Storm in a China teacup

I see headlines talking about ‘market turmoil’, that China’s heading for a meltdown and apparently I should care about the Kazakhstani Tenge’s devaluation or something. What’s going on? Like, should I be stocking up on canned goods and shotgun shells?

No. You should calm down. Turmoil is a state of unrest, ambiguity and uncertainty, but it is not the end of the world because a few rich people get worried about the returns on their portfolios. Buy canned goods and shotgun shells another time.

The Chinese economy is stuttering because it is going through a development phase, like all other economies, where too much credit gets extended, asset prices go way too high, the banks get into trouble, and the state has to step in to calm things down. A few weeks ago, the Chinese central bank moved to devalue its currency, and has been doing lots of other things to keep its economy growing as fast as it can.

Everyone was worried the US central bank would raise interest rates in a month, but that’s off the cards now, until at least the end of the year, if not the start of the new year. Places like Kazakhstan had to devalue their currencies to stay competitive. That’s one of the good things about having your own currency.

Meanwhile the commodity markets for things like wheat, coal, oil, steel, and so forth, are wobbling, as China is so key to the global supply chain. If China really tanks, these exporting countries will see demand for their products falling, and they may well end up in a recession. Despite the uncertainty, and despite the ambiguity, it’ll be grand.

Why will it be grand?

Because economies cycle up and down. They’ve been doing that for centuries. Economies move in two main cycles: the business cycle, which is really about investment in housing and other fixed assets; and the financial cycle, which is all about the ratio of how much you borrow to fund your assets. The business cycle is much shorter than the financial cycle, but they sometimes coincide.

Financial cycles build up over a seven to ten year period, and take about as long to recover. Business cycles typically move over three years or so. In the end, economies recover. It’s not fun for some people in these economies, of course, and the level of interconnection between different economies means China’s problems are our problems, but really, this is part of that cycle.

What about the Chinese economy? If they aren’t buying our stuff, aren’t we goosed in Ireland? What about all the dairy farmers selling whey protein to China, and business like that?

China isn’t going into a recession in every sector at the same time. It is still one of the largest economies in the world, and Ireland is tiny. There is every chance individual markets—like the whey market—will continue to grow.

Sensible management of inventories also helps manage things in a downturn. Ireland’s dairy farmers know how to do this, they survived the recession here, after all. For example, despite an unemployment rate of 15 per cent at one stage during the Irish crisis, ICT businesses were growing so quickly they found it nearly impossible to find enough staff.

The real worry for Ireland is the eurozone and the British economy. The eurozone is barely growing, there is a deflation in prices across a good chunk of it, including some of the major economies, and the threat of Britain leaving the European Union is certainly there.
Tell me about oil. Why are energy bills going up here when oil and gas are getting cheaper?
The market for oil has damaged the Irish economy several times, especially in the late 1970s and early 1980s. Oil is one of the key products feeding the economy – so when it gets too expensive, the price of everything has to go up, as producers pass their increased costs onto consumers, and you get inflation.

The exact opposite is happening now. A global over-supply of already-produced oil, combined with the rise of renewable energy across the world and China’s weakening industrial output, means oil is falling below the price at which it makes sense to take it out of the ground.
This is having profound effects on oil-producing economies, like Saudi Arabia. The price deflation is also effecting countries like Ireland, making us a little bit richer (temporarily) as the cost of running our cars and homes goes down a bit.

Energy bills are going up here to fund infrastructural development and smart meters, which makes sense when interest rates are so low, so the capital costs of these investments needs to be paid for.

Weirdly, the gas markets don’t trend the same as the oil markets, so while people are getting worried about assets like oil, gas markets are doing well.

What’s going to happen next?

Everyone is waiting from more information from China, which can be pretty unreliable at times. There are indications that the Chinese government moved in to push the Chinese stock market up this week.

The US is growing more strongly than expected at 3.7 per cent. This caused the price of Brent crude, a benchmark, to bounce by 10 per cent overnight, and stock markets are rebounded.
Nobody trading stocks, equities, commodities, bonds, or currencies, wanted to be the one holding the hot potato when the music stopped. (Yes, I’ve mixed a metaphor there. I regret nothing.) So a sell-off happened, plunging the stock market indices we all know and love, like the FTSE, the Dax, and the Dow.

The fundamental truth of markets is that there are always at least two sides to a trade, and for every person who sold out of fear, someone bought out of greed. One of them will be right; the other will be wrong. In the end, the Dow had its biggest gain over two days since 2009, the FTSE is nearly flat over last week, and the S&P500 was down slightly. All in all, things have calmed a bit.

So, just to recap: no canned goods?

Maybe a few tins of beans, but that’s it – and only because beans are delicious. Markets boom. They bust. Ultimately if Ireland’s finances are sound, its private businesses are smart enough to weather a global storm. Especially one in a teacup.