The news this week appears to be focused on the stock markets around the world seemingly going into a dive. One of the things that puzzles me is why this is regarded as such a disaster. I accept that if some investor actually badly needs money and has to sell, this is not good news, but apart from that, and apart from speculators getting it wrong (and here I have little sympathy) what is the problem? If the number of people employed stays the same, the amount produced stays the same, the wages and salaries stay the same, what is important stays the same. What matters in a business is cash flow. If raw materials are available, if costs are stable, if interest rates are low, and if sales are constant, variations in stock prices seem to me to be irrelevant.
Maybe we are all a bunch of wailers! Recall that as oil prices kept rising, there was a general wailing that energy costs would stifle the market. Well, now oil prices seem to be as low as ever, thanks to fracking, and there is general wailing, seemingly because the oil merchants are no longer able to extort such high profits from everyone. (Although, from the price of petrol locally, I rather fancy oil companies are doing rather well out of this too. Prices go up very quickly, and down rather slowly.) It seems to me quite probable that if oil prices stayed the same, there would also be general wailing.
In the alleged “bad news” column, growth in China is falling. The most pessimistic prediction I have seen is that it will fall to (horrors) 5 % this year. So, there may be problems. Thus the Australian mining sector will suffer because construction in China is slowing to a more sustainable level. So? Who else is growing at 5%? If growth were universally zero, would not things be the same as last year? Was last year that bad?
So the European economies are falling backwards. The Greek financial mess is at least partly the fault of the rest of Europe. The huge number of asylum-seekers from the muslim regions also hardly helps, but surely that is a problem Europe has to face. The sanctions against Russia is self-imposed. Cutting off your biggest markets carries a price, and politicians should have made preparations for those consequences, but they did not. The inability to make good predictions and then act on them was also a failure. Consider the dairy industry. A year or so ago there were very high prices. However, the sanctions against Russia removed one of the bigger consumers, and worse, only too many farmers thought the dairy prices were so high they had to get into it. A major reduction in the market size, and a major increase in production meant that prices would collapse. All the money you pay in taxes and that leads to information gathering might have been analysed and appropriate advice given. Of course this presupposes governments are interested in their citizens.
I suspect reality has little to do with the collapse. Quantitative easing pushed too much money into the system for too long. Low interest rates have forced people to invest in stocks because they are one of the few assets that would normally give much better returns in period of low interest. There was too much cash chasing too few stocks, and the prices rose to ridiculous levels. The price to earnings ratios of many mature shares exceeded 17, and that was in a period of high earnings. Those who know would have decided this could be the time to liquidate. The problem is, once some start selling, everyone wants to sell and the stock prices tank, an issue compounded by computerized trading.
Is this all that bad? If you are a long term investor, or a value investor, this is good, because as the prices tumble, there are bargains out there if you know what you are doing. Those that get hurt are the greedy ones who do not know what they are doing, and surely there is some justice in that.
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