Brazil is not a country Americans think about all that often but it is a huge country and an economy which has long been on the rise. No longer. A political crisis (driven by a very crony socialist president) coupled with the bottom falling out of commodity prices (driven by a declining China – also a crony state reaping what it has sown) have combined to hammer the country.
This is not an isolated issue of concern only for currency traders and international economists. What we are seeing is contagion. Trouble in China is passing through to much of the world’s developing economies. As the dollar has strengthened many of the world’s second tier economies have suddenly found significant headwinds.
But oil, priced in dollars is cheap – for us. Nice to have a reserve currency. (In most respects.Texas and North Dakota are feeling it on the chin though thanks to cheap oil.)
OK, Politico did not use the exact term, but Charles Davidson and Jeffrey Gedmin make a pretty bold statement in today’s edition. China is a kleptocracy and this encourages instability in the country and in the global economy.
We have argued this pretty much since the founding of this website. A broad system of crony capitalism like the one in China creates distortions in the economy, prices are obfuscated, the connected become wealthy, dishonesty is compounded, until the facade eventually crumbles when the lies become apparent. To some degree that is what we are seeing now with the Chinese downturn.
Such a system is destabilizing politically as well. As corruption is rewarded and cronies amass power and wealth, resentment increases among everyday people. Anger bubbles as the cancer spreads throughout the land.
Davidson and Gedmin are right to highlight the system of kleptocracy in China as President Xi is visiting the United States. But they argue that we should be actively undermining the regime on moral grounds, and from a position of ethical superiority.
But we have serious (and similar) problems in this country. Perhaps we should first extract the log from our own eye.
Kyle Bass is often excellent. He is warning today that much of the developing world is in a dangerous banking position. He argues that these emerging market systems are quite exposed to even a run of the mill downturn. Additionally he argues that China has “only just begun” devaluing its currency.
Could? Well, I suppose so. In the same sense that taking drugs away from an addict is likely to trigger a “drugs crisis.”
If you don’t know, the entire financial world is on tenterhooks right now waiting for the latest declaration from the Federal Reserve, or as David Stockman puts it, the financial politburo. Will they raise rates or won’t they? Look to the skies. Stare into the crystal ball. What will the masters of the universe do? We, those who do not reside on Mount Olympus, can only wait, and fear/hope/whatever. (We are supposed to be a free market economy I thought. Why do we have these guys setting the price of money arbitrarily? I mean I know why. People want to believe in the cult. But seriously, in the 21st Century, why should we?)
If the Fed does raise rates it will be an historic moment for sure. We’ve been at 0% interest rates for almost a decade. It will likely freak world markets out even more than they are already.
We’ve been saying the numbers weren’t to be trusted in China for years. (We certainly weren’t the only ones.) Looks like the world is also coming to this realization, or more likely is just acknowledging that the jig is up. Or maybe both. Whatever, we hope that you had a good ride if you were investing in China on the long side, and hope that you saw the writing on the ghost city walls before things got ugly.
This video from 60 Minutes circa 2013 is probably worth watching again.
Things are getting wacky in The Ultimate Crony Capitalist State.
Robert Shiller, not always our favorite economist here, is warning that the stock market is looking particularly bubbly. This isn’t a huge story except that talk of a bubble is now coming from one of the accepted shamans of Keynesianism. Shiller also called the tech bubble and housing bubbles accurately. His book Irrational Exuberance is a classic.
This must mean that everything is cool then right?
People don’t want to do business where the whole system is rigged. Sure lots of legal graft can be tolerated if the location for whatever reason is especially good. California comes to mind. But eventually capital, human and otherwise, leaves. People are only going to be jacked for so long.
One of the ways people can be stolen from is through externalities like pollution. As Charles Hugh Smith explains, pollution in China is dumped on the people because the polluters – which are in partnership with the government in many cases, if not all cases – can do whatever they want. There is no market mechanism, no social market mechanism, no real property rights, to address the problem. The state has decided it will pollute and so it will. (Of course the state can screw up the other way too. Just ask anyone in West Virginia.)
The only choice then is to leave. If one can.
Think of 2008 as a primer. A very difficult and disruptive primer. Nothing’s “fixed.” Markets never really cleared.
Additionally, as is explained below, the now 0% interest rates are almost locked there as the cost of serving US debt by the US government would explode upward with increased (and very likely closer to real market level) rates. That’s a sticky place to be to say the least.
But people will continue blissfully along, until they can’t. Then they’ll scream that “capitalism” messed everything up. Watch.
We are pretty much obliged to run this one. Of course it has popped. It’s been deflating for months. Really longer than that though the Shanghai Stock Exchange didn’t reflect it for a while. And it’s not like the Chinese pop is over, it’s got plenty more to go. Lots of “fun” is still ahead of us.
People who care about the world economy and world politics should look closely at China. It is a classic case of “mainvestment.” This is a very important concept to understand. The great(est) Keynesian experiment is unwinding now. Good to know why.
“Black sky reality.” Oooo. Scary.
Actually it is kind of of scary. But it’s not the end of the world. It makes sense that Hong Kong’s sky has darkened given its proximity to China. Heck Canada has fallen into recession.
Peter Schiff and I diverge on some important points. For instance I don’t think he gives the Chinese economic system a hard enough time. I think he totally recognizes the crony nature of the place but I think it’s more fragile than he does.
And he’s been plenty wrong at times. (Who hasn’t been?)
When crony capitalism gets really really serious on a personal level.
Oil got hammered over 8% today. Stocks in the US 3% roughly.
This is largely driven by reality hitting China, the Ultimate Crony Capitalist State, and reality hitting investors around the world who have ridden the Fed driven asset inflation of the last few years. As we have said there are huge, massive, pockets of monetary cotton candy in markets which will collapse sooner or later.
But don’t worry, supposedly China has another dose of “stimulus” on the way. That ought to make things better.
Below are a few of the articles we have done on markets and China in the past 6 months or so for your information.