Has the China bubble burst yet? Just checking.
It’s a full moon today, so anything can happen. But keep in mind it is “Golden Week,” in Japan and China. To be honest, we have no idea the meaning or the origin of this week-long holiday. But in practical terms, it probably means that if the financial world is going to come crashing down because of a meltdown in Asia, it is going to have to wait until next Monday. That gives us a few days to prepare.
We are only partly joking. Really, what can you do in a world where the art of traditional valuation is as useless as a one-legged man in an butt-kicking contest? “I think we are on the verge of a secular period of tighter monetary policy than people can ever imagine and that may be the story for the next five to ten years-that central banks around the world will be tight,” lamented Merrill Lynch’s chief investment strategist Richard Bernstein.
“The elevated levels of liquidity are posing new challenges for those who carve their living from trading stocks and bonds, forcing many to find new ways to assess the value of markets and stocks,” continued the Financial Review’s Robert Guy.
Be skeptical, dear reader. Very skeptical. Go long skepticism, with leverage even. We recall the great lengths morons and retards went to in 1999 and 2000 to justify sky-high valuations on the tech-fueled Nasdaq. The justification was necessary because most of the Nasdaq’s companies either had no earnings, or investors were paying for earnings 50-years out.
If you stop to be sensible about it for a second, you’re reminded that stocks are ultimately a claim on cash-flow. While you can get away with projections that never materialise for a few quarters, money eventually talks. And if it doesn’t investors usually walk.
That’s why traditional methods of valuation focus on the present value of future cash flow and what price to pay for it today. The faster a company, say a small company, is growing its cash flow (and hopefully its net income) the more you might be willing to pay now for future cash flow.
Nothing happening in China or Australia changes that today. It’s all about future cash flow. We do emphasise the word “future.” And here is one more aspect to the discussion. Actual possession of valuable and scarce natural resources is not a replacement for current cash flow. But it is pretty damn desirable, and only a few steps removed from “monetising” resources into sales and income. And that’s why the resource land grab in Australia continues, with active participation from the Chinese and the Russians.
Markets and Money