for the hysteria over China, this might well be chalked up to more normal long-term cyclical patterns.
The flip side of the China Syndrome is why would the likes of India. Brazil and South East Asia not be subject to well established business cycles? Have the bankers and rulers of these countries unlocked the secret of controlled growth? I think not.
As an old-timer I have to admit I have witnessed at least four commodity cycles and I fail to see the difference this time around. The players may be different but the cause is still the same. Too much cheap money pumped into increasing capacity ahead of the growth in demand.
The volatility of the correction had nothing to do with the planners or the players and everything to do with technology and good old-fashioned greed.