"Kee" Points with Jim Kee, Ph.D.

Jeanie wrote an excellent letter over the weekend to all of our clients and I would like to make a few additional points. The sell-off in stocks we have seen recently seems to be driven by concerns over China and oil, the primary reasons for the brief 12% correction in stocks we had in August.


Stocks are very liquid, which means you can sell them and convert them into cash very quickly. But this very property of liquidity can also be responsible for short-term volatility, and that’s what we are seeing now. The press doesn’t help, milking as they do the cow of shocking headlines whenever there is a stock market pullback.


China is slowing but still growing. I still see the same thing I mentioned some months ago regarding China, namely, that the closer (physically) analysts are to China, the more optimistic they are regarding near-term stabilization of growth rather than a hard landing or crash. By the way, I just sat through two days of seminars on China byanalysts from all over the world (including China), and in the end, few really agreed on issues dependent upon Chinese data (like housing, real-estate/land policies, credit numbers, etc.). None were expecting a “crash,” however.


Here’s my attempt to describe the world as succinctly as possible: When China joined the World Trade Organization in 2002, global growth surged, particularly commodities (oil, steel, copper, etc.), which had been flat for about two decades. China’s share of global manufacturing increased dramatically, largely at the expense of other countries like the US, who lost share. That is one of the reasons US growth was a bit below average even as global growth was above average during the period. It is also consistent with what was then China’s export and investment led growth strategy. Growth in China has slowed fairly dramatically since 2010, partly by design as their strategy has shifted towards domestic spending, and we’ve seen a lot of this moving in reverse. Commodities have come down just as dramatically as they rose, as has global growth and manufacturing (i.e. “the global manufacturing glut”). This in turn has hurt emerging markets that both produce commodities and that comprise parts of the global manufacturing/assembly supply chain with China.


So we’ve gone from a surge of global growth above the normal 3% range to 5% and then back down again, and it’s been eventful to say the least. Policy makers around the world have responded to all of this primarily via monetary policy (e.g. lower interest rates and bond buying), because it is easy to implement, rather than fiscal policy (e.g. tax, spending, regulatory reform) which is difficult to implement. That reduces the risk premium of financial assets, which have surged (rebounded from a prior collapse mostly), but does little for economic growth (which responds more to fiscal policy), which has not. I think that’s why forecasters have over-predicted growth at the beginning of each year since this expansion began in 2009, only to lower their forecasts by mid-year. A key difference this year seems to be that they have learned from this and are starting the year more pessimistically. That’s good news: the chances of positive surprises are higher going into 2016 because expectations are lower.


Oil: It appears that oil has to stabilize in order for markets to become comfortable with the implications of lower oil prices in the volatile, oil-producing countries. I think that once we get some stabilization in oil markets and in Chinese growth data – both expected this year – we’ll see increases in both consumer demand and production. That should also result in higher asset prices.


Investing: In the meantime, it is not a market for broad indexes but rather for those with investment focus, specifically, with the ability to take gains in appreciated stocks and to put money to work in opportunities created by the current sell-off.