China Unhinged

America’s Unique Advantage

The investors who were selling America’s greatest companies (Apple, Disney, Starbuck and Nike) in a panic this week, deeply misread the nature of what is happening in China. To begin with “only about one five-hundreds, or 0.2% of gross domestic product in the United States is generated by exports to China.” This is totally meaningless, and even companies that have larger exposure to China, like Nike and Apple, have a unique advantage. The status, among the young Chinese middle and upper class, attached to owning an Iphone or a pair of Air Jordans, gives them pricing power. Despite the fact that Android powered Chinese smartphones are priced much cheaper, Tim Cook reported yesterday that Apple were seeing no fall off in Chinese demand.

And unlike 2008, the American economy is in pretty good shape compared to China or the rest of the world. The fall of oil prices which is crippling Russia, Venezuela, and most of the Mid East, is a boon to the American economy.

Of course, lower oil prices confer economic benefits, too. The average American household, for instance, buys 1,200 gallons of gasoline every year. And gasoline, on average, has sold for most of this year by roughly a dollar a gallon less than in 2014.

So if there is little connection between Chinese troubles and the U.S. stock markets, what is going on? My guess is it is a result from High Frequency Trading. Much of this trading is driven by strictly technical factors of chart line convergence or divergence, driven by computer algorithms.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

So about 75% of the daily volume of all American exchanges is placed by high-frequency automated programs, often front running big trades to get a 2 cents profit on 10 million shares. These programs work just as well in going short or going long, and so they are really exagerating the falls.

So my first question is: Who was the John Paulson of the last week? What short side hedge fund or front running high frequency trader really scored in the last week? Because as we know, the reason they call it stock trading, is because for every long bet, there is a short bet. Now Bernie Saunders has a solution for this problem; a stock transaction tax.

Senator Bernie Sanders of Vermont, who is seeking the Democratic nomination for president, has done just that, by proposing a financial transaction tax: a small excise tax, typically a few hundredths of a percent, on trades of stocks, bonds, derivatives and other securities. An itty-bitty, one-basis-point transaction tax (a basis point is one-hundredth of a percentage point, or 0.01 percent) would raise $185 billion over 10 years, according to new estimates by the nonpartisan Tax Policy Center. That would be enough to finance an ambitious expansion of prekindergarten programs for 3- and 4-year-olds and restore funding of college assistance for low-income students.

What’s more, a financial transaction tax could significantly reduce the amount of high-frequency trading. This trading, most of it automated, is used to make windfall profits through arbitrage (taking advantage of small differences in price) in milliseconds. It does nothing to help ordinary investors and can destabilize financial markets.

Ultimately, there may be a more problematic reason why there is such a lack of investor confidence: Deflation. I have been on this subject since the crash of 2008. Here is how Paul Krugman explains it.

What we’re seeing is what happens when too much money is chasing too few investment opportunities. More than a decade ago, Ben Bernanke famously argued that a ballooning U.S. trade deficit was the result, not of domestic factors, but of a “global saving glut”: a huge excess of savings over investment in China and other developing nations, driven in part by policy reactions to the Asian crisis of the 1990s, which was flowing to the United States in search of returns.

Krugman and Ray Dalio are both saying the same thing. Too much savings, too little investment. As I have pointed out before, this is a feature of today’s monopoly capitalism.

Why do Google or Apple have more than $100 billion in cash on their balance sheets?

Because they operate in a framework of Monopoly (Google in search) or Duopoly (Apple and Google in mobile operating systems) capitalism that does not conform to the classic notions of market functionality.John Bellamy Foster and Fred Magdoff, in their book The Great Financial Crisis, describe the work of the economists Paul Baran and Paul Sweezy on monopoly capitalism like this:

The problem, as they explained it, was that the enormous productivity of the monopoly-capitalist economy, coupled with oligopolist pricing, generated a huge and growing surplus, which went beyond the capacity of the economy to absorb it through the normal channels of consumption and investment.

So if Apple and Google can’t find enough interesting opportunities for their $100 billion of cash(each) then, what does that say about America’s needs right now? A good argument could be made that we don’t need to invest in more factories turning out consumer goods. The capacity utilization figures for most industries is in the 70% range.

In terms of investment, the great needs are in public infratructure. The crappy airports, crumbling bridges and pothole filled streets are an embarrassment to our society. If America’s corporations really wanted to demonstrate their patriotism, why couldn’t they put some of that idle cash into infrastructure bonds that would give a decent return above the money market funds much of the cash is sitting in today. Large U.S. firms currently hold more than $1.64 Trillion in cash on their balance sheets.

And if we were going to undertake a massive infrastructure improvement program than one of the starting points would be to implement the IEA’s Blue Map Scenario which halves CO2 emissions by 2050 at a net savings of $8 trillion.

Despite all the blather coming from Donald Trump, the global position of the U.S. is quite strong. But we have a lot of work to do investing in rebuilding America’s infrastructure. As both Krugman and Dalio point out, the global savings glut is there to help finance that investment.

All we need is the political will.