First, while the US embraces market mechanisms (mostly) and really believes that they tend to work (mostly), China really doesn’t like or trust them. The result, as in the wider economy, is festering instability.
Second, China’s equity market woes aren’t about technicalities, but reflect an array of underlying problems, which have undermined confidence. Stock prices are probably still expensive, both on conventional measures and more specifically because most listed companies, including banks, are vulnerable to the lingering and worsening problems of over-capacity, indebtedness, and slowing growth. Successful global Chinese companies such as Alibaba are listed in Hong Kong, not the mainland.
Third, China’s reform agenda, the backbone of what the government has trumpeted as economic transformation to a new economic development model, is stuck in the mud. Many reforms have succumbed to pushback or inertia, and even the political top brass appear to be downplaying reform now in favour of keeping the economy running at an unsustainably high rate.
The Chinese expression, “loud thunder, small raindrops,” describes perfectly the progress of these reforms, since they was launched with great fanfare in 2013. Many useful and necessary things have been done, notably in the finance sector, but in incremental steps that don’t really alter the institutional ways in which the economy works. For example, there is some reform of state enterprises, but not in ways that alter ownership structures or the pervasive nature of state monopolies. There is judicial reform going on, but it’s not possible to have an independent judiciary and the rule of law. More advanced reforms in finance, without parallel changes in the real economy, have exposed the economy to greater capital flight and financial instability.
Fourth, the volatility in China’s stock market cannot be divorced from what’s going on with the its currency, the renminbi. Last year’s mini-devaluation of 2 per cent was followed by about $250bn of market intervention to push the currency back up again, and for a while it stabilised at around RMB6.40 to the US dollar. Stability was certainly essential to strengthen the government’s successful case to get the renminbi admitted to the IMF’s Special Drawing Right late last year (an accounting unit, comprising the US dollar, Yen, Euro and Pound and now the renminbi, but one that carries status). But the authorities also introduced a series of restrictions on the ability of Chinese residents, companies and banks to export capital, and then launched a new currency index, comprising 13 currencies, as a reference rather than a target. The not so veiled implication was that the renminbi would be allowed to drop against a higher US dollar, if that should happen.
"You hear talk about the Russians wanting to reduce supply. They can't possibly because a good three-quarters of where they produce their oil is in very cold areas in Siberia. They don't have those pipes insulated, they have to continue to pump crude oil through there," Gartman said. "The Iranians and the Saudis hate each other. They have, for lack of a better term, a war going on — a gas price war. They're not going to let go."
The most important incentive to many of these countries is free cash flow, Gartman said.
"When you need cash flow, you produce and you don't really care where the end price is. You keep producing it."
In the longer term, Gartman sees oil in a $27-$47 range with many of the volatile swings behind it.
"The bear market has not ended in oil," said Gartman. "If we start to go sideways for four, five months, companies will become profitable again at these levels."
As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S.
In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.
"The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities," the central bank said in announcing the stress tests last week.
In that particular simulation, the unemployment rate doubles to 10 percent, the same level it reached in the aftermath of the last financial crisis.
Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2.