Wow, so some messed up stuff happened with the Dow yesterday, huh? A 416 point plunge! Drudge whipped out the siren and everything! And we all know what the Dow's decline means, right? Actually, wait a second, no we don't! We are pig ignorant when it comes to stocks and stuff. We are, in fact, as financially savvy as the New York Post seems to think its readers are ("Don't worry, play Scratch N' Win!"). Fortunately, we know people who do understand these things and are willing to explain them to us. We spoke to Dana Vachon, former J.P. Morgan Investment Banking Analyst and author of the forthcoming Mergers and Acquisitions (pre-order today!).
So let's pretend I don't know anything about the stock market. Actually, there's no need to pretend: I don't know anything about the stock market. What the hell happened yesterday, and why should I care?
What happened is that a rumor got started that the Chinese government was going to clamp down on liquidity; i.e., the Chinese had too much money in the stock market, and were going to take measures to reign in speculation, investment, etc. So, for the first time...ever...the tail wagged to dog. Historically, the U.S. coughs and the rest of the world catches cold; yesterday, China hiccupped, and everyone had a heart palpitation.
And what happened today?
The Chinese government announced that this was just a rumor, positive U.S. growth news came out, and our government and financial establishment got the ducks in a row: announcements of confidence, etc., and everyone believes we are in for another 18 months of growth. But yesterday was a historic day.
Because of China?
Exactly. The Chinese own all of America's debt. Plus, they don't fight dumb wars, and have a good deal of cash on hand. It doesn't establish a new paradigm, but it hints at one.
Wait, the Chinese own our debt? Why would they want it? Did they buy it from Japan?
China has an interest in American debt because in some sense it finances Chinese growth. Japan owned all the debt in the 1980's, I believe, but they've been flat for over a decade. Worse than old Europe.
So who owned our debt in the '90s? Or did we have none?
We were rapidly retiring it. They even talked about eliminating the 30 year T-Bill.
Fucking Clinton, with the prosperity.
Blowjobs and debt repayment... ain't that the life? But that's all sort of extraneous. Yesterday was about the equity markets, and a sign of China's definite importance in the global economy. The term "developing nation" is at this point something to be rethought: This is a serious country with a serious economy.
What does it mean for me? And by "me," I mean, someone who actually isn't a Gawker Media employee and has a 401K and some small equity?
It means nothing. An economist at Deutsche Bank once put it to me this way: "The modern economy is a man in a Ferrari careening across a crowded intersection at 130 MPH. On the other side of the intersection is a harem of naked women, and a huge bottle of champagne. If he makes it across, everything is fine. If he doesn't, you've got a huge problem. What are his odds?About 30%."
Basically, if you have money in the market today, you are really there to participate in the next 15 years of notable growth, and essentially you are saying that you believe in that growth - period. A day's events mean nothing to you. Or, rather, should mean nothing to you.
And when should I expect to start working for my new Chinese overlords?
You already are. Actually, there are two views on that, and here I am a bit out of my depth, but some believe that the interconnectedness of the global economy makes a term like "overlord" obsolete. How do you treat an iPod? All the design and chips, etc., are done in the U.S. The crap just gets assembled in China and shipped back, so whose books does that really belong on?
And so far as U.S. debt goes, the Chinese have the most petrified government on the face of the earth. 3% growth is to China as cheap crude is to Venezuela, which is to say the Chinese government is aware that a good chunk of its population lives on $3 a day: They need to continue to grow to maintain civil order. There has never been an American Tiananmen Square, right?
Haymarket in Chicago, maybe.
There is that great quote where Kissinger said to Chou Enlai, "Was the French Revolution a good or bad thing for history?" and Chou said, "It's too early to tell." The Chinese are very much on our team, but America has to keep innovating. New technologies, new industries, biotech, nanotech, pharma, etc. etc.,etc.; let the Chinese package the goddamn iPods, we'll design them and earn dividends off them. That is the 30% chance.
Speaking of technologies, was there some kind of Dow computer fuckup yesterday?
Yes, some glitch apparently. Bear in mind, though, that people came to their senses today. I mean, the Chinese rumor was more powerful than the Chinese market.
A butterfly flaps its wings in Beijing...
But durable orders in Chicago squash the butterfly.
Thanks very much.
I can forward you some UBS research.
Fuck no, people stopped reading way back at the Ferrari thing.
Alright, then. Always a pleasure.