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| Events in Greece and China have led to summertime uncertainty and worries |
But now here come forces from Greece, China and even from within U.S. markets that make us wonder whether the rest of summer will be disrupted by events oceans away. What we fear most is whether what happens over there can have impact on what exists here. What over there will affect market performance, investor behavior, and overall economic outlook on these grounds?
Many observers argue that Greece defaulting on its debt obligations and China's stock markets entering into a quarter-length nose-dive are contained events that won't cause too much of a dent in U.S. capital markets. We don't know for sure. But most of us know how a tipping of a giant mortgage iceberg led to the financial crisis and Great Recession of the late 2000's.
Out of the blue in early July, an unexpected technology glitch caused a nearly four-hour shutdown at the New York Stock Exchange. That stressed markets for an afternoon, but spawned greater worries about who or what was responsible and when will that occur again. Market analysts reminded us that because brokers and traders can go elsewhere to conduct trading (thanks to updates in trading rules in the past decade), the shutdown didn't cause calamity or panic. Yet everybody now knows this can happen again, will likely recur, and will happen more frequently than we want to acknowledge.
So instead of taking it easy in the precious weeks up to Labor Day, we are obliged to keep an eye on world events and wonder how they much damage they will inflict on trading positions and investment portfolios. For bankers and corporate finance officers, we wonder what impact all this will have on deal flow, corporate transactions, and companies' willingness to invest in new projects and business growth over the next six months.
The financial turmoil in Greece is often explained and has been intricately analyzed. A complex, befuddling scenario can be summarized:
a) Greece, a member of the Eurozone, didn't meet a recent required debt obligation (billion-dollar payments that were due) and wants to renegotiate terms with a creditors (which include the IMF and Europe's central bank) that are already fatigued from years of patience, fumbled negotiations, and little improvement in the country's economy or its willingness to take seriously a hefty debt burden.
b) Greece, meanwhile, also has other obligations, including substantial pension-related debt, accumulated after years of outlandish spending and effusive promises to government workers.
c) While the country's economy stumbles and appears to have dim hopes of an impending recovery, Greece must fend off creditors, make choices about who should get paid or who won't, decide if it wants to continue to be a Eurozone team player, and employ expert negotiating tactics to get irritated creditors to back off and agree to a restructured debt arrangement.
No side in any multi-player game of debt-restructuring chess wants the worst outcome. Hence, the mountain of debt must be restructured, payment schedules extended, terms redrawn, and tenors extended. But how does this get done to the satisfaction of all?
Meanwhile, nobody definitively can show how the country's economy will rebound soon or define how a series of defaults and continuing non-payments will affect the rest of the world. Daunting uncertainty prevails.
In China, an equity marketplace still in adolescence is going through growing pains. The Chinese stock market has grown enormously and quickly, so much so that it is now second only to the U.S. in aggregate market valuation. But unlike U.S. markets, Chinese institutions and investors, including individuals have helped spark the country's consumer boomm don't have the advantage of a history of precedents from which lessons can be learned about crises, rampant volatility, trends, and exuberant behavior. They are learning on the fly.
Stock investing in China had become a new, popular pastime. Individuals and institutions just becoming accustomed to buying shares in private companies and hoping for favorable windfalls had hopped onto the bandwagon of stock ownership. Chinese markets welcomed the surge in new activity and new investors in the midst of a rocketing economy.
The inevitable equity bubble many projected has come to be. Equity markets had soared above 75% in value in the last year or two. P/E ratios, the benchmarks that indicate what's a bubble or not, climbed to outrageously high levels, even soaring past P/E ratios of the irrational days of the 1990's Internet bubble here. In the past month in China, markets have imploded by percentage points (30-40% and more) that would cause investing nightmares in the U.S.
Yet Chinese government bodies have assumed a curious, perhaps expected role in trying to prop up markets, reignite confidence and assuring all that things will be all right. They have purchased shares or have arranged for loans to others to purchase shares to boost indices. They, including Communist officials, have changed rules on the spot and show no restraints in intervening to keep a capitalistic-bred machine humming briskly. Anything possible, short of inviting invite foreign investors to come over and partake in trading in its markets. (For example, they have prohibited short-selling.)
The rest of the world is getting acquainted with Chinese equities, how they trade, who buys them, what explains volatility, and the meddlesome role of government entities that keep stock markets buoyant.
It's hard to compare U.S. and China equity markets. They operate by different rules and histories, although Chinese exchanges have observed U.S. markets and replicated some best practices (including triggers that halt trading when something seems awry). U.S. companies have layers of ways to issue new equity (private placements, venture capital, private equity, small-business and large-company offerings, etc.). China continues to study what works and what it might adopt.
U.S. markets have strict laws for registering new securities, reporting requirements of issuing companies, and insider-trading prohibition. U.S. markets have a vast array of players from clearing firms to high-frequency traders and an assortment of hybrids and derivatives: options, convertibles, equity swaps, e.g. It's just a matter of time before China catches up and introduces its version of the same.
For now, Chinese players can work to straighten out the summer angst without the complexities of exotics. The current woes are likely due to something U.S. players know well: irrational exuberance--market values that can't be explained by the underlying economics.
In the U.S., we watch both Greece and China, analyze, wonder and try to gauge impact. In some ways, we are actually rooting for both to overcome their issues and solve their problems. That results in stability for all and continued optimism in all world corners, because what's good over there keeps the markets humming over here, too. Like it or not, what happens in Shanghai can influence what happens on Wall Street or seep inside the computer servers that keep trading activity in the U.S. whizzing.
Yet back on these shore., the New York Stock Exchange's systems glitch reminds us that (a) we need to prepare for and brace for more frequent outages and technology mishaps, (b) it was a good idea after all to have changed rules in the early 2000's to permit more exchanges to exist to arrange trades for any or all stocks, and (c) now and then, there is still a benefit to stick with apparently antiquated trading models that require humans in trading robes to stand at Wall Street posts to ensure orderly markets will continue throughout a trading day.
Tracy Williams
See also:
CFN: Alibaba and Its U.S. IPO, 2014
CFN: Michael Lewis' Back-Door Move, 2014
CFN: High-Frequency Trading: What's Next? 2012
CFN: Dark Days at Knight Trading, 2012
CFN: Derivatives: Making Sense of Where We Are, 2013
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