First-responders say there are three collisions to any car crash. The first one is when your vehicle hits something – another vehicle or a tree, for example. That one gets your attention. It makes noise. It’s violent.
The second collision is the human collision. It’s when your body snaps against a seat belt. Or when you’re slammed against a door. Or when your head smashes into the windscreen.
The third collision is largely unseen. But in terms of damage, it’s the worst. It’s the internal collision. It’s when your brain slams into your skull. Or your organs slam into your ribs. These internal injuries do the most damage. You don’t see them. But you feel them.
There’s no direct analogy between car crashes and stockmarkets. But you take my point. The first crash is between investor sentiment and reality. This halts the thoughtless and relentless rise of stocks. It happened this summer. China helped/caused it with its currency devaluation.
The second collision was the Federal Reserve not raising interest rates in the US. It’s further dented investor confidence. Japanese stocks fell 3.6% overnight and are now negative for the year. Australian stocks – led lower by the miners – fell 3.82%. The FTSE fell nearly 2.5% yesterday and the S&P 500 lost 50 points.
Now comes the third collision, the internal one. That’s the one that does the most damage. It’s also the one where you lose the most money. It’s the real crash. It hasn’t happened yet. But it sure feels like it’s coming.
Focusing on what’s unseen
The other useful knowledge to take away from the car-crash knowledge is causation. Your mind is focused on the vehicle collision. But you know the bigger collisions have to come. Think about what that means in the context of Glencore’s share price plunge. Its shares are down 87% from the price it floated on the stockmarket at in 2011.
As mashups go, it’s spectacular. Yesterday alone, the stock fell a whopping 29%. True, it’s up over 7% at the open today. But doubts remain about the ability of the asset base to service its debt costs. It’s viability as a going concern is at stake.
But ask yourself what the second collision is? It didn’t take long to find out. Commodity trader Noble Group saw its shares fall as much as 15% in Singapore trading. The shares are at their lowest level since 2008. Noble shares took a battering in February on the back of lower commodity prices and questions about ‘irregularities’ with its accounting.
There are other secondary collisions as well. Japanese shipper Daiichi Chuo filed for bankruptcy protection from its creditors yesterday. The firm has lost money for four years in a row. The price of the share roughly matches the fall in iron ore and coal prices, which themselves are linked to Chinese demand.
That’s the way it goes in globalisation. Everything is connected to everything eventually. It reminds me of a quote from mathematician and science fiction writer Vernor Vinge. Vinge popularised the term “the coming technological singularity” in a 1993 essay of the same name. In his book A Deepness in the Sky, he wrote “If you avoided all the other threats, the complexity of your own successes would eventually get you”.
That’s about where we are with the current global system. For example, think of the counterparties to Noble and Glencore. I’m talking about the holders of their debt. Or the owners of credit default swaps linked to that debt. This is where the second and third collisions will come. And they always do.
Is ‘Obor’ a road to nowhere?
This period will be a real test of the ability of investors to think about the long term. As you know, thinking and planning for the long term is hard when the value of money (or the price of money via interest rates) is so variable. But you have to give it the old college try.
For example, take China’s “One Belt, One Road” project, hereafter Obor. This is commonly referred to as “the new Silk Road”. Chinese President Xi Jinping has been taking Obor on a road show of sorts, preaching the gospel of state-sponsored infrastructure and continent building everywhere he goes.
But according to some Western strategists, Obor isn’t about the economic integration of the European landmass through infrastructure. It’s about Chinese territorial expansion disguised as trade. According to Moritz Rudolf in The Diplomat:
The Silk Road Initiative is the major project for Chinese President Xi Jinping. On every state visit and within every diplomatic forum, he has promoted his idea of “One Belt, One Road” (Obor). Beijing wants to create China-centered infrastructure networks in order to expand its own economic and political influence in Eurasia.
But the time when the country was able to make economically unprofitable investments on the basis of political motives is long gone. Beijing had intended to invest more than $900 billion in infrastructure expansion in Eurasia. However, the money is now needed to stabilize its stagnating economy and nervous financial markets. China‘s currency reserves decreased drastically in August.
Due to financing difficulties a number of infrastructure projects have come to a standstill. For example, the gas pipeline known as “Power of Siberia”, the subject of an agreement signed by Russia and China in May last year, is in danger of flopping. In addition to this, the release of funds for the construction of the Altai gas pipeline to connect western Siberia and China has been delayed indefinitely.
Is Obor a pipedream or a vision of the future? I’ll ask MoneyWeek’s editor-in-chief, Merryn Somerset Webb. She’s in the office today. And she’s taken the position that the financial troubles in China are transitory. Stay tuned.
V-EU Day for Cameron
Partial victory for David Cameron in his war against the un-democratic apparatchiks who run the European Union. The UK prime minister successfully lobbied Jean-Claude Juncker, the president of the European Commission, for a change in rules which impose a value added tax (VAT) on tech start-ups.
Under the old rules, companies pay VAT in every country they trade in, rather than just the country they’re headquartered in. The UK policy on VAT is designed to stimulate competition and innovation. It does this by applying a threshold of £81,000 in sales before a company has to register to pay the tax.
It’s all very well for the prime minister of a sovereign nation to score a win for British businesses from time-to-time. But it’s quite another thing to have to lobby an unelected official to change a rule which applies to the people who elected you. Do you need any more proof of what Britain’s future is like if it stays in the EU? It would be a future of constantly having to ask for permission from Brussels and Berlin.
Sweden’s negative interest rate dystopia
Tim’s Price timing with his report on Financial Martial Law couldn’t have been any better. He warns of more deliberate attacks on your financial freedom of action. One of them is negative interest rates, an idea floated recently by Andy Haldane at the Bank of England.
In practice, though, there are other countries already much further on the road to a cashless society with negative rates. Peter Spence wrote a great article about it this week in the Telegraph. Sweden’s Riksbank (its central bank) has taken official interest rates below the ‘zero lower bound’ in an attempt to reduce unemployment and generate an annual inflation of target of 2%.
None of this has worked. But analysts reckon that gives the Riksbank even further to go with negative rates. Rates could go to -0.5% by the end of the year. They are negative in Denmark as well. And in Switzerland, they’re at minus 0.75%.
None of these mild penalties on the holding of cash have had the desired result. They have not promoted dis-hoarding by savers. It raises the question—if you’re an elitist rate-setting academic—of how low you could take negative rates before the rational saver would get serious about getting out of cash.
You’ll find out soon enough. And in the meantime, put this phrase in your dictionary: the monetisation of fiscal deficits. It’s government spending financed directly by central bank money printing. I’m going to ask Bill Bonner about it in today’s Capital and Conflict podcast.
Category: Economics