* The commentary will now be taking its summer holiday. It will be back on 21st September. *
As symbols of futility go, that of Sisyphus takes some beating. In Greek mythology, Sisyphus was captured by the gods after having freed humanity from Death. They punished him, of course: he would spend the rest of his days pushing a boulder up to the top of a mountain. Just when he reached the summit, as perpetual torment for his efforts, the boulder would inexorably roll back down again. Sisyphus was condemned to push the boulder uphill for all eternity. His was the original rolling stone.
The American author Henry David Thoreau would go on to echo the essential pointlessness of Sisyphus’ struggle. In his own memorable phrase,
“Most men lead lives of quiet desperation and go to the grave with the song still in them.”
Today’s Sisyphus is China. More particularly, the Chinese authorities. They are determined to roll that boulder uphill.
The path of least resistance for the boulder, however, is downward. Gravity, after all, is a bitch. The Chinese stock market is still comparatively young, and as stable as any toddler overwhelmed by parental expectations.
With their boulder beset by the giant suck of gravity, China’s Sisyphus first cut rates, and trimmed banks’ reserve ratios.
The boulder continued to roll downhill.
So Sisyphus announced plans to slash brokerage costs. But the boulder was not in a mood to listen.
Sisyphus is nothing if not persistent. Next up: a relaxation of rules on margin trading. But the boulder remained impassive, and continued to roll downhill. Sisyphus threatened to look into illegal market manipulation, and to round up the usual suspects. Bothered, replied the boulder as it kept on rolling.
Sisyphus tried to repeal gravitational laws. He banned numerous accounts from selling the market short. But the boulder rolled on down.
So Sisyphus knocked heads together on the exchange, and rustled up a package of 120 billion yuan to help support the boulder. The boulder still fell.
Sisyphus tried to tackle supply. Over two dozen Chinese companies suspended their IPOs. But the boulder remained deaf to these efforts.
Sisyphus strong-armed his friends to put money into the market. The boulder was impassive.
Sisyphus warned of “panic” and “irrational selling”. The irony: Sisyphus warning of irrationality. Still, down she came.
Sisyphus began looking for a new market regulator. Good luck with that, replied the boulder as it resumed its imperious decline.
Sisyphus started moving pension fund money into the market. But the boulder kept falling.
Sisyphus tried to persuade anyone who would still listen that the real problem was not his own currency devaluation but fears over a looming interest rate rise by the US Federal Reserve. The boulder allowed itself a quiet giggle, and resumed its fall.
But Sisyphus will be back tomorrow, with new plans.
Global investors are right to be spooked by the example of Sisyphus. But they are learning the wrong lessons. Sisyphus is alive and well and active in western markets, too. He has been busily trimming interest rates across the developed world. He has been bidding up the price of bonds, with some kind of ‘cargo cult’ belief in a magical, trickle-down economic paradise. He has been distorting, warping, manipulating and destroying all he touches, in a fond belief that the State knows best.
The August 11 devaluation of China’s renminbi was when our collective market boulder lurched decisively downhill. A problem previously contained within China’s borders suddenly spread westwards. The boulder is coming after us, and it’s a boulder called deflation.
Trying to make sense of complex market developments, investors are at risk of confusing the narrative. This is not a reprise of the 1997 Asian financial crisis. It is not a reprise of the 2008 financial crisis, either. Many Asian economies are now in far better shape than their western competitors. They have significantly less debt, more promising demographics, much lower welfare burdens, and demonstrably higher foreign exchange reserves. They still have ammunition to deploy, if required.
This is not quite an emerging markets crisis, either. The very term ‘emerging market’ is, like the term ‘hedge funds’, now so widely used and abused as to be meaningless. Some ‘emerging markets’ are clearly vulnerable, though, especially those exposed to the commodities complex and with substantial dollar borrowings.
In a globalised economy, in which boulders are moved as much by confidence as by capital, all governments will be tempted to act like Sisyphus. As investors collectively brace for that advancing boulder, they should consider just how much they are paying to stay on the mountain. Asian stock markets may have absorbed the brunt of the volatility thus far, but it is largely the western stock markets that trade on expensive valuations, that cannot possibly decouple from that deflationary surge, and which are ripe for further falls.
Tim Price is Director of Investment at PFP Wealth Management and co-manager of the VT Price Value Portfolio.