Everyone seems to ask repeatedly: How can the stock market set new records when there is all this global turmoil? Are investors not watching the mess in the Middle East, the bankruptcy of Russia, the instability in Brazil and Argentina, Euro-sclerosis, narco/government crime in Mexico, and Ebola? Perhaps it’s all Fed created liquidity that just fuels an infinite rally. After all, the only alternative to stocks are bonds with no yield, so lets just go all in and roll the equity dice.
But maybe there is another logical explanation. It used to be that we would have bilateral trade – we would buy goods from specific countries where they had a geographic or technological superiority. Even more importantly, they would buy our stuff. Proximity was an advantage. Lower transportation costs and similar consumer tastes gave our neighbors significant advantages even if their labor costs were high. On the other hand i f they got hit by an earthquake or a revolution then we would have to find new buyers and suppliers. For now intra – European trade is still huge just like trade between the US and Canada.
Things are changing – fast.
We suddenly introduced an entity that can produce anything at a cheaper price. Egyptians now import twice as much stuff from China than from Turkey. China is the number one importer into Russia, Syria, and Brazil. It’s even passing Holland as the biggest importer into Germany! Virtually every country can now buy all its consumer goods from China at vastly lower prices than anything made regionally (or locally) – if they have sufficient US dollars… and therein lies the rub.
Since China buys nothing from anybody (except some raw materials from the Third World), Russia, the European Community and the UK have to borrow (US) dollars, endlessly to get all this fabulous stuff, that they used to make at home (or get regionally). The result is a crash in economic interdependence (and GDP growth) and a rise in borrowing to finance trade deficits. No one cares if Russia dies because no one sells anything in Russia. Libya, Iraq, Syria, Brazil, Venezuela, Mexico, Turkey, Greece, Spain, and France can all implode – you can get everything you need from China so everyone else can go on permanent vacation; just don’t buy stock in a bank that lends money to these places.
It turns out that “globalization” was a fraud. Yes,we can now read tweets from Jordan and follow the Ebola crisis in West Africa thanks to new phone apps. But the economic connections that were flowering in the 90’s thanks to lower tariffs and floating exchange rates are dying. If everyone just buys everything from China then who needs their neighbor’s goods. For that matter, why do I care about the guy four states or four hundred miles away? As long as the economic implosion next door doesn’t cause people to invade then it’s all good. Japan has been in an economic quagmire for 20 years and it has hurt nobody other than Japan. If you had predicted that in 1988, people would have thought you were crazy. Now everyone is just like Japan.
In the end, it’s all about imports. As China takes up a greater share of every countries’ imports, other countries drop out of everyone else’s economy and out of their lives. They are seen and heard on the news but not in our portfolios (unless you are crazy enough to invest in them). Putin is a social media sideshow. We are economically invincible – feel free to ignore political or economic failure in South America, the Middle East, and southern Europe. Welcome back to the 1950’s when TV brought us news about far away places but everyone understood that none of it really mattered – unless we were stupid enough to send our army there. (or substitute “banks” for “army” to update this rule.)
All this freedom we now have, to ignore the world, comes at a huge price. We too, are part of the evil bargain. We have allowed Chinese imports to infect us as well so we wallow in debt and our wages stagnate. This is one huge trade-off: We have accepted a slow grinding economic death but are appeased by the lack of blow-back when other countries suffer more than us.
Unfortunately schadenfreude doesn’t pay the rent.