China unfortunately created stock market but doesn't have the requisite pieces to allow one to operate properly.
For a fully functioning stock market you need:
- capital, which they have
- speculators, to make trades happen, they have these
- transparency in how your market works, or atlest the appearance that the market is fair to all
- and you need stoggy old buy/hold/long only investors. China is missing these.
In most markets the latter is done by ETF retirement investment and pension plans who have to invest 100's of billions of dollars each year.
The scariest thing about this for the global equity markets is that in 10-20 years the top 3 markets could be China, India and the US.
Whether or not you like the US stock market, it is fairly transparent and not run by the whims of the government. The other two countries are about as opaque as you can be. Speaking as a person who actively invests money, that's a very troubling thought.
As one economic nobel prize winner put it... "China and India haven't put out a credible macroeconomic number in the past 10 years".
China is also loosing alot of money each month trying to support the yuan. I saw a credible estimate of about 100 billion a month since October.
Because I'm more than willing to stand on those points as being accurate.
The assertion that you need someone to actually buy and hold stocks to have a stock market,
or the assertion that there aren't pension funds and ETF funds willing and able to put 100's of billions of money into the market?
These two types of investors act as dampers.
When the markets go south they are the ones who start buying up "bargains" and hold their existing positions because they aren't worries about 6 month returns they are worried about 25 year returns
> It sounds to me like you made it up.
You can think that if you'd like... Since trading on the equity markets is my day job, I'm pretty comfortable with my knowledge of them.
pension and etf funds are for the most part full invested. outside investors with dollar signs in their eyes are what you're talking about, and there's absolutely nothing preventing these investors from buying chinese stocks (hong kong proxy or whatever).
> or the assertion that there aren't pension funds and ETF funds willing and able to put 100's of billions of money into the market?
Based on your HN profile, you are 10000x more qualified than me on this subject, but I would like to see some evidence to back up the claim that the shanghai stock exchange has no pension funds trading large volumes of equities over long time horizons.
According to the wikipedia chronology of the Shanghai Stock Exchange [1], an influx of speculators did not enter the market until 2006-2007, following the "unbanning" of IPO's. Presumably the implication is that prior to speculators entering the market, most trades were executed by large institutional investors.
If these institutional investors are not trading on long time horizons (like a pension fund would), then who are they, where does their funding come from, and for what purpose do they use the exchange?
The individual investors that joined the stock market in 2006 are all "pension funds" in their own right. That is what they are saving for, amongst other things.
So why are people then trading stocks in China or India or wherever if they don't trust the system? They wouldn't be able to become the largest stock markets if nobody would trade there and there would be nothing to be scared by.
I think you're underestimating how pervasive the stock market is in doing stuff. Say, foxconn wants to build a new factory. they put up stock as collateral for a loan to pay for it. Stock crashes. They have to sell existing assets to cover the loan.
Even if they retain control by selling to a trusted partner, the asset shift is painful. If you can imagine foxconn getting into that trouble, it's very easy to imagine them not being able to manufacture IPhones or Galaxys for a few months while they negotiate contracts with the new asset owners. Any idea what that would do to Apple stock? And, you know, your 401k?
This is an extreme example, but captures the spirit. when suppliers go out of business, or even run into trouble, all the companies that depend on them slow down, have to renegotiate new contracts, possibly miss deadlines. It can be ugly.
Because you can still make money in the short term. The lack of transparency means that every dollar you invest there has extra risk attached to it. This discourages long term and large investments while promoting short term thinking and risky behavior.
When a lot of the economy depends on volatile markets, there are negative externalities. In other words, it doesn't just affect the people who are using the market to gamble.
They don't know enough to complain. That's a major part of the problem. Signing up is compelled by misrepresentation of the entire system, the whole way through.
Some may have been leaned on by the government to participate. Some did trust the system to start, and are now struggling to get out. Some thought they could make a quick buck.
Holding cash is a losing strategy long term, plenty of money has already gone into real-estate. They can't expatriate their money, where else is it gonna go?
You are talking about two different economic classes. It takes a few hundred thousand dollars to move immigrate to Canada and it takes more to be a housing speculator.
> So why are people then trading stocks in China or India or
> wherever if they don't trust the system?
If you're speculating, i.e. purchasing for the sole purpose of selling it to someone else, who is also speculating, it doesn't matter whether the system is trustworthy, it only matters whether there is a "greater fool" standing ready to trade with you.
If the perception is there that people are trading in these markets, people will trade in these markets. But without fundamentals, the whole thing can quickly suffer from a collapse in confidence, followed by a "run."
It's no different than buying Bitcoins. Why speculate in bitcoins? Because other people are speculating in bitcoins.
I have been playing a fun game where I see if a financial article on YC has bitcoin mentioned in the comments. It is in basically every comment section of anything related to finances. Personally I speculate in Bitcoins as a hedge against variations in cash and stocks. I like to think of it as e-gold that has some advantages and disadvantages versus a solid asset like gold. Due to the increasingly global and digital nature of our existence I think BTC has a very high potential upside.
Non-rich Chinese people are doing that because the government has been pushing it pretty hard (think the way state lotteries are pushed in the US, or fantasy sports, with pretty much the same returns, really).
Oddly enough, said non-rich Chinese people are also the ones China is trying to protect with its market stabilization efforts, or so it claims. I'm really not quite sure what they _think_ they're doing there.
Apart from that, it's pretty much all people looking to make a quick speculative yuan.
>> Whether or not you like the US stock market, it is fairly transparent and not run by the whims of the government.
This.
This will be China's undoing. The hardest thing to try and control are open market forces - which China is clearly controlling and attempting to manipulate, with disastrous results.
CCP cares way more about maintaining control than in ensuring stability. I'm sure they have plans in place to shut the whole market down if they decide it needs to be done.
> CCP cares way more about maintaining control than in ensuring stability.
That may be true. But I think they also see lack of stability as threatening their ability to remain in control. So in practice, they care a great deal about stability.
They have other ways of maintaining stability. Ways they have been relying on for decades before there ever were viable financial markets. They can simply fall back on those.
I wonder if that's true. The people are used to high growth and a steadily increasing standard of living. If the CCP decides to go back to Mao's playbook they'll likely have a revolution on their hands.
The CCP is absolutely massive in terms of what percentage of its people are party office-holders. They have unprecedented levels of control over all aspects of Chinese life.
Revolutions grow out of revolts. Revolts grow out of riots. CCP is remarkably adept at managing riots. For riots to grow, you need revolutionaries to amass power. CCP is remarkably adept at policing this kind of action too.
The CCP isn't going away anytime soon. Xi Jinping has way more to fear from intra-party power struggles than from grassroots activism.
Nevsky Capital, a successful hedge fund, just shut down and released an interesting letter to its investors that's worth reading in full. I'm not sure about the transparency of India's stock market, but it did not have nice things to say about the quality of their economic data:
"Data releases have become much less transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever increasing importance of China and India. China is the world’s second largest economy, but already much larger than the US in a broad swathe of sectors. India will be the world’s third largest economy within a decade. Unfortunately their rise is increasing the global cost of capital because an ever growing share of the most important data they produce is simply not credible. Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe."
It's really frustrating to see China and India constantly discussed as if they were a single unit, particularly when it comes to economics.
Aside from the fact that they are (a) both very large, and (b) both rapidly developing countries/economies, China and India share very little in common.
There are challenges to investing in either China or India, but the reasons behind those challenges are about as different as you can get. The underlying issues in the two countries are dramatically different.
As I see it, India is a functioning democracy with a strong commitment to capitalistic industry. Regulation might be too much/too less in some areas but that will eventually improve. OTOH, China is very close to dictatorial, with the government controlling everything from the exchange rate to every company's policies. For example, we have proper public debates in India about stuff like net neutrality, freedom of the press, and we routinely criticize the government and politicians. That is simply not possible in China.
I really do not understand how anybody with even a little understanding of the two countries can lump India and China together in the same political/financial group.
Because, "capitalist" and "communist" are not two fundamentally opposed groups: go far enough in either direction, and you end up in the same place results-wise.
> I really do not understand how anybody with even a little understanding of the two countries can lump India and China together in the same political/financial group.
Are you asking how the term 'BRIC' came about?? If so, the paper where the term was first used is available online and it is remarkably readable. The pdf is located:
The BRIC (Brazil, Russia, India, China) countries are all grouped together because they all have very large populations (Russia is the smallest at 140 million) and rapidly modernizing economies. In other words, they're actually big enough to stand on their own on the global stage should their economies become fully developed.
From the standpoint of an investment banker (which is where the term BRIC comes from) any differences between them are largely irrelevant - they all have a large population, a government that is stable enough to protect their business investments, and an improving distribution of wealth to ensure widening participation in the economy to sustain growth for decades (this is important when macro investing; a rising tide raises all ships, and macro investors are basically investing in all ships). But that's about where the similarities between these 4 countries end, so using the term "BRIC" to speak about cultural similarities is meaningless.
So let's just talk about countries with more than a billion people with growing economies? They are mentioned together because of their developing status and increasing effects on the world economy, but otherwise have little in common.
I'm not sure how you think they are lumped together. That quote outlines how each specifically meets the criteria of being "less transparent and truthful" in the eyes of the author.
I don't know why you are getting downvoted; you're absolutely correct. Note that while the below sounds racist; I'm referring explicitly to the governments themselves.
> There are challenges to investing in either China or India, but the reasons behind those challenges are about as different as you can get. The underlying issues in the two countries are dramatically different.
I agree; and you probably know this all, so it's for others' benefit. China is a centrally-planned economy that has transitioned to a capitalist-style oligarchy. Culturally, they value society as a whole as being more important than the individual or individual groups. The Chinese government is still the ultimate authority, though many factions exist within the Communist party. Everything coming from the central Communist party is reviewed and OKed by a dozen officials to ensure a consistent story - so any bad numbers are a result of deliberate overstatement at some level. It also means that stakeholders at every level have the opportunity and incentive to falsify numbers (because missing your numbers means losing your job and ending up in poverty). It's not a giant conspiracy; but there is little downside to falsifying accounting numbers (which will get you a prison sentence in the US).
India is on the opposite end of the spectrum - it's basically a free-for-all with a bunch of very different groups of people pushed together to try to make it work. There are thousands of ethnic groups, many of whom hate each other. So in order to keep the peace, they have to allow each ethnic group a wide berth. This means that when you say "the Indian government" you're talking about an entity that is a multi-headed hydra (or even multiple hydras). There are many competing desires and biases present in the Indian government, and it's politically difficult to deal with those problems when your population is as fragmented as India's is (and why the election of a more modern leader with a global focus like Modi was a huge step forward).
That was lack of transparency inside privately generated mortgage backed securities. The US crash wasn't caused by blatant lies about economic indicator (GDP numbers, etc). The transparency of the housing sales is actually what allowed people to see the contractions and prevent the issue from getting even worse.
With the tech bubble/bust you could look at underlying companies for the canary in the coal mine. With the housing bubble/bust as you mention you could look at each mortgage and the ability of the borrower to pay. When you have a bubble arguably in government debt, what is the mechanism of transparency to look for?
With the housing bubble there wasn't a good way to look at each mortgage or the borrowers ability to pay. In a lot of cases the mortgage data was falsified or didn't even exist. In the aftermath of the bust several banks could not produce any documentation on homes they wanted to foreclose on.
Transparency of housing sales isn't what allowed people to see the contractions and it certainly didn't keep the problem from getting worse. Massive numbers of defaults were the indicator. What kept the problem from getting worse was the government taking partial ownership of the major banks/AIG, increasing the FDIC limit and TARP.
Stock market movements are heavily influenced by macroeconomic trends like inflation, GDP, unemployment etc., and the government is the organization tasked with collecting and disseminating that data. When you don't trust the numbers coming out of the central bank, you can't have much trust that the stock market is reflecting the true value of the securities.
When people refer to the 'stock market' not being transparent... they are referring to the Regulators. Indian regulators are as transparent as US,China,EU. They have been known for bringing down big shots e.g. Sahara Group but on the other hand have failed to investigate some of the other big co's.
What indian economy lacks -
1. new credible entrepreneurs e.g. existing group co's have gotten into more new businesses and expanded into traditional sectors as compared to a handful of new names.
2. new business models e.g. most business are copying what has existed in US such as ecommerce, taxi aggregators, etc.
3. enhancing regulation in existing markets e.g. real estate.
> Whether or not you like the US stock market, it is fairly transparent and not run by the whims of the government.
I wish I could believe this, but after years of federal debt fueled Quantitative Easing and implicit guarantees of "too big to fail", I've stopped believing this is true.
Says former Fed governor Fisher:
"We frontloaded a tremendous market rally to create a wealth effect ... The Federal Reserve is a giant weapon that has no ammunition left."
I think, 'transparency' in this sense might be more akin to 'predictability'. If you can count on the big players to act a certain way, even if that's the most evil thing possible, you can make a decision with confidence. if they're out there doing random stuff all the time, it's really tough to say, 'this is the right choice'.
I just finished Too Big to Fail by Sorkin. From that point of view, everyone was facing something that had never happened before, so it's hard to be predictable in that case. One day, they push J.P. Morgan to buy Bear Sterns. One day they let Lehman Brothers die. One day they nationalize the banks. It was just all over the map. On the other hand, they were facing something new, never really thought about before. It's hard to have policy for rare events, so they just kind of tried stuff and iterated on what worked.
It's kind of a testament to the quality of the US market that you can say for sure, 'i don't want any of that', because of a specific reason. That's very different, and far more valuable than 'i don't want any of that because it's incomprehensible'.
Right...but a real problem is, or course, moral hazard, ie "if they did it before (bailed us out), they will almost surely do it again, so what incentives do we have to alter our risky behaviors that are currently making all of us rich?"
All I was trying to point out is that the idea that the US market is devoid of any government manipulation and shenanigans is fiction at best.
The assistance had a pretty hefty price. First, the weakest died. it's not like the fed jumps in at the first sign of trouble. Second, companies had to take losses first. They take the first billion (or more) before any fed help kicked in. Third, they got nationalized. Nobody wants that, and everybody bought the government back out as quick as they could, or died.
But, again, the beauty of our system is we have an idea about how the major players will act, it's not totally opaque and unpredictable like China. If there's another little bubble, it's pretty clear the fed will just let that industry die. If it's huge, at least some players will die. The rest, can either suffer on their own, or suffer as a nationalized entity.
I've had a little experience with this and I agree. If they can improve here (and what's to say they won't in the next decade), what's left to hold them back?
What specifically about the free market is hold Brazil back? What changes would increase economic output? I understand that import taxes on things like consumer electronics are punitively high, but that's a cross-section of the consumption aspect of GDP. GDP can still be increased through capital investment, fiscal policy and net export growth.
> It's tough doing business in Brazil.
Yes, dysfunctional bureaucracy both in the public and in the private sector (government, banks etc.) makes it really hard to create and manage any business. I tried really hard for a while, but it didn't work out.
Sadly Brazil is little better than a middle eastern oil state. They rode a massive bull market driven by China's insatiable appetite for commodities. Rather than use that whirlwind to diversify and prepare for the day that slowed down they appear to have done little. It's very sad.
You could say that Australia's in the same position. We dig up stuff and export it to China. We had a chance to extract some tax from the mining companies but blew it.
I don't think things are going to be very nice here in 10 years.
Coupled with China's lack of global consumer brands, corruption, pollution, demographics issues, global slowdown, carry trade unwind, rising US interest rates...you get the idea
> Coupled with lack of global consumer brands, corruption, pollution, demographics issues, global slowdown, carry trade unwind, rising us interest rates...
You don't need global consumer brands when your country is the size of China. They have 15% of the world's population and speak a language that few outside the country can speak and even fewer can read: nobody else is going to come in and take those customers except Chinese companies. Corruption is being cleaned up; but it's still a real problem at the local level. Again, pollution is a huge problem but China is betting the farm on "clean" energy tech and will be the energy leaders of the world in 20 years. If (or when) they figure it out, they're the only ones with the manufacturing skill and capacity to mass-produce.
The truth is, we've never seen what happens when a large country "awakens" in the age of globalization. Macroeconomic theory is largely based on the import/export balance, which is increasingly less important as borders become less meaningful (and import/export controls become increasingly difficult to enforce).
I have a feeling that China will surprise us - despite the fact that they will have negative population growth over the next few decades and an aging population, the fact that they are actively moving subsistence farmers to the cities may stall the effect of a shrinking population with the added consumption / demand from turning poor farmers into urban consumers. Their aging population is also accustomed to a lower standard of living than the up-and-coming generation. Population deflation has been especially damaging to Japan because it hit them after they had become a heavily industrialized country. Despite the huge progress China has made, hundreds of millions of people still live in poor farming villages. That's a source of potential growth that I expect the Chinese government to tap strategically.
This is my feeling too, if anything China is about to breakout and become wealthier and more powerful than it already is. Good work ethic + common sense is a wonderful combination. The "west" largely lacks the later, while the rest of the world (except for a few countries, including China) lacks the former.
You are being downvoted because this is a really poor comment. "The West" lacks "common sense"? "The rest of the world except China" lacks "work ethic"? What?
- Chinese companies are the only ones that can serve Chinese customers: Yum brands (KFC, McDonald) 7000 restaurants. Starbucks 1600 stores in China. 7-eleven 2000 stores in China. H&M. BMW. Mercedez. Apple. Microsoft. etc. All top brands, and command a higher price point/margin than local competitors if any. Meanwhile, none of the Chinese brands can even get a foothold outside China.
- Clean energy in 20 years: in 20 years, most of the Chinese rich will have already left
- large migration from rural to urban: there's no jobs waiting for these rural farmers. Therefore they cannot generate value; they're merely drags on the system. In year 2016, with manual jobs being automated, a body is no longer an asset but a liability. The person would need to have the knowledge/skills to compete for global job scarcity. And Chinese citizens aren't trained in English to compete for global knowledge worker jobs.
3 million? According to http://www.yum.com/investors/faqs.asp they have "41,000 restaurants in more than 125 countries and territories" - meaning about 17% of their stores are in China.
> Edit: To clarify, I am supposing that perhaps more English-speaking knowledge workers would be trained in the future.
As a side effect of US immigration policy and the hot job market for knowledge workers over the last 20 years, an extremely disproportionate number of PhD candidates in science and business at US universities are Chinese nationals. So it's already happening -- and we're the ones doing it.
I think China is aware that Mandarin will not become a global language of trade -- it's simply too difficult to learn. But this likely suits the government just fine as it funnels all business deals through a (relatively) small group of people who are fluent in Mandarin and another language. And given the difficulty of learning to read Mandarin as opposed to say, French or English, I suspect almost all of those people will be Chinese.
The immigration policy is deliberate, from a 1989 NSF memo:
"A growing influx of foreign PhD's into U.S. labor markets will hold down the level of PhD salaries to the extent that foreign students are attracted to U.S. doctoral programs as a way of immigrating to the U.S.. A related point is that for this group the PhD salary premium is much higher [than it is for Americans], because it is based on BS-level pay in students' home nations versus PhD-level pay in the U.S. . "
Basically the government wanted to allow more foreign students in to PhD programs to suppress PhD wages. They estimated without any policy changes, computer science Phd wages would be over 100k by the year 2000...
Bottom line, the Chinese nationals in your classroom and in your office are the result of a concerted effort by the US government and the tech industry to suppress wages.
One could also say that it is to ensure an adequate supply of reasonably-priced high-end knowledge workers.
We have to be very careful here: On the one hand, if talent is too restricted, prices will rise, but so will opportunity costs, suppressing R&D, or that R&D might simply move to where the talent is.
Meh, I don't buy it. If prices rise then supply will meet the demand and resources will be allocated accordingly. Do you have any numbers to show that as we've seen a decrease in wages for STEM professions that we've also benefited from an increase in R&D? And not actually an accumulation of wealth by the wealthy industry stewards with all time high corporate profits?
The average CS PhD is what? 36k/yr? That is only attractive to international students who place a lot of value in being on US soil. The smart domestic students will avoid PhD programs and CS altogether, which is precisely what the industry wants, the self full filling prophecy of the "talent shortage".
Numbers? America has always been an immigrant country, from its very founding (even the Ameri-indians crossed a bridge to get here). There is nothing to compare against; high-end STEM has never been dominated by American-only talent. So all we have is world supply vs. world demand to go on, and what can we tell from that?
I made about $1300/month as a PhD student at the end of the 90s/early 00s. But in exchange, I got to do the research I wanted to, it was a fair exchange for me. If you are in it just for the money, I guess it doesn't make much sense, but then you don't need a PhD anyways. I'm also one of the odd balls who is an American CS PhD graduate working for an American company in...China. Turns out, those high-end research jobs really can move from the US to another country (before China, I was in Switzerland)!
> If prices rise then supply will meet the demand and resources will be allocated accordingly.
CS grads already easily make the most money out of all STEM graduates except maybe medicine which requires a much larger time/money investment.
Where exactly do you see the extra supply coming from if, say, CS wages went up another 50%? Who would be incentivized to study CS who isn't already sufficiently incentivized today?
I think you missed the first point... the other comment never states that only Chinese firms can serve Chinese customers at all. He/she was more in agreeance with your point about chinese firms not needing to operate outside of china because their domestic market is large enough to serve their needs. Why leave when you have a 1bn+ person market in front of you?
I don't think chinese firms can't get a foothold abroad (see Huawei), it's just that they have less desire to.
The Chinese government couldn't cut off Apple at this point. The middle class are too bought in as users/owners, the rich make too much money from being suppliers, too many poor people have jobs depending on being Apple suppliers.
Massive civil unrest because Apple is kicked out of China? Ummm, there wouldn't be massive civil unrest in Palo Alto if Apple was kicked out town. People buying Apple products just don't do massive civil unrest. They'd bitch on Twitter (or Weibo/etc), but riots in the streets because you can't buy an iPhone? I'm as big an Apple fan as the next guy, but that just isn't credible.
Do you have any more you can tell me about your time in China? While you were there, what were the defining aspects of the Apple users you met? Were they representative of your other middle-class friends there? When you spoke to FoxConn employees, were they really not concerned about work drying up in the future and massive lay-offs? Amongst your connections with major shareholders of production companies, did you really get the impression they wouldn't use their influence - political and otherwise - to keep major buyers able to buy? You mention Weibo - how do you see the difference in Weibo vs Twitter as a tool which has caused political change in the past?
Really excited to hear more about your experiences!
Apple not being able to sell in china is pretty much unrelated to FoxConn assembling parts for them in China.
Proof:
The iPhone was released in china in like 2012 or something, There were no riots, and FoxConn was still handling the assembly... Sooo... Pretty sure your point is moot now.
> I don't think chinese firms can't get a foothold abroad (see Huawei), it's just that they have less desire to.
They not only have a desire but they also can get a foothold (look at how well many of their cheap phone brands are doing in developing countries). However, they do have a limited ability to do so when it comes to developed countries. Which isn't that bad since most of the big brands are manufactured inside their borders anyways. The calculus looks better for them than for, say, the UK.
I'm not sure that a 7-eleven per half million Chinese people really diminishes the potential for domestic firms to grow in their continent-sized domestic market. And that's even without protectionism and ownership rules that encourage Chinese franchises of foreign companies to be 50/50 joint ventures.
Think Lenovo is doing a lot better in overseas markets than Yum Brands in Chinese markets...
Most leading players in China’s CVS sector are regionally
based. Currently, there is no national leader. According to
UBS Investment , top CVS players in Guangzhou, Chengdu
and Shenzhen have a relatively high market share. Meiyijia,
the market leader in Guangdong province, accounted for more
than 60% of Shenzhen’s market share and 30% in Guangzhou.
Hongqi, the market leader in Sichuan province, accounted for
Exhibit 8: Market leaders and respective market share in selected cities
Source: UBS Investment. October 29, 2013. “Report on Chengdu Hongqi Chainstore Co., Ltd.”
Chengdu
43.6%
Market leader;
Hongqi
Beijing
23.8%
Market leader;
Easy Joy
Shanghai
17.9%
Market leader;
Quik
Shenzhen
61.3%
Market leader;
Meiyijia
Guangzhou
30.0%
Market leader;
Meiyija
Chongqing
26.6%
Market leader;
Chongkelong
43.6% of Chengdu’s market share. Meanwhile, the market in
Chongqing, Beijing and Shanghai is somewhat fragmented -
Chongkelong has a 26.6% market share in Chongqing, while
Easy Joy has a 23.8% market share in Beijing; Quik has a
17.9% market share in Shanghai.
> Chinese companies are the only ones that can serve Chinese customers
I don't agree with this; but Chinese companies are in a much better position to do so, and China is where the growth is.
> Clean energy in 20 years: in 20 years, most of the Chinese rich will have already left
A bit hyperbolic; but we already have a global economy. Foreign companies will continue to invest in China (both in companies and in their own projects) regardless of what the Chinese wealthy do. There are 1.2 billion people in China. Most don't brush their teeth. Think how much more toothpaste P&G could sell there if people became even moderately wealthy and more concerned about dental hygiene.
> large migration from rural to urban: there's no jobs waiting for these rural farmers.
As long as the Chinese government is willing to sponsor public works projects, there will always be jobs. And China is not unique in the transition from a manual labor to a knowledge labor economy: they're actually probably in a better position than most because they can benefit from explosive growth whenever they choose to. And don't forget that the Chinese population is aging rapidly: there will be more people exiting the workforce through retirement and death than new entrants into the workforce. Ensuring need and training match up is a problem, but I don't think any government has solved that one; so I wouldn't call it a huge impediment to their growth.
No, that was your point. You said quote "nobody else is going to come in and take those customers except Chinese companies"
>Foreign companies will continue to invest in China
Sure they will, but it will be dramatically smaller. $850 billion a year outflow makes it so
>if people became even moderately wealthy
IF. These rural farmers have to compete with cheaper workforces in southeast Asia. And english speaking knowledge workers worldwide.
>As long as the Chinese government is willing to sponsor public works projects
The government did that already since 2008. All they got were 300% gdp/debt ratio and badly constructed roads/buildings. They can't borrow anymore money to do that, not with the carry trade unwinding and default rates going up.
> All they got were 300% gdp/debt ratio and badly constructed roads/buildings.
This is too hyperbolic. They got airports and a large network of trains and high-speed trains. They also got the internet, electricity and smart phones all of which are still relatively new to China. The impression I got when I lived there was that the past decade has been all about developing infrastructure. Now there is a young generation growing up with more education, more technology and more opportunity than ever. China is a huge, complex country early in its development and it is hard to generalize about it.
1. KFC? McD? Yes, they have this. But they also have their own chains. That you did not hear about them, does not mean they don't exist. I actually really like the (Japanese) chain Yoshinoya here but there are enough Chinese alternatives. Starbucks? Yes, they have this. But they have their (I assume) own chains (I assume for example Holyland and 85 degree are Chinese brands).
Technology? Yes, the rich kids love Apple products. But they have Haier, huawei, Hisense, Xiaomi. Your ignorance won't make this brands disappear. And if you don't want to buy them, there are billions of people and the world that will. And don't forget. "Made in Germany" was a label forced upon products by England to suggest "inferior technology". How did this turn out?
Instead of Paypal they use alipay, instead of Whatsup they use the much superior WeChat. Yet, Baidu is very inferior to google. They have Alibaba and Taobao.
Yes, they have their BMW, Mercedes and VW. But they also have their Chinese brands like BYD etc.
They may have a recession/depression for some years but it won't stop the rise of the East. The world GDP has already shifted back to the East after it shifted to the west due to the industrual revolution. The economic future lies in the Eurasian continent with Russia/CIS, India and China. Europe has two options - associate with the US or with the Eurasian continent. The US is very eager to prevent this (e.g. TTIP). Don't forget, Chinese think very strategically and long term.
The long term problems are likely different. Besides over aging (which can be seen in the West too), believe of cultural superiority. While it has it advantages not to be flooded with criminal "refugees" like Germany, the closed society in China also keeps talent out. Most superpowers (Rome, UK, USA) were very open for talent and it was easy or at least possible to become a citizen. This is a problem. Corruption? This can be fixed. But the deeper tendency to be dishonest is likely the cultural problem. Similar to Arabs, Chinese don't trust each other.
Yes, I've been to China. Btw, have you ever read the thread? I was responding to OP's statement 'nobody else is going to come in and take those customers except Chinese companies'
> The world GDP has already shifted back to the East after it shifted to the west due to the industrual revolution. The economic future lies in the Eurasian continent with Russia/CIS, India and China.
Yeah that like sounds something out of Zerohedge. You're gonna have to provide some evidence.
> I was responding to OP's statement 'nobody else is going to come in and take those customers except Chinese companies'
But you haven't refuted that statement. You merely pointed out there is a tiny amount of "western" companies operating in China, with no numbers on the ratio of foreign to local operations. Which would be the real way to refute that point.
There are foreign brands sniffing around the edges. But mostly, Chinese spend their money IN china. The car companies are a good counter example, but that's mainly because China didn't have the Car manufacturing expertise in house, I believe this is changing. McDonalds and KFC are a joke in China for every one of them you see, there will be at least 10 chinese fast food competitors with more customers. (Turns out Chinese have a preference for Chinese food - Crazy huh?)
iPhone still only hold about a 30% market share. I think that'll change too, as Huawei, and Xiaomi have become significantly more competitive and are significantly cheaper.
This is common knowledge. Google the numbers. I actually tried to include a graphic that I saw once but I was not able to track it down anymore. I was basically a world map with a ball/point that showed movement of world GDP. This ball was far on the east before the industrial revolution since much more people lived in Asia than in Europe and they also had more efficient agriculture. With America becoming populated mainly by European and with the industrial revolution the percent of GDP product by the Western world shifted to the west. At one point this trend decelerated, then stopped, then reversed and then accelerated (towards the east). This should not come as a surprise.
I don't think that graphic you're thinking of shows "world GDP" so much as "the centre of gravity of GDP across the planet": These are two quite different things. In any case, you might have in mind a map by McKinsey Global Institute in their "Urban World" 2012 report.
Ah, you are the maker of the graphic.
Well, I vaguely remember the graphic I saw.
But as a feedback
- What are the two extremes? I don't know the end points in your graphic.
- You graphic does not show how the center shifted from the East to the west after the industrial revolution. Because from 1500 to 2010 you actually have either hard data or past estimates.
- I would have put the distance of the dots (years) and a color legend in the picture.
- I am to stupid to understand what the different sized arrows mean in the graphic. What information do they provide?
> You don't need global consumer brands when your country is the size of China.
Need? I guess not. But I think the point is that those things manifest themselves in a healthy market/economy/society, a healthy innovative market. If you're not advancing technologically, then you have no hope for your future. And that's what companies like Samsung, Toshiba, and Sony all do (in the electronics industry). They innovate. That innovation breeds more innovation and lays the groundwork/framework for future innovation.
That's China's biggest problem right now; they relied so much on theft of IP that they lack the infrastructure to innovate on their own. They're stuck on a ledge and can't go any higher without either technological handouts or stealing more IPs. Unfortunately for China, companies are becoming much better at protecting themselves having learned from past mistakes.
China is essentially the world's factory. That's all, nothing more, nothing less. That's all they will ever be until they climb down from their ledge and start climbing up again (starting over from scratch).
> They have 15% of the world's population
And? not sure how this is relevant. If anything, it's even more incriminating; they have that many people but so little to show for it. So little genius, so little innovation, so little advancement... It's proof that their current social, economic and political system has been a failure. They should be trouncing everyone. But they aren't.
> Corruption is being cleaned up
Their "corruption clean-up" has been just lip service. You'll note it was published first from China's own government-ran news agencies (Xinhua).
If you look at transparency international's corruption index (here: https://www.transparency.org/cpi2014/results) you'll see that they actually dropped 20 places from 2013 to 2014. Their corruption actually got worse, not better.
> we've never seen what happens when a large country "awakens" in the age of globalization.
> Need? I guess not. But I think the point is that those things manifest themselves in a healthy market/economy/society, a healthy innovative market. If you're not advancing technologically, then you have no hope for your future. And that's what companies like Samsung, Toshiba, and Sony all do (in the electronics industry). They innovate. That innovation breeds more innovation and lays the groundwork/framework for future innovation.
China has been quite innovative in the manufacturing arena. You know all those neat laser drills and 6 axis CNCs that mass-produce all the tech products we have? They were probably designed in the US; but the Chinese are the ones who know how to organize them to churn out 100 million iPhones.
> They should be trouncing everyone. But they aren't.
Look at your history; China was reeling from the collapse of its imperial government (largely as a result of the meddling of European powers) in the early 20th century. They were then invaded by Japan (which has always been a military-focused country, and thus had a very strong military when Western powers came calling and was able to resist colonialization). After its infrastructure was pillaged by a 15-year Japanese occupation, there was a power vacuum and a decade-long civil war.
China was kept in the stone age until basically 1954 by the meddling of outsiders. For all the awful, misguided things Mao did, he and the subsequent leaders of China set the country on a path for rapid modernization - modernization at all costs.
> Their "corruption clean-up" has been just lip service.
I don't know about that. The Chinese government is acutely aware that they need foreign investment in China, and that becomes very difficult to do when there are "hidden taxes" in the form of corruption.
> Unfortunately, China's a long way from awakening.
If that's true, then that's pretty scary given where they are now vs. 20 years ago.
That's interesting that you know this depression is going to happen. How much money have you placed on this certainty? There's a few different ways you can short the Chinese economy. You'd be crazy not to if this is as sure a thing as you say.
ProShares provides a convenient way to get short exposure to large Chinese stocks that trade in Hong Kong (you buy the ETF to get short exposure): http://finance.yahoo.com/q?s=YXI
Well... This particular form of shorting China sounds really dangerous. Big firms tend to be the last to fail, and ETFs have a lot of strange behaviors; I'm thinking more in terms of looking for companies that will become more prosperous as their Chinese competition falls.
Especially if one "shorts" the Chinese economy by buying and holding leveraged inverse ETFs! A sure way to lose your bet, no matter the outcome.
(Background for non-investors: leveraged ETFs are intended to replicate intraday performance, and a long-term buy-and-hold strategy is always expected to trend toward 0)
ETFs and the financial-services industry in general are the real world's magic system. I personally don't want anything to do with them...
(For one thing, ETFs like to buy and sell whole sectors of the market: if Volkswagen has a problem, they sell Toyota. This strikes me as a good way to lose your money -- while not really understanding what's going on.)
A Leveraged ETF is designed to amplify (and possibly invert) the daily returns relative to some benchmark. So for example, SPY is the "normal" ETF which tracks the S&P 500 index. UPRO is a triple-leveraged ETF which is designed to get 3x the daily returns (gains or losses) of the S&P 500, using the same amount of capital. Some other ETFs are leveraged and inverse, meaning they will gain value when the index loses value, and vice-versa. In general, day-trading these ETFs is a way for small traders to increase the leverage on their bet. However, there is always some sort of "friction" with using leverage in this way, which causes the all leveraged ETFs to slowly lose value over time. Intuitively, you could say that you taking out a tiny loan in order to increase your bet, and the friction is just interest payments. Maybe somebody else can explain some more technical details, if you are interested (I recommend financial blogs such as Kid Dynamite's on these types of topics).
Here are some examples of levered ETFs... sorry, it seems most web UIs are interactive and actively resist linking to a customized chart. I'll link to the benchmark. You'll need to click "Compare" and enter the two leveraged ETFs, be sure to check the "Display as a Percent Change" option, and then mess with the duration (from 1D through 5Y is illustrative). You can see that daily or short-term returns are inverted relative to each other, but long-term returns (6 months or more) are net negative across every pair of ETFs.
FXP 2x inverse leveraged ETF of 50 of the largest and most liquid Chinese stocks listed on the Hong Kong Stock Exchange. Index goes down 7%, the ETF goes up 14% (roughly). If you love more risk, YANG for 3x inverse leveraged ETF.
Not to mention the expats (though I guess we are small part of this). I have to do a bank run today because we aren't allowed to do forex on weekends anymore (the rules get weirder and weirder!).
And all done. Took about 3 hours, but I had to run back home to get my old passport (my current one wasn't good enough). The bank was filled with people doing the same thing.
Clothing is the lowest point on the value chain. They never meant to become a clothing manufacturer perpetually, they were using it as a way to leapfrog up the value chain.
They're pretty happy to let Bangladesh take over the manufacturing of clothes while they do electronics (and ultimately aerospace and CPUs).
* 1-2% GDP Growth that you cited is the opinion of one woman who makes a living selling opinions on the Chinese economy, it is anecdotal.
* The article you posted states that central government GDP/Debt ratio is 64%, whereas local debt is 280% - so relative to the United States, with a total debt ratio of 332% China is still "flush with cash," in a sense and could stimulate out the 280% ratio, as the very article you cited notes.
* Regards to Banks/Commodity firms - they are state owned, they could be privatized and this would improve efficiency.
* You need to read the articles you post - there are $1Trillion in Foreign Reserves left to help the Yuan glide down slowly against a foreign basket of currencies, out of a total $4Trillion in foreign reserves. The US has $0.4T by the way, far less (this includes gold).
* Epoch times is not a reliable source. They are just 100% anti-China, that is their reason for existing.
* Manufacturing moves in and out of countries all the time, the net value of production in China is going up.
* China does not require global consumer brands, it has 1.5 Billion people. China is flush with cash and can spend its way out of all of those issues.
* No, we don't get the idea. You posted a bunch of links with very brief headlines on each. You didn't read many of the links you posted. Your post is a non-coherent shotgun approach.
The major issue facing China is the fact that it fundamentally a one-party controlled communist command-economy, and it has pegged its way into that political path, without a clear way to get its way out. They attempted to go the democracy route for a bit in the 80s, but things out out of hand and Tiananmen Square Massacre occurred, effectively erasing the Chinese political consciousness. Now they are kind of floating in this world where no one really cares about politics, they just care about making money and hope the government is nice to them. This is the defining challenge of China in the 21st Century.
The economy will go up and down but overall continue to grow over the next 20-30 years because they can buy their way out of whatever depression they need to. Things will probably get less polluted over time. If you look at the Shanghai composite, this has always been unstable and volatile and has had much worse crashes in recent memory. So every time the China stock market crashes, people come online and think they can become instant Sinologists and Peking Toms by posting a flurry of links. It doesn't mean anything --- it's a sputtering of irreverent neckbeardiness which does not further hacker news' understanding of the situation and actually makes people dumber for having read it, a la Billy Madison.
The question, as relates to that, has always been, can you stay solvent longer than the market can stay irrational? Cause what you're really saying is that the market is not reflecting the pricing data it implicitly has available, and so is not currently rationally priced. Another problem with timing the market based on the implications of macro monetary policy is that (as you do a good job of pointing out) it is just one element of many that create the environment for the companies, and it is the companies which create the fundamental value for the market. The depression you're talking about is (as all depressions are) one caused by fundamentals. Governments have quite a few tricks in their bag to get around the deflationary issue you bring up. As for "China's lack of global consumer brands, ...", once their consumer class is up and running (which is exactly what all of China's government's spending is aiming to do) they will have more consumers than the US has citizens, and then (a lota) some. Basically, it's just not that simple.
I'm skeptical that the presence of buy and hold investors is the missing ingredient.
Even if 15% of investors are speculators, the price can still swing drastically, since price is a function of supply and demand, and the charts we're seeing are not volume-weighted.
Market price stability is a function of the uniformity of supply and demand over time. Buy and hold investors already own the stock so their preferences are not reflected in short term supply/demand uniformity (price stability).
What we're seeing in China is a lack of uniformity of views on the future price, and thus rapid fluctuations in supply/demand uniformity over time. Government instability plays into that tremendously.
That is a fairly unfalsifiable statement, and it is trivially true for nearly anything, b/c we all make all decisions today based on the faith/expectation that we will be alive tomorrow.
The notion that tomorrow will be substantially different from today makes nearly all planning useless, so it's trivial that all planning hinges on some notion of faith in the future.
But price itself is only a function of supply and demand. If I am selling bread and it's nearly time for me to go home and the bread will be stale tomorrow, I might offer the remaining loaves to the last few customers at a discount if I expect it not to sell otherwise, etc. Supply vs demand. Charted on a graph the price would take a nose dive at the end of the day.
If a short term investor feels that his position will not improve, it makes sense to liquidate. The more symmetrical market participants' views are, the more the price will change as a result of trading (why would someone sell when they expected the price to go up?. This illustrates the adage that one person's junk is another person's treasure) To be logical we must consider would-be buyers and would-be sellers of the shares.
Only in the rather peculiar case of significantly asymmetrical views of the future price will the price remain stable with lots of shares changing hands.
I wonder how this relates to the 'ghost' towns being built over there? Could this be a consequence of the slowing rate of construction of these huge cities/housing projects (no one lives in practically)? That artificial growth is/was not sustainable and the bubble is bound to collapse, or is this simply oversimplified view of the problem?
I've always wondered about this as well. Heavy investments in new cities, when there was no demand for them, just for the sake of "increased growth" was always a red flag to me. Interested in any correlation.
I don't have any direct sources for this, but the word that I heard from a friend who spent some time in China recently was the following:
- Chinese investors have limited places to park their cash. Stock market and real estate are two major options, and real estate is seen as a superior investment (stock market has... problems, you could say)
- Chinese law prevents purchasing property without developing it.
- Real estate investments therefore require barebones property development--regardless of tenancy--in order to remain legitimate.
Therefore, "ghost towns" are a natural outcome of Chinese investment in Chinese growth. They can remain vacant for a long time and still satisfy the investment goals of the developer.
People often point to the "ghost cities" like Ordos when declaring China to be in a massively overbuilt or "artificial" real estate bubble, yet studies such as those done by Mckinsey below predict 350M more people moving to cities by 2030 [1]. Given NYC has a population of about 8M, it appears China actually needs to build an additional 44 NYC sized cities (or expand existing ones) by 2030.
Makes you question weather they really in a bubble? It appears they could fill Ordos and 43 other new cities in the next 15 yrs! Perhaps they need to be putting these cities up even more rapidly.
> For a fully functioning stock market you need...stoggy [sic] old buy/hold/long only investors
I'd qualify this with value orientation. To have a successful stock market you need the factors you mentioned plus long-term holding value investors.
To illustrate the difference, consider what would happen if the Warren Buffetts and David Teppers of the American capital markets put all their money into ETFs. You'd have no price discovery. Someone needs to be wiling to do their own research, reach conclusions with conviction, and trust in those conclusions through short- and medium-term wobbles.
Long-term value investors require capital. They also need transparent, liquid markets. China has capital and liquidity. It lacks (along with India, Russia, and a number of other "emerging" equity markets) reliable data and/or trustworthy institutions. This deters long-term value investors [1].
Yes. Or, very simply put, you need more long-term optimists than long-term pessimists. China is wealthy in many ways, but a wealth of optimism is not prevailing.
Optimism in society requires faith in leadership. Trust. Transparency. Perhaps even a higher purpose. Maybe even a sense of global humanity. I do wonder how things may have been different for China had its tooling been fitted for slow, highly transparent and deliberate growth.
You're technically correct. I'm using the term "price discovery" crudely in light of the audience. "Valuation" would be a more accurate, if more ambiguous, term.
If everyone buys indexed ETFs, the market stops discerning between the index's components. If everyone buys "China," the difference between "shitty thing over there" and "half-decent asset if not levered through the roof" vanishes. When the market starts falling "finger in the pie" syndrome sets in. Nobody has any idea what one thing is worth over another. Even if they do, they probably can't trust their data, and even if they can, they know nobody else can. So everyone dumps "China," punishing all assets alike.
> So everyone dumps "China," punishing all assets alike.
This is already happening due to the circuit breaker actions. What happens is that the trust in the market mechanism gets eroded to the point where even those companies that were not the ones losing big time will get drawn into the next wave of sell-offs. It's basically a stay of execution at that point (if we haven't already passed it).
> To illustrate the difference, consider what would happen if the Warren Buffetts and David Teppers of the American capital markets put all their money into ETFs. You'd have no price discovery. Someone needs to be wiling to do their own research, reach conclusions with conviction, and trust in those conclusions through short- and medium-term wobbles.
There are a lot of different ETFs, some much more broad than others. You don't need to buy the whole market. If you think energy is cheap you can buy an ETF of energy companies (say XLE) which is a useful way to diversify if you're not able to buy reasonable quantities of multiple names.
> The scariest thing about this for the global equity markets is that in 10-20 years the top 3 markets could be China, India and the US.
> Whether or not you like the US stock market, it is fairly transparent and not run by the whims of the government. The other two countries are about as opaque as you can be. Speaking as a person who actively invests money, that's a very troubling thought.
> As one economic nobel prize winner put it... "China and India haven't put out a credible macroeconomic number in the past 10 years".
This was one of the reasons cited for renowned hedge fund Nevsky Capital closing its doors. They are up 1212% since 2000. [1]
"Data releases have become much less transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever increasing importance of China and India. China is the world’s second largest economy, but already much larger than the US in a broad swathe of sectors. India will be the world’s third largest economy within a decade. Unfortunately their rise is increasing the global cost of capital because an ever growing share of the most important data they produce is simply not credible. Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe."
What is "operate properly" for a stock market? For us Westerners, it means be fair and equal to everyone. But maybe for a less efficient country, it means moving from peer-to-peer trades to centralized, which at least defines a unique trading value and is already better than multiple, independent, bilateral sales contracts.
The most important thing is you need companies that have the ability to return capital to investors. If you do not, what you have is like free-to-play mobile game. Real money goes in, and is then redistributed to the insiders who take it and walk away.
This comes in two pieces, first transparency and accuracy of the company: Who is enforcing accounting standards? Who is doing the auditing to ensure the said assets are really there?
The second, is the economy based on real demand or something temporary: Are profits dependent on the activity of government officials & central bank finance?
It would be very unfair to single China out in this regards, just look at what happened to Brazil.
I am very ignorant about all this stuff. But am I correct that until recently, the Chinese government was actively devaluating the yaun to support their export industries? But now they've had to do an about-face and start trying to push it up?
So, you know that the NYSE was started by a bunch of guys on the edge of town under a tree? The key was they were located at the heart of the business district, where the transactions were occurring. This has been true and crucial since the early days of "finance", since back in medieval and Renaissance times when merchant houses (as in 'establishments', not actual buildings) exchanged debt and eventually stock.
As to the US stock market being "fairly transparent and not run by the whims of the government", check your history man. The US stock market has seen some crazy wild, stock manipulation, insider trading, government manipulating, bucket shop, boiler room, "oops, we have too much paper to process so shut the whole thing down" days.
And, I should add, those days aren't over. The mess is still all there, it's just much more sophisticated and comes with a better staffed and better funded marketing department.
They don't stop people from selling. Circuit breakers are useful for one-time flukes (e.g. Flash Crash) but for sustained downturns they can actually make things worse.
If you think you _may_ want to sell at all tomorrow but also think a circuit breaker could trigger, you're going to sell first thing in the morning. So will everyone else.
The circuit breaker can actually trigger a worse panic as investors all try to squeeze in sell orders at once. This triggers the circuit breaker, confirming everyone's fears, and starts again the next day.
It makes it worse when they say they are propping up the market, if the market is at a relative peak and daddy warbucks shows up saying he'll buy anything no matter the cost, of course everyone is going to get out while the getting is good.
GDP is a flow (depends on our arbitrary convention of splitting time into years). Market cap is a stock. Comparing one to the other is like comparing a bathtub that holds 100 litres to a hosepipe that discharges 1 litre per minute (or is that 60 litres / hour?).
Doesn't that just prove that 1 dog = 2 cats and not that anyone was actually willing to pay $1 million for the dog? People are spending real money, that they could equally well as spend on other things, on stocks - they're not just trading stocks, correct? The man in your story couldn't actually sell the dog to someone for $1 million, but people who own stock can sell for cold cash.
You're correct. There's no actual basis validating anything on the order of $1 million for the two cats. That's the flaw in why the parent's example doesn't work, it never actually meets reality in any way. Market valuations don't only exist in theory.
Market caps for eg public companies are generally given legitimacy through trading, routine liquidity, auditing of financials, and dozens of other processes and regulations that companies must conform to. You can sell your Microsoft stock for a very well known amount of dollars, under very well known terms, essentially any time you want during market hours; you can never sell those cats for $500,000.
The difference between me claiming my right shoe is worth $50 billion, and owning all of Uber's stock and having that be worth $50 billion? People with a lot of money, and a lot of reputation, deciding that Uber is worth $50 billion, after typically having put their money where their mouth is and investing. To say nothing of Uber having a real business (meaning they can raise debt, have credit ratings, sales, cash flow, operating projections, et al), having a value that the IRS or an auditing firm or investors can actually assess, and so on. One is verifiable to some large degree, the other can never be anything more than an absurdity - I can very likely sell my Uber stock for a lot of value, even if I take a big discount; I can never sell my right shoe at even a 99.99% discount to the $50 billion.
For small trades on the public market yes, you can trade for cash at approximately the price listed on the exchange at that moment in time.
If Bill Gates wanted to liquidate his Microsoft stock, though, it's unlikely that his sale price would match the exchange. Once you get into trades of a significant portion of the company, there's not enough guaranteed to be enough liquidity at price listed on the exchanges.
> The market cap valuation works in exactly the same way.
No it doesn't, not in a functioning public market.
Just because the guy claims the cats are $500,000 each, doesn't actually make it so. The sole thing occurring there, is a person is claiming something (that is obviously false). No taxing authority on the planet would assess those cats at $500,000; no professional auditing firm would either. The entire bogus premise collapses instantly upon scrutiny.
In almost any market, a claim is worthless unless you can eventually cash it in for a large portion of that sum, typically in a currency that possesses real value. In your example, your cats can never be cashed in for a meaningful fraction of their proclaimed value under any scenario. I can sell my Tesla stock however, there is an extremely well established and accepted value placed on it. I can still pretend, and make an outrageous claim on what my Tesla stock is worth ($1 trillion!), however it is nothing more than a bogus claim and has no actual bearing on reality.
If I understand you correctly, you are saying that value/worth exists because of price and a liquid market. This is incorrect. Price is independent of value, and does not require the ability to sell.
Suppose the government made a law saying that you cannot never sell KO (Coca-Cola stock). Today KO is selling for $41.62/sh. Tomorrow, is it worthless? No. It pays a 3.05% dividend, which it typically increases 10% a year. It is worth at least $1.27 (the first year's dividend).
Now to the question about cats selling for $500k. Would a sensible taxing authority or professional auditing firm assess a flower at $500k - $1 million? In 1637 a single Viceroy tulip bulb sold for 3000 - 4500 florins; a skilled craftsman made 300 florins/yr [1]. Assuming that a skilled craftsman would make at least $50k/yr (probably more, given that $50k is near the median US income), one tulip bulb cost $500k - $1 million. Not so different from selling cats for $500k, so you cannot attack the example for unreasonable prices (s/(dog|cat)/tulip bulb/). Now, was it worth that price? No, hence why it fell back to a much more reasonable level shortly afterwards. But during the mania, selling one tulip in exchange for two lesser-valued tulips would be quite valid.
You missed the point of the illustration, which was that price (market cap) has no relationship with value. Admittedly, the illustration was rather opaque.
Unless that flower was purchased with two cats (or two bulbs), I don't see how this strengthens the analogy.
That said, I do agree that GDP and market cap can't be compared in a meaningful way.
It's like saying that the ISS is about the size of a football field. Does this comparison help you to visualize the size of the ISS? Sure. Does this comparison help you to understand anything else about the ISS or football fields? No.
>But that's just market cap, which isn't comparable in any way to GDP.
If the units are correct and the same, then the comparison makes itself. The distance between two cities and how far an electric car can go on one charge are vastly different things, but since both can be measured in the same units, the comparison makes itself.
In particular: The unit of GDP is in fact dollars/year (even if people rarely bother reporting the precise unit), whereas market cap is just dollars. They're as incomparable as velocity and position.
I doubt it will have a long term impact on other markets. Other markets aren't anywhere near as overvalued. Markets have been expecting this since mid 2015. There isn't going to be a liquidity crisis, if anything it will make Chinese goods cheaper as the RMB is devalued. This couldn't be more different than 2008.
Russell Napiers Anatomy of the bear shows that the unifying feature of all the great bear markets was deflation. With rates aready at zero, central banks will need even more non conventional mechanisms. QE4, then govt spending. That's Napier's thesis...
I agree, it could very well prompt a recession. Also looking at the technicals, the 1 year percent change of the S&P 500 is negative, which is a strong recession indicator historically. The 150-300-39 day MACD also looks bad. These indicators have both only been negative one other time since 2009, which was in September 2015.
There's countless different indicators and investors don't follow the same ones, if any at all. Most people aren't computer programmers who have run historical simulations. Just because you know something doesn't mean that other investors do. For example I bought lots of Bitcoin when it was at $16, because I thought I knew something other people didn't, and I was right.
The fact is if you followed the indicators that I mentioned since 1950, your net worth growth rate would've increased at least 50% without even using leverage. Trends in the general stock market change slowly (the price doesn't look like random noise) and that's why it's predictable enough to beat a buy and hold strategy.
> The fact is if you followed the indicators that I mentioned since 1950, your net worth growth rate would've increased at least 50% without even using leverage.
Well that's easy, the hard part is finding the indicators that will do that for the next 60 years, not the previous!
Ultimately, what matters the most is the price and what other investors do. The price is affected by investors' perceptions of political and social pressures. If there are new political or social pressures, then they would affect the price (over seconds to months) which would then change the indicators. The indicators wouldn't pinpoint what those pressures are, and they would only change after the fact, but they would still change. I wouldn't want to predict the influence of those kinds of pressures unless I could get quantitative data and back-test it, which I don't think is possible.
It's not a perfect strategy by any means. But I think using indicators is superior to a buy and hold strategy. When you invest you are necessarily choosing between different strategies. There is nothing magical about buy and hold other than that it's simple, and a lot of people do it. Historical data shows that if you trade based on indicators then your returns are much higher. I think it's important to find what works the best through calibration and back-testing.
There are also risks such as survivorship bias that even applies to indicators, in addition to companies and economies. The best indicators survive in whatever system you use, and that doesn't guarantee they will actually work well in the future. Still I think it's better than the buy and hold strategy.
Meanwhile I've been trying to sell holdings when they go below the 12-month moving average, since that strategy would have made me a ton of money had I used them during 2001 and 2008, but instead I've just been whipsawed to all hell. Not sure any of these indicators really make sense in the long run.
What I found through lots of calibration is that it's best to sell when the weekly average of the S&P 500 is -2% compared to that same week a year ago, and then re-purchase when it goes back up to 0%. In fact it's best to short the S&P 500 when it's less than -2%. Perhaps if the interest rate is high then it's best to hold bonds, but that's not the current case.
I can't guarantee the indicators will work in the future, but they worked in the past, and they make sense to me because the S&P 500 historically followed a momentum-like path. And I don't see why a 65 year trend based on mathematically simple technical indicators will suddenly change overnight just because it's the future versus the past.
If you don't use indicators, then you're taking the strong position that they don't matter, which is more contrary to the evidence than using them. Unfortunately you either have to use indicators or not use them. So an "I don't know" opinion is still a definitive decision that they are worse, which is probably an incorrect decision.
Bad compared to everything else in the current investment climate, not so much.
CAPE of 25 corresponds to a yield of 4% before growth in earnings is taken into account. That's still pretty good compared to the yield on treasuries and just about anything else right now.
2008 was more of a housing bubble. I think this crash looks a lot more similar to 1999 - when valuations were ridiculous (see: http://assets.bwbx.io/images/iIS_j8I_fYlI/v2/-1x-1.jpg) and people were borrowing money like crazy to invest in an insane bull market.
Do you know where this graph appeared on Bloomberg? According to the Shanghai Stock Exchange website (http://english.sse.com.cn/), they're Average P/E Ratio is currently 15.62...
Wait, the median P/E is three times higher than the average? That does not sound right. Because the P/E cannot go below zero, the ability of a small number of stocks to throw the average off is limited.. In fact I can't think of any way for the average to be more than twice the median, even if half the stocks (minus one) had a P/E of zero. How would that work, mathematically?
Good point! But that makes me think that maybe taking the average of a bunch of P/E ratios is mathematically stupid to begin with. I mean, you could have one with earnings of .00000001 which would make the P/E ratio enormous, or with earnings of -.0000001 which would make the P/E ration enormously negative. Or you could have earnings of exactly zero which would give you a NaN. So maybe this is just is an indication that the median P/E is a much more meaningful quantity than the average. Maybe taking the average of a bunch of ratios is meaningless, in general. Or maybe they are adding up total price of all stocks on the exchange / total earnings of all stocks on the exchange. In that case, you could get the result that the "mean" was much lower than the average, if there were a small number of stocks that were losing bucketloads of money.
The Bloomberg chart states it is talking about projected earnings over the next 12 months. Would these projections be what the individual companies report, or would they be forecasts by Bloomberg analysts?
The CSE page doesn't define how they compute average P/E, in principle they could be using some historical measure of earnings.
Could that reported average be cap-weighted? It's possible that the very biggest companies have reasonable P/E ratios, but there are a large number of small stocks with crazy prices.
Those PE's made sense (to some/most) when the economy was growing 8-9% and revenue was following that growth, but now that it is down to ~3% with revenue following (or shrinking for a lot of the larger companies) those prices really need to come down and might even be discounted to reflect regulatory risk.
The hedge funds who saw this coming are doing very well at the moment [0] [1]
Of the top listed companies in Shanghai, most are banks, petro, insurance, energy, etc. that are domestic driven (the SSE website is down at the moment but the list is here: http://english.sse.com.cn/listed/list/)
I don't think there were many expecting that a public company investment in China would be supported by exports.
On August 23rd, 2015 China announced they would be allowing pension funds to invest in the domestic stock market for the first time ever. [1] Funds were "allowed" (why would they want to invest in a falling, low-confidence market?) to invest up to 30% of net assets. Clearly the government wanted to allow liquidity to flow into the market and calm investors, and it seems to have worked for ~6 months.
So now the average Chinese consumer will be double-hosed: once over by losses to their personal retail brokerage account, and again by losses sustained by their pension funds.
Hopefully enough Chinese consumers made enough money from the crazy ride up on the market that they cashed out periodically and invested in sensible hard assets such as homes and cars. Because the correction will probably be very painful.
This sounds pretty crazy, but is it possible for the Chinese government to manipulate the American stock markets by playing with its own stock market?
China knows that when its markets plunge, the American markets plunge too.
Is there a way for China to create the illusion of its markets plunging, without losing real value (or at least profiting from the perspective of some influential power in China)? Perhaps they could accomplish such manipulation through a combination of 1) collusion between the CCP and the largest investors in the Chinese market, 2) currency manipulation, and 3) shorting of US equities?
I know this sounds speculative and vague, because honestly I have no idea what I'm talking about. But China certainly has the motive to manipulate American markets. And since the foreign investment is asymmetrical (e.g. the Chinese can invest in NYSE, but Americans cannot invest in Shanghai), China has an opportunity to "play both sides" of a Shanghai market crash and any corresponding American market drop, while American investors cannot do the same.
But China wants its people to feel wealthy. The property boom ended, then there was gold boom. They wanted a stock boom. People that feel wealthy are happy citizens. They have every reason to keep the stock market high.
I mean, you could say the same thing every year for any ruling party for the past millenium. I'm not convinced it's at all relevant to the conversation any more than any government beholden to its people.
I think the Chinese tradition of accepted regular popular revolt makes this possibility weigh more heavily on the communist party's collective mind than, say, that of the Indian ruling party.
While an interesting thought, this seems crazy, paranoid, and self-centered to me.
The world doesn't revolve around America. The Chinese government certainly cares a load more about its own economy doing great than how other economies are doing. They wouldn't sabotage their economy and destroy trillions of dollars in wealth to make a significantly lesser dent in our economy.
If you go to google finance and plot the S&P 500 for all known time you get a chart that goes back to 1975. I see three big humps 2000, 2007 and 2015. This is obviously not the most sophisticated analysis, but, there seems to be a pattern were the market gets over excited and then blows off steam. Maybe we are at the start of a correction.
The only thing that concerns me is that those market peaks/humps were due to humans getting concerned and changing behaviour. Maybe now that most trades are just computer to computer the Algos don't "know" to be "scared" and cool it we might keep going up till some epic event corrects it.
I am hoping it's a 1-2 year correction that goes down 50-60 percent. But, who knows.
What is a price? It's the amount two people agree to transact for, nothing more.
Price trends don't necessarily mean anything, and corrections are good as much as they are bad.
A correction means the previous price was incorrect, yet when prices fall humans sentimentally believe the old, higher price must have been correct. It's ridiculous.
Governments take extensive measures to control prices and to alter public perception of risk. Sometimes this adds stability to prices, but it often sets things up for a more drastic correction later.
Some investors are over-leveraged and must cash out to avoid ruin. Others are speculators trying to ride various trends, but in the end we all benefit from prices being corrected.
> yet when prices fall humans sentimentally believe the old, higher price must have been correct. It's ridiculous.
Only sellers believe this, buyers believe that the old lower price was correct and they are being gouged. (See anyone who tries to buy a generator after a hurricane)
People often point to the "ghost cities" like Ordos when declaring China to be in a massively overbuilt real estate bubble. Yet studies such as those done by Mckinsey below predict 350M more people moving to cities by 2030 [1]. Given NYC has a population of about 8M, it appears China actually needs to build an additional 44 NYC sized cities (or expand existing ones) by 2030.
Makes you question weather they really in a bubble? It appears they could fill Ordos and 43 other new cities in the next 15 yrs! Perhaps they need to be putting these cities up even more rapidly.
The issue may not be that there is too much building, but that they're building in places people aren't going to be moving to. Ordos is in inner mongolia, and while there are a lot of people there, a lot more are moving to the east coast cities.
Right, like if you were predicting 40% city growth in the US, the solution would not be to build new mega cities in Utah (which has a comparable percentage of US's population as Inner Mongolia has in China).
Outside of Ordos, I don't think there are much of any other ghost cities really, unless someone can prove me wrong. All ghost cities from 3-5 years ago that were prominently featured in media are now populated. It just takes that much time for them to get to or near their planned capacity. China's political system allows it a luxury of very long-term planning, unlike the US, unfortunately.
At the risk of sounding stupid, why would Paypal freeze their account and why would the author of this story describe this as "understandably"? Is there something dubious about having that much money in any one account?
The Chinese stock market is so far divorced from the real Chinese economy as to be a joke. The government intervention is direct and strong, far stronger than anything we saw in 2008.
These companies' listed values might have well have been picked by a roulette wheel.
What numbers are you comparing though? The headline figure for TARP in the US was $700 billion, but even the GAO audit cannot perfectly trace how much it actually cost, as opportunity cost can't be calculated. Financing TARP took resources away from infrastructure projects or other projects for which positive economic externalities apply directly to society, not just bondholders.
China has 4x the population of the US. How "big" would the intervention have to be to be stronger than anything in 2008?
TARP was fully repaid. It didn't take money away from routine infrastructure spending. TARP was financed through deficit spending, and it never amounted to $700 billion as it was reduced to a limit of $475 billion. The final tally was $426b put in, $441b repaid.
At this point China has thrown roughly a trillion dollars just at trying to prop up their stock market [1]. That doesn't include what they've burned trying to control their currency, what they've spent trying to keep their real estate bubble from completely falling apart, and what they've spent dealing with zombie companies and their vast shadow corporate and muni debt, and so on.
A nit I'd like to pick is also that China has a vastly smaller PPP adjusted total GDP. So even four times the number of people, even a guaranteed loan program the size of TARP would be a larger intervention.
To digress a little bit, I know this may be heresy, but TARP was the single most courageous and under appreciated accomplishment of the G.W. Bush administration.
It's an economic miracle that when push came to shove, suddenly we were all Keynesians again.
I wonder if the auto-halting behavior makes the problem worse, not better.
Psychologically, if you know the markets will close if they drop too fast, it might actually encourage traders try harder and rush faster to be the first one to sell off more stocks that day before time runs out.
A thing to remember in this are the sizes of the various markets.
NYSE, the largest in USA, has a combined market value of 20 trillion dollars, whereas the largest in China (Shanghai Stock Exchange) has a combined market value of 4 trillion. This is for two economies of about the same size.
This means that when the Chinese market drops (or raises) the overall impact for the wealth of the country is much smaller than a similar change would cause in the American markets.
While GDP (PPP) of China and USA are similar, this isn't the same as saying that their wealth is similar.
The USA's net national wealth is about $85 trillion, while China's is about $22 trillion. I have a feeling that a much larger proportion of the USA's stock market is held by foreigners compared to China.
It is possible that drops (or raises) in the Chinese market actually affect Chinese wealth more than in American markets...
I'd be more interested in what percentage of the US stock market vs China is held by a tiny percentage of the population vs a broader public. Reductions in wealthy by a tiny minority has a smaller impact than the latter when looking beyond statistics.
What China did just put out a giant flashing neon sign that they will buy any (overvalued) asset at the current market price.
Every owner of an equity is lining up to sell their assets to the big idiot with the giant flashing neon sign saying they will buy anything, knowing that the more they flood the market, the more the central committee will buy.
China, you just got played, welcome to the market.
I'm surprised there's no mention of the impact of recently rising Federal Reserve Rates[1] on the Chinese Currency or the fact that the Yen was recently added the IMF's Special Drawing Rights currency[2].
Since China's moves in August I think its fair to characterize this as a currency war. And it's Dollar Hegemony that's hanging in the balance[3]. Many have characterized it as a war for much longer. What's different now? The proxy wars between the United States and Russia are heating up and tensions between China and the rest of East Asia are heating up. Western sanctions on Russia for Ukraine pushed it toward China and that may just have been the tipping point[4].
I find it remarkable how able the performances of equity markets are to obfuscate the currency and bond markets that are driving them[5]. When equities move fortunes change, when currencies move, the balance of power on the planet changes.
Looking at the graph the Chinese market traded around 2000 to 2500 from until late 2014 so that's probably what its companies are worth. Since then it doubled with speculators buying because things were going up but now that's stopped and the companies are still worth what they are worth and so back it goes. That's how markets are supposed to work - people but and sell stuff for roughly what it's worth.
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[ 0.26 ms ] story [ 306 ms ] threadFor a fully functioning stock market you need:
- capital, which they have
- speculators, to make trades happen, they have these
- transparency in how your market works, or atlest the appearance that the market is fair to all
- and you need stoggy old buy/hold/long only investors. China is missing these.
In most markets the latter is done by ETF retirement investment and pension plans who have to invest 100's of billions of dollars each year.
The scariest thing about this for the global equity markets is that in 10-20 years the top 3 markets could be China, India and the US.
Whether or not you like the US stock market, it is fairly transparent and not run by the whims of the government. The other two countries are about as opaque as you can be. Speaking as a person who actively invests money, that's a very troubling thought.
As one economic nobel prize winner put it... "China and India haven't put out a credible macroeconomic number in the past 10 years".
China is also loosing alot of money each month trying to support the yuan. I saw a credible estimate of about 100 billion a month since October.
I've never heard about this before, and it doesn't even make sense. It sounds to me like you made it up.
Because I'm more than willing to stand on those points as being accurate.
The assertion that you need someone to actually buy and hold stocks to have a stock market,
or the assertion that there aren't pension funds and ETF funds willing and able to put 100's of billions of money into the market?
These two types of investors act as dampers.
When the markets go south they are the ones who start buying up "bargains" and hold their existing positions because they aren't worries about 6 month returns they are worried about 25 year returns
> It sounds to me like you made it up.
You can think that if you'd like... Since trading on the equity markets is my day job, I'm pretty comfortable with my knowledge of them.
Based on your HN profile, you are 10000x more qualified than me on this subject, but I would like to see some evidence to back up the claim that the shanghai stock exchange has no pension funds trading large volumes of equities over long time horizons.
According to the wikipedia chronology of the Shanghai Stock Exchange [1], an influx of speculators did not enter the market until 2006-2007, following the "unbanning" of IPO's. Presumably the implication is that prior to speculators entering the market, most trades were executed by large institutional investors.
If these institutional investors are not trading on long time horizons (like a pension fund would), then who are they, where does their funding come from, and for what purpose do they use the exchange?
[1] https://en.wikipedia.org/wiki/Shanghai_Stock_Exchange#Chrono...
And of course there are pension funds in China.
Even if they retain control by selling to a trusted partner, the asset shift is painful. If you can imagine foxconn getting into that trouble, it's very easy to imagine them not being able to manufacture IPhones or Galaxys for a few months while they negotiate contracts with the new asset owners. Any idea what that would do to Apple stock? And, you know, your 401k?
This is an extreme example, but captures the spirit. when suppliers go out of business, or even run into trouble, all the companies that depend on them slow down, have to renegotiate new contracts, possibly miss deadlines. It can be ugly.
See http://www.nytimes.com/2015/11/29/business/international/chi... and its discussion https://news.ycombinator.com/item?id=10645768
If the perception is there that people are trading in these markets, people will trade in these markets. But without fundamentals, the whole thing can quickly suffer from a collapse in confidence, followed by a "run."
It's no different than buying Bitcoins. Why speculate in bitcoins? Because other people are speculating in bitcoins.
Non-rich Chinese people are doing that because the government has been pushing it pretty hard (think the way state lotteries are pushed in the US, or fantasy sports, with pretty much the same returns, really).
Oddly enough, said non-rich Chinese people are also the ones China is trying to protect with its market stabilization efforts, or so it claims. I'm really not quite sure what they _think_ they're doing there.
Apart from that, it's pretty much all people looking to make a quick speculative yuan.
This.
This will be China's undoing. The hardest thing to try and control are open market forces - which China is clearly controlling and attempting to manipulate, with disastrous results.
That may be true. But I think they also see lack of stability as threatening their ability to remain in control. So in practice, they care a great deal about stability.
Revolutions grow out of revolts. Revolts grow out of riots. CCP is remarkably adept at managing riots. For riots to grow, you need revolutionaries to amass power. CCP is remarkably adept at policing this kind of action too.
The CCP isn't going away anytime soon. Xi Jinping has way more to fear from intra-party power struggles than from grassroots activism.
"Data releases have become much less transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever increasing importance of China and India. China is the world’s second largest economy, but already much larger than the US in a broad swathe of sectors. India will be the world’s third largest economy within a decade. Unfortunately their rise is increasing the global cost of capital because an ever growing share of the most important data they produce is simply not credible. Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe."
http://www.businessinsider.com/nevsky-capital-closing-letter...
Aside from the fact that they are (a) both very large, and (b) both rapidly developing countries/economies, China and India share very little in common.
There are challenges to investing in either China or India, but the reasons behind those challenges are about as different as you can get. The underlying issues in the two countries are dramatically different.
I really do not understand how anybody with even a little understanding of the two countries can lump India and China together in the same political/financial group.
Are you asking how the term 'BRIC' came about?? If so, the paper where the term was first used is available online and it is remarkably readable. The pdf is located:
http://www.goldmansachs.com/our-thinking/archive/archive-pdf...
There were at least two follow up reports that I'm sure are also available online.
From the standpoint of an investment banker (which is where the term BRIC comes from) any differences between them are largely irrelevant - they all have a large population, a government that is stable enough to protect their business investments, and an improving distribution of wealth to ensure widening participation in the economy to sustain growth for decades (this is important when macro investing; a rising tide raises all ships, and macro investors are basically investing in all ships). But that's about where the similarities between these 4 countries end, so using the term "BRIC" to speak about cultural similarities is meaningless.
> There are challenges to investing in either China or India, but the reasons behind those challenges are about as different as you can get. The underlying issues in the two countries are dramatically different.
I agree; and you probably know this all, so it's for others' benefit. China is a centrally-planned economy that has transitioned to a capitalist-style oligarchy. Culturally, they value society as a whole as being more important than the individual or individual groups. The Chinese government is still the ultimate authority, though many factions exist within the Communist party. Everything coming from the central Communist party is reviewed and OKed by a dozen officials to ensure a consistent story - so any bad numbers are a result of deliberate overstatement at some level. It also means that stakeholders at every level have the opportunity and incentive to falsify numbers (because missing your numbers means losing your job and ending up in poverty). It's not a giant conspiracy; but there is little downside to falsifying accounting numbers (which will get you a prison sentence in the US).
India is on the opposite end of the spectrum - it's basically a free-for-all with a bunch of very different groups of people pushed together to try to make it work. There are thousands of ethnic groups, many of whom hate each other. So in order to keep the peace, they have to allow each ethnic group a wide berth. This means that when you say "the Indian government" you're talking about an entity that is a multi-headed hydra (or even multiple hydras). There are many competing desires and biases present in the Indian government, and it's politically difficult to deal with those problems when your population is as fragmented as India's is (and why the election of a more modern leader with a global focus like Modi was a huge step forward).
With regards to the Indian governments' fudging of macroeconomic stats, this article may be helpful: http://www.bloomberg.com/news/articles/2015-12-14/india-now-...
What indian economy lacks - 1. new credible entrepreneurs e.g. existing group co's have gotten into more new businesses and expanded into traditional sectors as compared to a handful of new names. 2. new business models e.g. most business are copying what has existed in US such as ecommerce, taxi aggregators, etc. 3. enhancing regulation in existing markets e.g. real estate.
We dont have anything similar to EDGAR.
I wish I could believe this, but after years of federal debt fueled Quantitative Easing and implicit guarantees of "too big to fail", I've stopped believing this is true.
http://globaleconomicanalysis.blogspot.com/2016/01/former-da...
I just finished Too Big to Fail by Sorkin. From that point of view, everyone was facing something that had never happened before, so it's hard to be predictable in that case. One day, they push J.P. Morgan to buy Bear Sterns. One day they let Lehman Brothers die. One day they nationalize the banks. It was just all over the map. On the other hand, they were facing something new, never really thought about before. It's hard to have policy for rare events, so they just kind of tried stuff and iterated on what worked.
It's kind of a testament to the quality of the US market that you can say for sure, 'i don't want any of that', because of a specific reason. That's very different, and far more valuable than 'i don't want any of that because it's incomprehensible'.
All I was trying to point out is that the idea that the US market is devoid of any government manipulation and shenanigans is fiction at best.
I don't want to dismiss your argument, moral hazard obviously had an effect - http://www.federalreserve.gov/pubs/ifdp/2012/1043/ifdp1043.p...
But, again, the beauty of our system is we have an idea about how the major players will act, it's not totally opaque and unpredictable like China. If there's another little bubble, it's pretty clear the fed will just let that industry die. If it's huge, at least some players will die. The rest, can either suffer on their own, or suffer as a nationalized entity.
What about Brazil? (not that they are transparent/credible, but that they ought to have huge economic growth over the next ~20yr)
I don't think things are going to be very nice here in 10 years.
1-2% gdp growth http://www.barrons.com/articles/anne-stevenson-yang-why-xi-j...
280% gdp/debt ratio http://www.forbes.com/sites/kenrapoza/2015/05/09/chinas-tota...
bankrupt shadow banks http://www.ft.com/cms/s/0/06cc9b9c-44c4-11e5-b3b2-1672f71080...
bankrupt state commodity firms http://www.bloomberg.com/news/articles/2015-10-14/the-next-c...
only a trillion reserve left http://www.businessinsider.com/china-burned-through-108b-in-...
$850 Billion Left China So Far This Year http://www.theepochtimes.com/n3/1882874-as-much-as-850b-left...
Manufacturing moving out of China http://www.forbes.com/sites/kenrapoza/2015/10/11/is-the-made...
Coupled with China's lack of global consumer brands, corruption, pollution, demographics issues, global slowdown, carry trade unwind, rising US interest rates...you get the idea
You don't need global consumer brands when your country is the size of China. They have 15% of the world's population and speak a language that few outside the country can speak and even fewer can read: nobody else is going to come in and take those customers except Chinese companies. Corruption is being cleaned up; but it's still a real problem at the local level. Again, pollution is a huge problem but China is betting the farm on "clean" energy tech and will be the energy leaders of the world in 20 years. If (or when) they figure it out, they're the only ones with the manufacturing skill and capacity to mass-produce.
The truth is, we've never seen what happens when a large country "awakens" in the age of globalization. Macroeconomic theory is largely based on the import/export balance, which is increasingly less important as borders become less meaningful (and import/export controls become increasingly difficult to enforce).
I have a feeling that China will surprise us - despite the fact that they will have negative population growth over the next few decades and an aging population, the fact that they are actively moving subsistence farmers to the cities may stall the effect of a shrinking population with the added consumption / demand from turning poor farmers into urban consumers. Their aging population is also accustomed to a lower standard of living than the up-and-coming generation. Population deflation has been especially damaging to Japan because it hit them after they had become a heavily industrialized country. Despite the huge progress China has made, hundreds of millions of people still live in poor farming villages. That's a source of potential growth that I expect the Chinese government to tap strategically.
- Chinese companies are the only ones that can serve Chinese customers: Yum brands (KFC, McDonald) 7000 restaurants. Starbucks 1600 stores in China. 7-eleven 2000 stores in China. H&M. BMW. Mercedez. Apple. Microsoft. etc. All top brands, and command a higher price point/margin than local competitors if any. Meanwhile, none of the Chinese brands can even get a foothold outside China.
- Clean energy in 20 years: in 20 years, most of the Chinese rich will have already left
- large migration from rural to urban: there's no jobs waiting for these rural farmers. Therefore they cannot generate value; they're merely drags on the system. In year 2016, with manual jobs being automated, a body is no longer an asset but a liability. The person would need to have the knowledge/skills to compete for global job scarcity. And Chinese citizens aren't trained in English to compete for global knowledge worker jobs.
>> "And Chinese citizens aren't trained in English to compete for global knowledge worker jobs."
There you go!
Edit: To clarify, I am supposing that perhaps more English-speaking knowledge workers would be trained in the future.
As a side effect of US immigration policy and the hot job market for knowledge workers over the last 20 years, an extremely disproportionate number of PhD candidates in science and business at US universities are Chinese nationals. So it's already happening -- and we're the ones doing it.
I think China is aware that Mandarin will not become a global language of trade -- it's simply too difficult to learn. But this likely suits the government just fine as it funnels all business deals through a (relatively) small group of people who are fluent in Mandarin and another language. And given the difficulty of learning to read Mandarin as opposed to say, French or English, I suspect almost all of those people will be Chinese.
"A growing influx of foreign PhD's into U.S. labor markets will hold down the level of PhD salaries to the extent that foreign students are attracted to U.S. doctoral programs as a way of immigrating to the U.S.. A related point is that for this group the PhD salary premium is much higher [than it is for Americans], because it is based on BS-level pay in students' home nations versus PhD-level pay in the U.S. . "
Basically the government wanted to allow more foreign students in to PhD programs to suppress PhD wages. They estimated without any policy changes, computer science Phd wages would be over 100k by the year 2000...
Bottom line, the Chinese nationals in your classroom and in your office are the result of a concerted effort by the US government and the tech industry to suppress wages.
We have to be very careful here: On the one hand, if talent is too restricted, prices will rise, but so will opportunity costs, suppressing R&D, or that R&D might simply move to where the talent is.
This isn't a zero sum game.
The average CS PhD is what? 36k/yr? That is only attractive to international students who place a lot of value in being on US soil. The smart domestic students will avoid PhD programs and CS altogether, which is precisely what the industry wants, the self full filling prophecy of the "talent shortage".
I made about $1300/month as a PhD student at the end of the 90s/early 00s. But in exchange, I got to do the research I wanted to, it was a fair exchange for me. If you are in it just for the money, I guess it doesn't make much sense, but then you don't need a PhD anyways. I'm also one of the odd balls who is an American CS PhD graduate working for an American company in...China. Turns out, those high-end research jobs really can move from the US to another country (before China, I was in Switzerland)!
CS grads already easily make the most money out of all STEM graduates except maybe medicine which requires a much larger time/money investment.
Where exactly do you see the extra supply coming from if, say, CS wages went up another 50%? Who would be incentivized to study CS who isn't already sufficiently incentivized today?
I don't think chinese firms can't get a foothold abroad (see Huawei), it's just that they have less desire to.
http://www.wsj.com/articles/yum-brands-to-spin-off-china-bus...
Apple is the biggest success story, but that could change literally overnight. It's a big risk to have large foreign operations in China.
They would have massive civil unrest.
Really excited to hear more about your experiences!
Proof:
The iPhone was released in china in like 2012 or something, There were no riots, and FoxConn was still handling the assembly... Sooo... Pretty sure your point is moot now.
They not only have a desire but they also can get a foothold (look at how well many of their cheap phone brands are doing in developing countries). However, they do have a limited ability to do so when it comes to developed countries. Which isn't that bad since most of the big brands are manufactured inside their borders anyways. The calculus looks better for them than for, say, the UK.
Think Lenovo is doing a lot better in overseas markets than Yum Brands in Chinese markets...
I don't agree with this; but Chinese companies are in a much better position to do so, and China is where the growth is.
> Clean energy in 20 years: in 20 years, most of the Chinese rich will have already left
A bit hyperbolic; but we already have a global economy. Foreign companies will continue to invest in China (both in companies and in their own projects) regardless of what the Chinese wealthy do. There are 1.2 billion people in China. Most don't brush their teeth. Think how much more toothpaste P&G could sell there if people became even moderately wealthy and more concerned about dental hygiene.
> large migration from rural to urban: there's no jobs waiting for these rural farmers.
As long as the Chinese government is willing to sponsor public works projects, there will always be jobs. And China is not unique in the transition from a manual labor to a knowledge labor economy: they're actually probably in a better position than most because they can benefit from explosive growth whenever they choose to. And don't forget that the Chinese population is aging rapidly: there will be more people exiting the workforce through retirement and death than new entrants into the workforce. Ensuring need and training match up is a problem, but I don't think any government has solved that one; so I wouldn't call it a huge impediment to their growth.
No, that was your point. You said quote "nobody else is going to come in and take those customers except Chinese companies"
>Foreign companies will continue to invest in China
Sure they will, but it will be dramatically smaller. $850 billion a year outflow makes it so
>if people became even moderately wealthy
IF. These rural farmers have to compete with cheaper workforces in southeast Asia. And english speaking knowledge workers worldwide.
>As long as the Chinese government is willing to sponsor public works projects
The government did that already since 2008. All they got were 300% gdp/debt ratio and badly constructed roads/buildings. They can't borrow anymore money to do that, not with the carry trade unwinding and default rates going up.
This is too hyperbolic. They got airports and a large network of trains and high-speed trains. They also got the internet, electricity and smart phones all of which are still relatively new to China. The impression I got when I lived there was that the past decade has been all about developing infrastructure. Now there is a young generation growing up with more education, more technology and more opportunity than ever. China is a huge, complex country early in its development and it is hard to generalize about it.
1. KFC? McD? Yes, they have this. But they also have their own chains. That you did not hear about them, does not mean they don't exist. I actually really like the (Japanese) chain Yoshinoya here but there are enough Chinese alternatives. Starbucks? Yes, they have this. But they have their (I assume) own chains (I assume for example Holyland and 85 degree are Chinese brands).
Technology? Yes, the rich kids love Apple products. But they have Haier, huawei, Hisense, Xiaomi. Your ignorance won't make this brands disappear. And if you don't want to buy them, there are billions of people and the world that will. And don't forget. "Made in Germany" was a label forced upon products by England to suggest "inferior technology". How did this turn out?
Instead of Paypal they use alipay, instead of Whatsup they use the much superior WeChat. Yet, Baidu is very inferior to google. They have Alibaba and Taobao.
Yes, they have their BMW, Mercedes and VW. But they also have their Chinese brands like BYD etc.
They may have a recession/depression for some years but it won't stop the rise of the East. The world GDP has already shifted back to the East after it shifted to the west due to the industrual revolution. The economic future lies in the Eurasian continent with Russia/CIS, India and China. Europe has two options - associate with the US or with the Eurasian continent. The US is very eager to prevent this (e.g. TTIP). Don't forget, Chinese think very strategically and long term.
The long term problems are likely different. Besides over aging (which can be seen in the West too), believe of cultural superiority. While it has it advantages not to be flooded with criminal "refugees" like Germany, the closed society in China also keeps talent out. Most superpowers (Rome, UK, USA) were very open for talent and it was easy or at least possible to become a citizen. This is a problem. Corruption? This can be fixed. But the deeper tendency to be dishonest is likely the cultural problem. Similar to Arabs, Chinese don't trust each other.
Yes, I've been to China. Btw, have you ever read the thread? I was responding to OP's statement 'nobody else is going to come in and take those customers except Chinese companies'
> The world GDP has already shifted back to the East after it shifted to the west due to the industrual revolution. The economic future lies in the Eurasian continent with Russia/CIS, India and China.
Yeah that like sounds something out of Zerohedge. You're gonna have to provide some evidence.
But you haven't refuted that statement. You merely pointed out there is a tiny amount of "western" companies operating in China, with no numbers on the ratio of foreign to local operations. Which would be the real way to refute that point.
There are foreign brands sniffing around the edges. But mostly, Chinese spend their money IN china. The car companies are a good counter example, but that's mainly because China didn't have the Car manufacturing expertise in house, I believe this is changing. McDonalds and KFC are a joke in China for every one of them you see, there will be at least 10 chinese fast food competitors with more customers. (Turns out Chinese have a preference for Chinese food - Crazy huh?)
iPhone still only hold about a 30% market share. I think that'll change too, as Huawei, and Xiaomi have become significantly more competitive and are significantly cheaper.
Actually, the picture was similar (but better designed) to this one: https://dannyquah.wordpress.com/2012/05/17/how-we-miss-the-g...
I'd disagree that that depiction was better designed than http://www.dannyquah.com/Quilled/Output/2010.09.27-Danny.Qua... or the animation http://www.dannyquah.com/Quilled/Output/2010.08-Danny.Quah-w... It depends on what you're trying to understand. For what you describe, I personally don't like so much the McKinsey graphic. This is discussed in Section 8.3 (in Chapter 8) of my draft manuscript http://bit.ly/1KeSicU on Ordering the World.
But as a feedback
- What are the two extremes? I don't know the end points in your graphic.
- You graphic does not show how the center shifted from the East to the west after the industrial revolution. Because from 1500 to 2010 you actually have either hard data or past estimates.
- I would have put the distance of the dots (years) and a color legend in the picture.
- I am to stupid to understand what the different sized arrows mean in the graphic. What information do they provide?
Need? I guess not. But I think the point is that those things manifest themselves in a healthy market/economy/society, a healthy innovative market. If you're not advancing technologically, then you have no hope for your future. And that's what companies like Samsung, Toshiba, and Sony all do (in the electronics industry). They innovate. That innovation breeds more innovation and lays the groundwork/framework for future innovation.
That's China's biggest problem right now; they relied so much on theft of IP that they lack the infrastructure to innovate on their own. They're stuck on a ledge and can't go any higher without either technological handouts or stealing more IPs. Unfortunately for China, companies are becoming much better at protecting themselves having learned from past mistakes.
China is essentially the world's factory. That's all, nothing more, nothing less. That's all they will ever be until they climb down from their ledge and start climbing up again (starting over from scratch).
> They have 15% of the world's population
And? not sure how this is relevant. If anything, it's even more incriminating; they have that many people but so little to show for it. So little genius, so little innovation, so little advancement... It's proof that their current social, economic and political system has been a failure. They should be trouncing everyone. But they aren't.
> Corruption is being cleaned up
Their "corruption clean-up" has been just lip service. You'll note it was published first from China's own government-ran news agencies (Xinhua).
If you look at transparency international's corruption index (here: https://www.transparency.org/cpi2014/results) you'll see that they actually dropped 20 places from 2013 to 2014. Their corruption actually got worse, not better.
> we've never seen what happens when a large country "awakens" in the age of globalization.
Unfortunately, China's a long way from awakening.
China has been quite innovative in the manufacturing arena. You know all those neat laser drills and 6 axis CNCs that mass-produce all the tech products we have? They were probably designed in the US; but the Chinese are the ones who know how to organize them to churn out 100 million iPhones.
> They should be trouncing everyone. But they aren't.
Look at your history; China was reeling from the collapse of its imperial government (largely as a result of the meddling of European powers) in the early 20th century. They were then invaded by Japan (which has always been a military-focused country, and thus had a very strong military when Western powers came calling and was able to resist colonialization). After its infrastructure was pillaged by a 15-year Japanese occupation, there was a power vacuum and a decade-long civil war.
China was kept in the stone age until basically 1954 by the meddling of outsiders. For all the awful, misguided things Mao did, he and the subsequent leaders of China set the country on a path for rapid modernization - modernization at all costs.
> Their "corruption clean-up" has been just lip service.
I don't know about that. The Chinese government is acutely aware that they need foreign investment in China, and that becomes very difficult to do when there are "hidden taxes" in the form of corruption.
> Unfortunately, China's a long way from awakening.
If that's true, then that's pretty scary given where they are now vs. 20 years ago.
Don't forget, the market can stay irrational longer than you can stay solvent
(Background for non-investors: leveraged ETFs are intended to replicate intraday performance, and a long-term buy-and-hold strategy is always expected to trend toward 0)
(For one thing, ETFs like to buy and sell whole sectors of the market: if Volkswagen has a problem, they sell Toyota. This strikes me as a good way to lose your money -- while not really understanding what's going on.)
Here are some examples of levered ETFs... sorry, it seems most web UIs are interactive and actively resist linking to a customized chart. I'll link to the benchmark. You'll need to click "Compare" and enter the two leveraged ETFs, be sure to check the "Display as a Percent Change" option, and then mess with the duration (from 1D through 5Y is illustrative). You can see that daily or short-term returns are inverted relative to each other, but long-term returns (6 months or more) are net negative across every pair of ETFs.
Crude oil: UWTI is 3x, DWTI is 3x inverse. USO is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/USO
Small caps (e.g. Russel 2000): TZA is 3x, TNA is 3x inverse. IWM is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/IWM
Financials: FAS is 3x, FAZ is 3x inverse. XLF is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/XLF
Bottom line: for buy-and-hold investors, leveraged ETFs are always a trap.
I've studied China for 29 years, speak/read Chinese and Japanese well, and have lived there long stretches.
All his statistics are correct. Most importantly is the capital flight - of both Chinese individuals and overseas investors.
Clothing is the lowest point on the value chain. They never meant to become a clothing manufacturer perpetually, they were using it as a way to leapfrog up the value chain.
They're pretty happy to let Bangladesh take over the manufacturing of clothes while they do electronics (and ultimately aerospace and CPUs).
http://www.scmp.com/business/companies/article/1863709/manuf...
Japanese companies (Toshiba, Citizens) head for exits as China loses steam
http://asia.nikkei.com/magazine/20150611-Something-in-the-ai...
* 1-2% GDP Growth that you cited is the opinion of one woman who makes a living selling opinions on the Chinese economy, it is anecdotal. * The article you posted states that central government GDP/Debt ratio is 64%, whereas local debt is 280% - so relative to the United States, with a total debt ratio of 332% China is still "flush with cash," in a sense and could stimulate out the 280% ratio, as the very article you cited notes. * Regards to Banks/Commodity firms - they are state owned, they could be privatized and this would improve efficiency. * You need to read the articles you post - there are $1Trillion in Foreign Reserves left to help the Yuan glide down slowly against a foreign basket of currencies, out of a total $4Trillion in foreign reserves. The US has $0.4T by the way, far less (this includes gold). * Epoch times is not a reliable source. They are just 100% anti-China, that is their reason for existing. * Manufacturing moves in and out of countries all the time, the net value of production in China is going up. * China does not require global consumer brands, it has 1.5 Billion people. China is flush with cash and can spend its way out of all of those issues. * No, we don't get the idea. You posted a bunch of links with very brief headlines on each. You didn't read many of the links you posted. Your post is a non-coherent shotgun approach.
The major issue facing China is the fact that it fundamentally a one-party controlled communist command-economy, and it has pegged its way into that political path, without a clear way to get its way out. They attempted to go the democracy route for a bit in the 80s, but things out out of hand and Tiananmen Square Massacre occurred, effectively erasing the Chinese political consciousness. Now they are kind of floating in this world where no one really cares about politics, they just care about making money and hope the government is nice to them. This is the defining challenge of China in the 21st Century.
The economy will go up and down but overall continue to grow over the next 20-30 years because they can buy their way out of whatever depression they need to. Things will probably get less polluted over time. If you look at the Shanghai composite, this has always been unstable and volatile and has had much worse crashes in recent memory. So every time the China stock market crashes, people come online and think they can become instant Sinologists and Peking Toms by posting a flurry of links. It doesn't mean anything --- it's a sputtering of irreverent neckbeardiness which does not further hacker news' understanding of the situation and actually makes people dumber for having read it, a la Billy Madison.
Even if 15% of investors are speculators, the price can still swing drastically, since price is a function of supply and demand, and the charts we're seeing are not volume-weighted.
Market price stability is a function of the uniformity of supply and demand over time. Buy and hold investors already own the stock so their preferences are not reflected in short term supply/demand uniformity (price stability).
What we're seeing in China is a lack of uniformity of views on the future price, and thus rapid fluctuations in supply/demand uniformity over time. Government instability plays into that tremendously.
What we're seeing is a lack of faith that many are finding disturbing.
That is a fairly unfalsifiable statement, and it is trivially true for nearly anything, b/c we all make all decisions today based on the faith/expectation that we will be alive tomorrow.
The notion that tomorrow will be substantially different from today makes nearly all planning useless, so it's trivial that all planning hinges on some notion of faith in the future.
But price itself is only a function of supply and demand. If I am selling bread and it's nearly time for me to go home and the bread will be stale tomorrow, I might offer the remaining loaves to the last few customers at a discount if I expect it not to sell otherwise, etc. Supply vs demand. Charted on a graph the price would take a nose dive at the end of the day.
If a short term investor feels that his position will not improve, it makes sense to liquidate. The more symmetrical market participants' views are, the more the price will change as a result of trading (why would someone sell when they expected the price to go up?. This illustrates the adage that one person's junk is another person's treasure) To be logical we must consider would-be buyers and would-be sellers of the shares.
Only in the rather peculiar case of significantly asymmetrical views of the future price will the price remain stable with lots of shares changing hands.
(edit: list formatting)
Makes you question weather they really in a bubble? It appears they could fill Ordos and 43 other new cities in the next 15 yrs! Perhaps they need to be putting these cities up even more rapidly.
[1]http://www.mckinsey.com/insights/urbanization/preparing_for_...
I'd qualify this with value orientation. To have a successful stock market you need the factors you mentioned plus long-term holding value investors.
To illustrate the difference, consider what would happen if the Warren Buffetts and David Teppers of the American capital markets put all their money into ETFs. You'd have no price discovery. Someone needs to be wiling to do their own research, reach conclusions with conviction, and trust in those conclusions through short- and medium-term wobbles.
Long-term value investors require capital. They also need transparent, liquid markets. China has capital and liquidity. It lacks (along with India, Russia, and a number of other "emerging" equity markets) reliable data and/or trustworthy institutions. This deters long-term value investors [1].
[1] https://www.scribd.com/embeds/294654490/content?start_page=1...
I disagree. ETFs just track an index. If you buy the ETF, someone else is buying the index (individual components of that ETF) for you...
If everyone buys indexed ETFs, the market stops discerning between the index's components. If everyone buys "China," the difference between "shitty thing over there" and "half-decent asset if not levered through the roof" vanishes. When the market starts falling "finger in the pie" syndrome sets in. Nobody has any idea what one thing is worth over another. Even if they do, they probably can't trust their data, and even if they can, they know nobody else can. So everyone dumps "China," punishing all assets alike.
This is already happening due to the circuit breaker actions. What happens is that the trust in the market mechanism gets eroded to the point where even those companies that were not the ones losing big time will get drawn into the next wave of sell-offs. It's basically a stay of execution at that point (if we haven't already passed it).
There are a lot of different ETFs, some much more broad than others. You don't need to buy the whole market. If you think energy is cheap you can buy an ETF of energy companies (say XLE) which is a useful way to diversify if you're not able to buy reasonable quantities of multiple names.
> Whether or not you like the US stock market, it is fairly transparent and not run by the whims of the government. The other two countries are about as opaque as you can be. Speaking as a person who actively invests money, that's a very troubling thought.
> As one economic nobel prize winner put it... "China and India haven't put out a credible macroeconomic number in the past 10 years".
This was one of the reasons cited for renowned hedge fund Nevsky Capital closing its doors. They are up 1212% since 2000. [1]
"Data releases have become much less transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever increasing importance of China and India. China is the world’s second largest economy, but already much larger than the US in a broad swathe of sectors. India will be the world’s third largest economy within a decade. Unfortunately their rise is increasing the global cost of capital because an ever growing share of the most important data they produce is simply not credible. Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe."
[1] http://www.zerohedge.com/news/2016-01-05/why-15-billion-nevs...
This comes in two pieces, first transparency and accuracy of the company: Who is enforcing accounting standards? Who is doing the auditing to ensure the said assets are really there?
The second, is the economy based on real demand or something temporary: Are profits dependent on the activity of government officials & central bank finance?
It would be very unfair to single China out in this regards, just look at what happened to Brazil.
As to the US stock market being "fairly transparent and not run by the whims of the government", check your history man. The US stock market has seen some crazy wild, stock manipulation, insider trading, government manipulating, bucket shop, boiler room, "oops, we have too much paper to process so shut the whole thing down" days.
And, I should add, those days aren't over. The mess is still all there, it's just much more sophisticated and comes with a better staffed and better funded marketing department.
If you think you _may_ want to sell at all tomorrow but also think a circuit breaker could trigger, you're going to sell first thing in the morning. So will everyone else.
The circuit breaker can actually trigger a worse panic as investors all try to squeeze in sell orders at once. This triggers the circuit breaker, confirming everyone's fears, and starts again the next day.
[0] https://twitter.com/DavidInglesTV/status/684922104412672001
Both are measures of very different things, and both are very different to actual money.
I don't really agree with you.
GDP measures the value of goods and services produced by a country over a specific timeframe.
Market cap (in this context) measures the value of all companies listed in the stock exchange.
Both are ways to measure an economy, and both are measured in units of money. What's the difference between money and "actual money"?
If I buy something from you for $10, and sell it to someone for $10 the GDP goes up by $20.
If on the other hand you sell it to someone for $10 the GDP goes up by $10 instead.
The value of money + value of tangible goods is the same in both cases, but the GDP is not.
They measure different things.
Tourist walks through some distant mountain village and meets the villager shouting "My dog is for sale". So the tourist asks
"How much for your dog?" "$1 million", villager replies.
Tourist just sighs and continues his walk. Later the same day tourist is coming back. He meets the same villager, so he asks:
"Did you sell your dog?" "Yes,to my neighbor, for $1 million" "Really? And he paid in cash?" "No, he gave me two cats, but they are $500.000 each"
The market cap valuation works in exactly the same way.
Or am I wrong?
Market caps for eg public companies are generally given legitimacy through trading, routine liquidity, auditing of financials, and dozens of other processes and regulations that companies must conform to. You can sell your Microsoft stock for a very well known amount of dollars, under very well known terms, essentially any time you want during market hours; you can never sell those cats for $500,000.
The difference between me claiming my right shoe is worth $50 billion, and owning all of Uber's stock and having that be worth $50 billion? People with a lot of money, and a lot of reputation, deciding that Uber is worth $50 billion, after typically having put their money where their mouth is and investing. To say nothing of Uber having a real business (meaning they can raise debt, have credit ratings, sales, cash flow, operating projections, et al), having a value that the IRS or an auditing firm or investors can actually assess, and so on. One is verifiable to some large degree, the other can never be anything more than an absurdity - I can very likely sell my Uber stock for a lot of value, even if I take a big discount; I can never sell my right shoe at even a 99.99% discount to the $50 billion.
If Bill Gates wanted to liquidate his Microsoft stock, though, it's unlikely that his sale price would match the exchange. Once you get into trades of a significant portion of the company, there's not enough guaranteed to be enough liquidity at price listed on the exchanges.
No it doesn't, not in a functioning public market.
Just because the guy claims the cats are $500,000 each, doesn't actually make it so. The sole thing occurring there, is a person is claiming something (that is obviously false). No taxing authority on the planet would assess those cats at $500,000; no professional auditing firm would either. The entire bogus premise collapses instantly upon scrutiny.
In almost any market, a claim is worthless unless you can eventually cash it in for a large portion of that sum, typically in a currency that possesses real value. In your example, your cats can never be cashed in for a meaningful fraction of their proclaimed value under any scenario. I can sell my Tesla stock however, there is an extremely well established and accepted value placed on it. I can still pretend, and make an outrageous claim on what my Tesla stock is worth ($1 trillion!), however it is nothing more than a bogus claim and has no actual bearing on reality.
Suppose the government made a law saying that you cannot never sell KO (Coca-Cola stock). Today KO is selling for $41.62/sh. Tomorrow, is it worthless? No. It pays a 3.05% dividend, which it typically increases 10% a year. It is worth at least $1.27 (the first year's dividend).
Now to the question about cats selling for $500k. Would a sensible taxing authority or professional auditing firm assess a flower at $500k - $1 million? In 1637 a single Viceroy tulip bulb sold for 3000 - 4500 florins; a skilled craftsman made 300 florins/yr [1]. Assuming that a skilled craftsman would make at least $50k/yr (probably more, given that $50k is near the median US income), one tulip bulb cost $500k - $1 million. Not so different from selling cats for $500k, so you cannot attack the example for unreasonable prices (s/(dog|cat)/tulip bulb/). Now, was it worth that price? No, hence why it fell back to a much more reasonable level shortly afterwards. But during the mania, selling one tulip in exchange for two lesser-valued tulips would be quite valid.
You missed the point of the illustration, which was that price (market cap) has no relationship with value. Admittedly, the illustration was rather opaque.
[1] https://en.wikipedia.org/wiki/Tulip_mania
That said, I do agree that GDP and market cap can't be compared in a meaningful way.
It's like saying that the ISS is about the size of a football field. Does this comparison help you to visualize the size of the ISS? Sure. Does this comparison help you to understand anything else about the ISS or football fields? No.
If the units are correct and the same, then the comparison makes itself. The distance between two cities and how far an electric car can go on one charge are vastly different things, but since both can be measured in the same units, the comparison makes itself.
A dollar of market cap is very different from a dollar of GDP, like a cubic meter of lead is different from a cubic meter of air.
What we're talking about is the value (or weight); the denomination (or volume) is irrelevant.
The value of a dollar GDP is considerably more tangible than a dollar market cap.
This is China finally having their 2008 and it impacting the world.
Lastly the US CAPE ratio is pretty bad too.
Technicals = Star Signs in most cases.
The fact that people know this information, changes the outcome which is why markets are so hard to predict.
The fact is if you followed the indicators that I mentioned since 1950, your net worth growth rate would've increased at least 50% without even using leverage. Trends in the general stock market change slowly (the price doesn't look like random noise) and that's why it's predictable enough to beat a buy and hold strategy.
I'm long on the US stock market because if US companies are good at one thing, it's their 5% YoY growth.
Well that's easy, the hard part is finding the indicators that will do that for the next 60 years, not the previous!
It's not a perfect strategy by any means. But I think using indicators is superior to a buy and hold strategy. When you invest you are necessarily choosing between different strategies. There is nothing magical about buy and hold other than that it's simple, and a lot of people do it. Historical data shows that if you trade based on indicators then your returns are much higher. I think it's important to find what works the best through calibration and back-testing.
There are also risks such as survivorship bias that even applies to indicators, in addition to companies and economies. The best indicators survive in whatever system you use, and that doesn't guarantee they will actually work well in the future. Still I think it's better than the buy and hold strategy.
I can't guarantee the indicators will work in the future, but they worked in the past, and they make sense to me because the S&P 500 historically followed a momentum-like path. And I don't see why a 65 year trend based on mathematically simple technical indicators will suddenly change overnight just because it's the future versus the past.
If you don't use indicators, then you're taking the strong position that they don't matter, which is more contrary to the evidence than using them. Unfortunately you either have to use indicators or not use them. So an "I don't know" opinion is still a definitive decision that they are worse, which is probably an incorrect decision.
Bad compared to everything else in the current investment climate, not so much.
CAPE of 25 corresponds to a yield of 4% before growth in earnings is taken into account. That's still pretty good compared to the yield on treasuries and just about anything else right now.
http://assets.bwbx.io/images/iIS_j8I_fYlI/v2/-1x-1.jpg Source: Bloomberg
Edit: Found it myself: http://www.bloomberg.com/news/articles/2015-06-16/real-cost-...
The CSE page doesn't define how they compute average P/E, in principle they could be using some historical measure of earnings.
The hedge funds who saw this coming are doing very well at the moment [0] [1]
[0] http://www.barrons.com/articles/hedge-fund-posts-strong-gain...
[1] http://www.bloomberg.com/news/articles/2015-11-17/hedge-fund...
http://www.usfunds.com/media/images/frank-talk-images/2012-f...
The current growth slowdown is largely due to decreased domestic consumption growth:
http://www.brookings.edu/~/media/Research/Files/Blogs/2014/0...
Of the top listed companies in Shanghai, most are banks, petro, insurance, energy, etc. that are domestic driven (the SSE website is down at the moment but the list is here: http://english.sse.com.cn/listed/list/)
I don't think there were many expecting that a public company investment in China would be supported by exports.
So now the average Chinese consumer will be double-hosed: once over by losses to their personal retail brokerage account, and again by losses sustained by their pension funds.
Hopefully enough Chinese consumers made enough money from the crazy ride up on the market that they cashed out periodically and invested in sensible hard assets such as homes and cars. Because the correction will probably be very painful.
[1] http://www.theguardian.com/world/2015/aug/23/china-to-allow-...
[1]http://www.bbc.com/news/business-35253188
China knows that when its markets plunge, the American markets plunge too.
Is there a way for China to create the illusion of its markets plunging, without losing real value (or at least profiting from the perspective of some influential power in China)? Perhaps they could accomplish such manipulation through a combination of 1) collusion between the CCP and the largest investors in the Chinese market, 2) currency manipulation, and 3) shorting of US equities?
I know this sounds speculative and vague, because honestly I have no idea what I'm talking about. But China certainly has the motive to manipulate American markets. And since the foreign investment is asymmetrical (e.g. the Chinese can invest in NYSE, but Americans cannot invest in Shanghai), China has an opportunity to "play both sides" of a Shanghai market crash and any corresponding American market drop, while American investors cannot do the same.
So... is it possible?
They know their history.
The world doesn't revolve around America. The Chinese government certainly cares a load more about its own economy doing great than how other economies are doing. They wouldn't sabotage their economy and destroy trillions of dollars in wealth to make a significantly lesser dent in our economy.
The only thing that concerns me is that those market peaks/humps were due to humans getting concerned and changing behaviour. Maybe now that most trades are just computer to computer the Algos don't "know" to be "scared" and cool it we might keep going up till some epic event corrects it.
I am hoping it's a 1-2 year correction that goes down 50-60 percent. But, who knows.
http://finance.yahoo.com/echarts?s=000001.SS+Interactive#{"s...
This is hardly some sort of disaster or the end of China's prosperity. Just a bump in the road for investors.
Price trends don't necessarily mean anything, and corrections are good as much as they are bad.
A correction means the previous price was incorrect, yet when prices fall humans sentimentally believe the old, higher price must have been correct. It's ridiculous.
Governments take extensive measures to control prices and to alter public perception of risk. Sometimes this adds stability to prices, but it often sets things up for a more drastic correction later.
Some investors are over-leveraged and must cash out to avoid ruin. Others are speculators trying to ride various trends, but in the end we all benefit from prices being corrected.
Only sellers believe this, buyers believe that the old lower price was correct and they are being gouged. (See anyone who tries to buy a generator after a hurricane)
Makes you question weather they really in a bubble? It appears they could fill Ordos and 43 other new cities in the next 15 yrs! Perhaps they need to be putting these cities up even more rapidly.
[1]http://www.mckinsey.com/insights/urbanization/preparing_for_...
Right, like if you were predicting 40% city growth in the US, the solution would not be to build new mega cities in Utah (which has a comparable percentage of US's population as Inner Mongolia has in China).
These companies' listed values might have well have been picked by a roulette wheel.
China has 4x the population of the US. How "big" would the intervention have to be to be stronger than anything in 2008?
At this point China has thrown roughly a trillion dollars just at trying to prop up their stock market [1]. That doesn't include what they've burned trying to control their currency, what they've spent trying to keep their real estate bubble from completely falling apart, and what they've spent dealing with zombie companies and their vast shadow corporate and muni debt, and so on.
[1] http://uk.reuters.com/article/uk-china-markets-rescue-idUKKC...
To digress a little bit, I know this may be heresy, but TARP was the single most courageous and under appreciated accomplishment of the G.W. Bush administration.
It's an economic miracle that when push came to shove, suddenly we were all Keynesians again.
Psychologically, if you know the markets will close if they drop too fast, it might actually encourage traders try harder and rush faster to be the first one to sell off more stocks that day before time runs out.
NYSE, the largest in USA, has a combined market value of 20 trillion dollars, whereas the largest in China (Shanghai Stock Exchange) has a combined market value of 4 trillion. This is for two economies of about the same size.
This means that when the Chinese market drops (or raises) the overall impact for the wealth of the country is much smaller than a similar change would cause in the American markets.
https://en.wikipedia.org/wiki/Stock_exchange
The USA's net national wealth is about $85 trillion, while China's is about $22 trillion. I have a feeling that a much larger proportion of the USA's stock market is held by foreigners compared to China.
It is possible that drops (or raises) in the Chinese market actually affect Chinese wealth more than in American markets...
https://en.wikipedia.org/wiki/National_wealth
Every owner of an equity is lining up to sell their assets to the big idiot with the giant flashing neon sign saying they will buy anything, knowing that the more they flood the market, the more the central committee will buy.
China, you just got played, welcome to the market.
I'm surprised there's no mention of the impact of recently rising Federal Reserve Rates[1] on the Chinese Currency or the fact that the Yen was recently added the IMF's Special Drawing Rights currency[2]. Since China's moves in August I think its fair to characterize this as a currency war. And it's Dollar Hegemony that's hanging in the balance[3]. Many have characterized it as a war for much longer. What's different now? The proxy wars between the United States and Russia are heating up and tensions between China and the rest of East Asia are heating up. Western sanctions on Russia for Ukraine pushed it toward China and that may just have been the tipping point[4]. I find it remarkable how able the performances of equity markets are to obfuscate the currency and bond markets that are driving them[5]. When equities move fortunes change, when currencies move, the balance of power on the planet changes.
[1] http://qz.com/588049/what-the-fed-was-thinking-when-it-final...
[2] http://www.globalresearch.ca/chinese-yuan-incorporated-into-...
[3] http://www.brookings.edu/blogs/ben-bernanke/posts/2016/01/07...
[4] http://www.economist.com/news/china/21650566-crisis-ukraine-...
[5] http://qz.com/588704/chinas-stock-market-isnt-the-problem/
The current Chinese government seems to have some other bright ideas though like trying to boost prices when there is a parade on (http://www.slate.com/blogs/moneybox/2015/08/31/china_s_stock...). Not sure that works long term.