More On China (Again!)
Normally I don’t write a January email newsletter since I’m busy writing our firm’s year end newsletter for clients as well as compiling our year end reports. However, since China is back in the news and the market is going down again I thought I’d share our thoughts again and answer some questions.
The Chinese Stock Market Does Not Matter!
The first thing people need to understand is that China’s stock market does not represent or correlate to anything other than China’s dysfunction.
Back in August during the first part of the China stock market collapse the satire website TheOnion.com wrote this:
Shoddy Chinese-Made Stock Market Collapses
SHANGHAI—Proving to be just as flimsy and precarious as many observers had previously warned, the Chinese-made Shanghai Composite index completely collapsed Monday, sources confirmed. “Sure, it looked fine from the outside, but anybody who saw it up close knew that it was of such poor quality that it wasn’t built to last,” said Allen Sigman of the London School of Economics, adding that the stock market, which he described as a crude knockoff of Western versions, was practically slapped together overnight and featured countless obvious structural weak points. “They pretty much ignored regulations, and inspections were a joke. The only surprise is that it didn’t fall apart sooner.” Sigman added that he just hopes there weren’t too many people who were hurt in the disaster.
Despite being written as satire it is pretty spot on. The Shanghai stock market really is a shoddy knock-off of Western markets. The Chinese market has a long history of booms and busts for no reason or any reason at all. The market is not well regulated. There is very little reliable financial information for the companies traded on the market. The traders and investors in the market have very little education (most have less than a high school diploma). Add all this up and it’s just a crazy casino game being played by relatively few people in China. Stocks only account for about 9% of household wealth in China.
It’s also important to keep the recent history of the Chinese stock market in mind. Below is a chart of the Shanghai Index over the last decade with the current boom highlighted.
The market rose more than 150% in under a year for no fundamental reason back in 2014. You never heard anything about it in the media a year ago when it was booming.
It’s very strange that now, for some reason, the media and world financial markets are singularly fixated on a relatively small, poorly regulated stock market as if it can tell you some important information about the direction of the world economy. Nothing happened back in 2014 when it boomed and just like so many crashes before nothing will happen this year as it completes its journey back down.
The US Economy Is Still Improving!
The US economy appears to be picking up steam. Low oil prices appear to be helping consumers. Consumers account for about 70% of the economy so anything that helps the consumer is good! A recent Gallup poll showed monthly consumer spending reached its highest level last month.
We are seeing retailers report record sales. Indeed, of the retailers that have reported monthly sales for December all but one (Gap Inc.) beat estimates.
This Friday’s non-farm payroll report soundly beat estimates. Even making a better adjustment for the unseasonably warm weather the report was still well above expectations.
US vehicle sales reached an all time high in 2015 of 17.47M cars and light trucks sold.
The future is looking good too. After years of subtracting jobs from the recovery the US government is set to be a tailwind in 2016. Due to sequestration budget cuts the US government has cost the economy around one million jobs. The recent budget agreement reached late December is set to increase government spending and tax benefits by around $300B for 2016. The graphic below shows how much Goldman Sachs estimates the spending will add to GDP.
Traditional economics usually underweights the effects of government spending so the real results should be higher than Goldman’s estimates.
With consumers finally starting to spend their savings from lower oil prices and a tailwind from government spending 2016 looks to be much improved over 2015.