As Global Stocks Tumble, Have Faith in Bibi-nomics to Shelter Israel

Four things to remember: Don’t believe anything you hear, have no faith in the markets or in Beijing, do have faith in Israel's Prime Minister.

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Prime Minister Benjamin Netanyahu, July 27, 2015.
Prime Minister Benjamin Netanyahu, July 27, 2015.Credit: Emil Salman

Just as we seemed to be shaking off the dust of the great financial crisis set off by the U.S. mortgage market, suddenly China looks like it's about to push is back into the hold. That at least is the impression you get from the world’s stock markets these days.

How this will end up is anyone’s guess, but here are four things you should remember while you try to keep your balance.

1) Don’t believe it when they say it won’t be that bad.

It may turn out not be that bad, but A) the experts don’t know, and B) if they do suspect that disaster is on the horizon, they won’t tell you.

The reason for A is obvious. Close to 90 years after the event economists are still debating the root causes of the Great Depression. They certainly can’t explain why things have gone awry over the last weeks and the few things they can explain don't give them tools to predict the future.

The reason for B – they won't tell you - is mostly self-interest. Most of the experts being quoted assiduously in the media are in the business of selling investments and aren’t going to go public urging everyone to pull their money out of securities and put it under a mattress till the great apocalypse blows over. 

Even the ones who have less of a direct interest are professionally inclined toward making balanced judgments, and weighing a huge number of factors pointing in different directions. If you’re looking for the kind of economist predicating the next crash, you’ll find them at the bottom of any web page under “sponsored financial content” with pitch for a newsletter subscription and for survivalist manuals.

2) Stock markets aren’t logical.

It is true that in the long run, they do digest all the available information out there and price securities accordingly. But in the long run, as Keynes said, we all die, so who cares?

In the short run, markets are no more logical than a crowd of people trying to escape a burning building. There may be some cool heads among them, but they’ll end up trampled and toast if they don’t follow the hysterical masses.

What you’re seeing right now is panic, not a logical reallocation of assets based on a considered and thoughtful decision after a careful examination of the facts.

Even when stock markets are long-run logical, the logic isn’t necessarily tied to how well the economy is doing or expected to do in the future.

In the U.S., for instance, share prices rose faster than corporate earnings or the economy from the middle of 2009 until the middle of last year. Share prices were driven to record highs by low interest rates, which have narrowed the number of options investors have to put their money.

If bonds are paying ridiculously low interest rates, you put your money in stocks. Where else are you going to put in, on Mars?

That’s one reason why the world’s stock markets particularly vulnerable to a selloff right now. Only the most delusional bulls really thought the shares were worth what they were trading at, and at the first sign that the rickety scaffolding that kept has them propped up is giving way, they will jump.

This particular case of stock market panic is worse than usual because it is being led by Chinese markets, which are thin on institutional investors, like pension funds who are relatively rational and in any case are too big to engage in massive selloffs, and long on small investors who can’t tell shit from Ebitda.

3) China’s leaders are ordinary mortals.

The country’s journey from Maoist pauperism to the upper reaches of the global economy has been impressive. Its leaders starting with the counter-revolutionary Deng Xiaoping should  get credit.

China’s gross domestic product grew more than 26-fold in 37 years. But managing an economy that had nowhere to go but up 30 years ago is a lot easier than managing the one that exists today, which is infinitely more sophisticated – an industrial superpower with a rising middle class expecting the government to deliver and closely tied to the global economy. 

Beijing’s problems are compounded by the fact that as an authoritarian government, it doesn’t have the means to channel the frustrations that are certain to develop as the economy slows and maybe plunges into recession.

China doesn’t have mid-term Congressional elections, Donald Trumps, Tea Parties or Occupy Wall Street movements to let off steam. China’s current leader, Xi Jinping, won’t be sent into the parliamentary opposition if he fails, but he may end up like Zhao Ziyang, the general secretary who was stripped of all his positions and put under house arrest by his colleagues until he died, for coming out on the losing side on policy toward the Tiananmen Square protests in 1989.

In the worst case, Xi has to consider the possibility that a serious policy misstep will end with his body being dragged through the streets. That’s not a good foundation for considered leadership.

It would be unfair to hand Xi his report card yet, but his quiz grades haven’t been good.

The government talked up the stock market to the point of irrational exuberance, its measures to stanch the blood have failed and the reason behind its currency devaluation shrouded in mystery. The New York Times reported this week that Xi has been less inclined than his predecessors to delegate economic policy and instead has taken into his own hands, leading to ad hoc decisions and zig-zagging and exposing himself to blame to failed policies.

All in all, a smart punter should bet against China solving its problems quickly and efficiently.

4) Bibi-nomics has its plus side.

If the world economy does go kablooey again like it did in 2008, Israel remains in a good position to survive it.

The government has gotten a bad name for its ungenerosity to the poor, the sick and the young because taxes and spending have been declining over the last nearly two decades, weighing on budgets for welfare, schools and hospitals. But the positive side of this Scrooge-onomics, to which Benjamin Netanyahu can take much of the credit, is that Israel is less vulnerable to a global downturn than economies with more expansive fiscal policies, which inevitably mean big deficits, big debt and heavy borrowing that relies on the generosity of the financial markets.

Our infatuation with China is fortunately recent enough that the direct impact of the country’s economic woes won’t be as serious as it could have.  

The growth in Israeli exports to China has lagged overall trade growth so our exposure to the Chinese market is less than for other countries. Israel’s vulnerability is on the investment side where China was emerging as a major funder of startup companies and a buyer of bigger, older businesses like insurers Clal and Phoenix. Some of those deals may now be jeopardy, but they aren’t important enough to sink the economy.