Remember one of the key points Tim Price made last year? The road to Financial Martial Law is paved with signal repression. Let me explain…
If you’re one of the financial authorities, and if you don’t like the information markets produce (in the form of prices) you shut down markets. Stocks, cash machines, capital controls. The principle is the same.
But shutting down a market sends a signal of its own. Oh crap! It’s a little like turning off the burglar alarm after your home has already been ransacked. It allows you to tally up your losses in peace and quiet. But you’ve still been robbed.
Yesterday, Chinese authorities ditched the circuit breaker they were using to start the new year (the year of the monkey!). That circuit breaker triggered two market halts in the first four trading days of the year. The authorities decided that calling for a “time out” in markets after moves of 5% or more was too narrow a trading range to accommodate the volatile swings in the market.
Last year, according to Marketwatch, there were 12 days in a 60-day period where the Shanghai Composite lurched more than 5%. If the circuit breaker had kicked in then, you would likely have seen more trading halts. What’s the takeaway?
You could take the low road and make fun of the Chinese for not knowing how to let a market be a market. But given that Western markets have their own share of manipulation, taking the low road is the easy road.
Or you could take the high road and say that having trustworthy and working capital markets takes years of experience and human capital. In fact, this is one reason why all the angst over losing the City of London to Frankfurt on Brexit is misplaced. London markets work well, based on 300 years plus. You don’t just replace that with a bunch of computers and tote boards with flashing lights.
In China, the circuit breakers had the opposite effect of what was intended. They broke the market. They were designed to short-circuit a feedback loop in which selling begat more selling. Instead, they begat more selling! It was a very Old Testament crash for an official atheist society.
The bigger picture is whether the sell-off in equities was driven by bad circuit breaker policy, the devaluation of the yuan by the PBOC, or by investors who are turning bearish on stocks. The global reaction to the Chinese sell-off suggests it’s the last option. Bonds, commodities, equities…there are a lot of itchy fingers reaching for the panic button.
Now is when it pays to have a cool head. The time to panic is before the crisis, when you’re of sound mind and your pulse is steady and strong. This week’s magazine and Charlie’s new reports are a great way to put the current situation in long-term perspective and make your plan, or revise based on new information.
Category: Economics