“Nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” You know. This was the fear Franklin Delano Roosevelt was referring to in his first inaugural, March 4, 1933. To a great degree this fear was justified. The country was in the middle of The Great Depression, 25% unemployment, the market down 75%, banks failing right and left, no FDIC, no social safety-net. And, all of this was brought on by years of ill-conceived fiscal and monetary policy following the ‘Crash of ’29’.
What is disconcerting today is that the same “nameless, unreasoning” fear exists now in the wake of the 2008/2009 financial crisis. Even though we successfully dealt with that crisis, there is a lingering subconscious, maybe, conscious fear that the next disaster is just around the corner. “This basic mistrust of fiscal and monetary policy, coupled with the get rich mentality of many who talk about the stock market”, according to my editor and friend, Kate Fitzsimmons (Fitzsimmons Communications), “is fueling this fear.”
I respond to these concerns in the following way:
- Seizures, like 1929 and 2008 are normal financial market events, but they are rare, maybe multigenerational.
- Market scammers, manipulators, frauds and cheats are normal, not defensible, but normal.
- Multiyear bear and bull markets are normal. Expect them. Embrace them.
- Stocks are not bets on Red or Black. They are ownership interests in a business enterprise. If you own a business, it is unlikely you would sell the business based on a Greek default, faltering Chinese economy or a bank fraud. Lots of bad things have happened in these United State since 1802, but the market appears to have survived quite nicely providing excellent returns for those willing to be investors. To wit, Professor Jeremy Siegel, in his book “Stocks For The Long Run”, puts these compounded annual total real returns in the area of 7%. This is, by the way, for a period that dates from 1802 to 2006. This does not mean there were no risks and no corrections. There were tons over this 200+ year period, including the crash of 1929 and subsequent bear market(s).
But what about the fear du jour, China imploding?
The market and the media, as usual, operate without the benefit of history or perspective. The China devaluation this week provides a perfect example.
In my opinion the current slowdown in China (note I use the word ‘slowdown’ and not ‘collapse’) was orchestrated by the Chinese government several years back to cool an economy growing its GDP at a sizzling 12+%. Again, this was planned. China now appears to be growing closer to 7% (we would drool over 4% in the good ole USA). The important point is that this was intentional.
Regarding the recent devaluation of the Yuan, in August of 2005, you could buy 8.1 Yuan for a dollar. last Friday a greenback would only buy 6.21 yuan. Ergo, in the past 10 years, you have have had a tremendous appreciation in the Chinese currency. As I pen this piece (11:50 PM, 8/12/15) a dollar will by 6.4o75 yuan (up about .20 Yuan since Friday). Although this is a fairly fast move for a currency market, percentagewise, it is only about 3%, and we are sill 20% stronger on the Yuan than 2005. In the bright light of history and Chinese government policy to stem the contraction that they started several years back, this does not seem to be the disaster the financial media would lead us to believe is in the making.
Another issue spooking our market is the boom-bust cycle the Chinese equity market just went through, and unintended consequence of a more stimulative Chinese monetary policy on a relatively young market that sparked a speculative bubble.
This, too, central planning is addressing. Despite the fact that this is a totalitarian, de-facto communist society, they are a smart, industrious people. If the economic miracle of the past quarter century is any indication, I am willing to believe that they will weather the current growth transition without taking the world economy down.
In the meantime their devaluation move has turned the U.S. and other markets into basket cases. As such, I am reminded of the immortal words of comedian, Redd Foxx: “This is the big ONE! I’m dying! Ya hear that Elizabeth? I’m coming’ to join you honey!”
What do you think? Is this the BIG one, or should we even care?
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