Before we get stuck into today’s market action—and boy is there a lot of it—we did manage to put together an edited version of our Skype call with Chris Mayer, who was in the Grand Hyatt in Beijing at the time. We say “we” but it was really our video editor Ben who managed to deal with the buffering and time lapses. You find part one here and part two here.
As you’ll see, the Chinese picture is a lot more complex from up close than it is from far away. We talked about the economy, private equity, where Chinese stocks are listed, and the contrast between industries that are state-backed and those that are not. The call could have lasted a lot longer.
Left out of the final cut was this comment from Chris, “The worst case scenario for the global economy is a full bore China collapse because there are very few answers for that.” There are one or two answers, though, as you can see from the chart below. It shows the performance of the two investments we recommended in our “Exit the Dragon” report vs. the All Ordinaries since April 30th.
Thumbing through the report this morning we read this line, with emphasis added:
The risk is that should the Chinese economy come to a grinding halt, one of the first currencies that global investors will abandon is Australia. With such a reliance on selling our raw materials overseas, there’s little else that Australia produces – apart from houses – that will be of interest to international investors. The rush for the exit will be swift, and potentially painful. So, if that did happen, what can you do to protect yourself?
The big down move in the Aussie dollar in the last few days has confirmed that analysis, as has the big up-move in the first recommendation on the chart above. But Bloomberg reports earlier today that the Aussie, along with the Euro, is up on speculation that policy makers will interview to stop the big slides.
They can have a crack. But if hot global investment capital flows flee risk markets and head toward what they perceive as safety, the moves in currencies could be even bigger than you expect. And we have reason to believe, as we’ll explain later to Australian Wealth Gameplan readers in the weekly e-mail update, that the second investment recommendation could profit from a region that’s managed to stay out of the limelight so far…Japan.
But what about the broader markets? They are selling off with conviction after a brief short-covering rally. Ironically, when you restrict short selling you remove the very mechanism with which corrections are generally reversed: a short-covering rally. When shorts cover it creates the buying that’s necessary to stop stocks from falling. You also get value investors wading it at lower levels.
Yet policy makers—in an attempt to stop the selling—have no given traders every reason to keep selling: nobody knows what the policy is going to be tomorrow! To be fair, nobody knows anything about anything when it comes to tomorrow, except that it will probably come.
If it does, it will be Saturday, which means we’d better get cracking on our update to paid subscribers. But not before noting Ross Garnaut’s column in today’s Australian Financial Review that government “must not be captured by private interests.” It is just the sort of article that seems sensible, and so seeming, is utterly perilous for welfare of ordinary Australians. Why?
The most insidious of the lines in his argument is, by our reckoning, this:
It is important that the current noise eases into constructive discussion of the public interest, in which resource sector perspectives are expressed and over time understood, without crowding out the representation of the public interest.
Quite obviously Garnaut suggests that it is in the public interest for Australia to pass some kind of resource rent tax in order to move toward a “more equitable distribution of income, in a way that has lower economic costs other than other measures to promote distributional equity.”
Huh?
Leaving aside the issue of what it means for a government to base policy on promoting “distributional equity” rather than just, say respecting property and contract rights, Garnaut’s argument has one humongous embedded assumption, from which another erroneous idea necessarily follows.
The assumption is that there IS such a thing as the public interest. It follows that once you’ve established that there IS such a thing, it is the government’s job to protect that interest against presumably nefarious, greedy, and rapacious private entities whose pursuit of their own benefit damages the public interest.
What utter hogwash.
You do have to give credit where credit is due, however. He has deployed an enormous amount of bright shiny red alluring linguistic lipstick on this pig of an argument. It sounds sensible, even if at an underlying logical level, it’s self-evidently absurd.
But rather than just assert its absurdity we’ll say that there is no public interest. That is a term used mostly by lawyers, litigants, and policy makers who seek to justify action that would it be illegal to take against an individual. Thus, you have to fabricate and elevate a higher theoretical authority: the public interest.
Before we get to the exact definition of this logical fallacy, a sensible objection should be answered: aren’t there some things that promote the general welfare better than others and shouldn’t we promote them?
The answer to that is unequivocally yes! And the market system does promote them through the responsible stewardship of private property. People take care of what is theirs. This is proved by the tragedy of the commons, in which public property is trashed because no one takes (or has) ownership of it.
What promotes the general welfare is a sound rule of law that protects individual liberty from the predations of the legislature. The general welfare is best promoted by people being free to pursue their own interests under the equal protection of a transparently made and enforce law. What promotes the public interest is the guarantee of private freedoms.
Or if you want to use the lingo of the Statists, positive policy outcomes are achieved by promoting personal liberty and the rule of law. The “public interest” is in having predictable and impartial rules that don’t unexpectedly or unfairly tax people for their success but punish them when they transgress the rights of others. To the extent that there IS a public interest at all, then, it’s ensuring the rights of the individual to life, liberty, property, and the pursuit of happiness.
Yet Garnaut’s argument, in the way public interest is defined, sets a hypothetical interest of “all society” at odds with firms and individuals and then makes the government the designated and morally enlightened guardian of what’s good for the public.
But again, if there were such a thing as the public interest, it would probably be in protecting private citizens from the legislative and regulatory whims of those who govern them. Or preventing the government from conduction illegal searches and seizures, or prohibiting the establishment of religions, or of the right to peaceably assemble.
This is why so much of the foundational law of free societies is “negative law.” It is a prescription on what the government cannot and must not do. Bills of rights and charters don’t define, generally, what individuals can and cannot do. They usually define precisely the limits of government power. It’s in the public interest to protect individuals from the predations of government.
That’s a bit of political and legal theory. But logically, Garnaut is guilty of what our old classical rhetoric professor would have called the “fallacy or reification.” He has “thingified” the concept of the “public interest” and pretended as if it’s a real thing that has real enemies (the miners) and must be defended by real people (enlightened policy makers).
It’s pretty presumptuous, really. Do the people of Australia own their land? Does the Queen of England? Or do private investors own it?
As a legal alien, there’s only so much we know about who owns what around here. If it’s the people of Australian, then it follows that any non-indigenous Australians owe, and could be coerced into paying, a rent tax to indigenous Australians. Doesn’t it?
Dan Denning
for The Daily Reckoning Australia
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