Chinese volatility and American hubris.
The Chinese stock market had a very short day yesterday: Trading was halted after a mere 29 minutes. China’s stock market is subject to a so-called “circuit breaker,” a regulatory measure that automatically cuts off trading if the market declines by more than 7 percent in a single trading day. The plunge on Thursday came after the circuit breakers had already suspended trading earlier in the week.
Volatility in stock markets is caused by many things: news, the release of new economic data, corporate reports, developments at individual firms or in particular industries. Harold Macmillan was talking about politics rather than markets (the subjects are not unrelated), but he identified the world’s main source of uncertainty: “Events, dear boy. Events.”
Volatility is not caused by the absence of artificial anti-volatility measures.
That’s something that is almost always overlooked in politics: X is not usually caused by the absence of measures against X. For instance, the United States doesn’t have high levels of violent crime because of an absence of laws against guns, but because we are a violent and unruly society. (If you think our rate of shootings is elevated, compare our rate of death by bludgeoning, or our rate of accidental vehicular deaths, to the rates in Switzerland or Singapore.) And it isn’t a lack of appropriate regulation that causes some business executives to make dumb decisions or to take on excessively risky investments, any more than car wrecks are caused by the absence of guard rails, or obesity by Happy Meals.
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In the case of Chinese shares, there is some reason to believe that the anti-volatility measures actually contributed to volatility, which is one of the reasons why China’s securities regulator suspended the use of the circuit breakers. The bulls may feel a little sick to their stomachs when the market drops by 10 or 12 percent, but there is a far worse feeling: not knowing how far the market is going to drop. “Well, that happened, what do we do now?” can be a very unpleasant question to answer, but it is answerable. “What’s going to happen next?” isn’t. Regulations such as China’s — and ours; U.S. circuit breakers kick in at 20 percent — keep certain unknowns unknown.
When markets have seen a significant run-up in prices — and Chinese shares doubled in price from June 2014 to June 2015 before turmoil set in that summer — it is natural for investors to begin to suspect that stocks are overpriced, to conclude that the market has been run up too high on momentum and wishful thinking, and to wonder where things are headed. When prices reverse, investors engage in what traders sometimes call “searching for the bottom.” But if regulators — or elected officials — won’t let investors search for the bottom, the bottom will never be found, and there will be more uncertainty.
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China isn’t the only country that does that, of course: A great deal of broadly bipartisan U.S. economic policy in the past decade has been directed at preventing markets from finding the bottom of U.S. housing prices after the millennial bubble collapsed. There’s no real economic reason to prefer high and rising housing prices to low and declining housing prices. The real difference is the political character of the actors in the housing market: Homeowners tend to be older, wealthier, settled, and politically engaged; home buyers tend to be younger, poorer, less rooted, and less politically engaged. Homeowners vote, and they feel better economically when there is significant appreciation in the price of what is for most households by far the largest single asset. So politicians prefer high real-estate prices. Affluent people, financial institutions, people with retirement accounts, unions, and government-employee pension funds tend to own a great deal of stock, so higher share prices are a political winner, too.
When Chinese shares went sideways, Nicole Sherrod of TD Ameritrade sent a funny little tweet reading “Morning market update for Millennials,” followed by a bunch of cutesy emojis: bears, Chinese flags, downward-pointing graphs, and SOS signals. But from one point of view, young people should welcome a downturn in the markets, assuming that we’re talking about Millennials who have jobs and money to invest. Why? The S&P 500 hit an all-time high last May, and it’s really hard to follow the most basic investment strategy — buy low, sell high — when you buy in at record prices. No president ever boasts that the price of ground beef or gasoline hit an all-time high during his tenure, but we treat corporate shares and housing as though they were magical commodities. That’s great if you’re an owner, but not if you’re looking to buy.
#share#Which brings us back to China’s stock market and its effect on ours.
Americans are suckers for the fearsome Asian Economic Superman: It was Japan a generation ago, it was China up until the day before yesterday, and it’ll probably be India next, maybe Korea. Never mind all the kryptonite flying around. In the blink of an eye, we went from hearing U.S. politicians howl about how Beijing was artificially suppressing the price of the Chinese currency, the renminbi, to watching in terror as Beijing struggles impotently to reverse the decline of that currency.
What is the renminbi really worth? Nobody knows. Beijing interferes with the foreign-exchange market in various ways, and the governmental footprint in the broader Chinese economy prevents the emergence of real information through prices. While the U.S. dollar is one side of 90 percent of the world’s currency trades, the renminbi is involved in only 2 percent of those trades. So there’s a lot less uncertainty when it comes to what the world will give you for a dollar.
The assumptions in Washington are the same as those in Beijing: that everything is subject to political power.
Though they disagree, politicians in Beijing and Washington both think they know what the renminbi should be worth. Until Thursday, Chinese authorities thought they knew how much shares on the Chinese stock market should fluctuate on any given day, too. Their counterparts in Washington believe that they know in which direction housing prices and gasoline should be headed on any given Friday morning in January — and what interest rates on credit cards should be, how much an hour of unskilled labor is worth in Muleshoe, Texas, how many people should be majoring in engineering vs. history — and how the renminbi should be valued, too, if you ask them, it being a bipartisan article of faith in Washington that most of what’s wrong with the U.S. economy is caused by scheming, inscrutable Orientals in exotic locales, rather than (unthinkable!) the work of power-hungry numbskulls in Washington. The fact is that these politicians and their philosophy of ad-hocracy are only agents of chaos, blind idiot gods flailing in the economic darkness.
It isn’t insignificant that Washington’s smart set has only recently (and only partly) been cured of its debilitating China envy. But they’ll never learn the real lesson of China, or the U.S. housing bubble, or whatever the next great economic crisis is: There are things you can’t actually do with political power, and one of the things you can’t do is intelligently manage markets that are so complex as to be literally incomprehensible, even in theory.
#related#But every expensively miseducated jackass who thinks he should be president of these United States has an opinion about what a bottle of grape soda ought to cost in Des Moines or Dixville Notch. The assumptions in Washington are the same as those in Beijing: that everything is subject to political power, that it all comes down to having the right sort of enlightened rulers with the right sort of enlightened ideas, that everything else — the real world — is detail. But human beings, and their relationships, are not electrical circuits. They are not governed by circuit breakers. Not in reality.
Are gas prices too high? Too low? What about housing prices in San Francisco? In Galveston? The correct answer to those question, and many like them, is: “I don’t know, and neither does anybody else.” But God help the politician who tells the truth about that.