Thursday, March 13, 2014

Today's sell-off, and why a Chinese corporate default is a good thing...

As I suggested in this morning's audio commentary, Wall Street, for much of the day, seemed at a bit of a loss as to what truly sparked today's sell-off. By the end of trading, however, the experts settled on Ukraine and China, which I believe the rally in treasuries supports (although I still believe the technicals, and energy, contributed as well). The fact that overall volume (the number of shares trading hands) was very average, tells us that today's sell-off was anything but panicky. Call it a buyer's strike...

With regard to the Ukraine situation, as of the moment, I'm still pretty much where I was here and here on the subject.

Here are my thoughts on China:

This week got off to a rough start on news that China's exports declined last month to the tune of 18%, against expectations of a 7.5% increase. China chalked it up to the Lunar New Year. Well, we'll see. Additional angst came from other data (industrial production, retail sales and urban fixed investment) suggesting that China's economy is indeed slowing. And, to top it all off, on March 7th, Chaori Solar became China's first company to default on its on shore debt.

With regard to its slowing economy: For starters, economies, even centrally-controlled ones, are cyclical---and China's has been growing at a breakneck pace for an awfully long time. Plus, China's leadership has been making a concerted effort to "rebalance" its economy to one more driven by domestic consumption (we are talking the largest population on Earth), as opposed to exports---which ought to be good news for other countries' exporters. This transition is expected to result in a growth rate somewhat less than they've grown accustomed to---and its leadership appears to be resigned to that reality. As for the corporate default, while some view it as cause for serious alarm, I see it as cause for celebration. In that that's how true markets work---and it's a beautiful thing. Here's what I mean:

When allowed to function properly, markets reward good management and punish bad. While an economy will cycle its way through expansions and contractions, this natural phenomenon (the risk of loss) inspires prudence; essentially protecting society from the kinds of bubbles that arise out of central planners' efforts to avert political pain by spending other peoples' (taxpayers) money on other people (those whose risk-taking reflected their expectation of a government bailout should they come up short). Knowing they can fail, corporate execs must thoroughly calculate how they allocate their companies' resources. You gotta wonder how different things might have been in the U.S. these past few years had bankers not known all along that their dear friends, central bankers, were there to backstop their bets.

Now, all that said, in my wildest dreams I cannot fathom China's leaders allowing for the kind of pain their economy would have to endure to properly purge the excesses they themselves have fostered---I mean if the U.S. politician can't do it. Which means there's virtually no chance, at this juncture, of a major run on Chinese credit markets.

Lastly, one thought on Ukraine. I believe Putin cares what Li Keqiang (the Chinese Premier) thinks. And, clearly, Li is not the least bit interested in seeing a serious hit to the global economy resulting from the present conflict. Nor, at the end of the day---contrary to what many think---do I believe Putin is. Which, alas, certainly doesn't mean that it can't get uglier before it gets better.



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