Macro Issues Are Everywhere, Does It Really Matter…? by Lukas Neely, Investor Vantage
“There’s too much emphasis on macroeconomics and not enough on microeconomics. I think this is wrong. It’s like trying to master medicine without knowing anatomy and chemistry.”
— Charlie Munger
Since the recent correction, we’ve seen a bevy of reasons why the market is falling: interest rates might increase, China is falling off a cliff, here comes 2008 again. I thought it would be an important discussion and, at the very least, clear some things up regarding China as a “reason” for the U.S. market decline.
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Media reporters are just doing their job, however, it causes them to ‘latch-on’ or try to find certain “things” to justify any recent move in the stock market. Essentially, their job is to stay busy for the sake of being busy. If they can’t’ find a news story to talk about, they are out of a job. They are forced to talk or write about something (regardless if there is a legitimate news story or not). I have a simple reaction to almost any reason for a broad market pull-back —- it doesn’t matter! And it’s a waste of time to try to figure it out. An investor’s time is better spent on things that can bring about tangible results to your investing. Leave the sound bites and headlines for the media. Know where you might be in the cycle and focus on your businesses and their competitive positions in their markets. The businesses will tell you what is going on in the world and whether (or not) they are worthy of your investment.
Lets get back to China being the reason for the U.S market pullback. Nearly every headline we’ve read lately has put a sense of panic in the air that China’s economy is falling off a cliff. This just isn’t true! China is actually growing. It may not be growing at the rate it once was (10%). Instead it’s growing dismally at 7%. I know, what a horrible economy. The U.S. may never grow at 7% again and we’re complaining about ONLY 7% growth. I understand that Chinese numbers aren’t the most trustworthy in the world, but, despite the conspiracy theorists, the truth probably lies somewhere close to this number.
But what if the Chinese slowdown continues?
It doesn’t matter. Less than 1% of our Gross National Product (GNP) is in sales to China. China is an incredibly small percentage of U.S. exports, however it’s a much larger percentage for other counties. This again puts the U.S. at a major advantage, not disadvantage.
Obviously, if China disappeared tomorrow, it could be a big issue. But alas, China is growing. We will actually go out on a limb and put a fairly high probability on China being around for some time to come. Not only that — we’d even be willing to bet that they continue to grow well into the future as their lower class citizens make their way to the middle class.
If China doesn’t matter, why is the U.S. Stock Market in correction mode?
I don’t know (no one does). It could be a whole host of reasons. Maybe, the Chinese market selloff brought to light that U.S. earnings peaked months ago, we were on the upper echelon of historical and absolute valuation levels. In addition, the market hasn’t had seen a bear market since we bottomed in 2009. The market moves in cycles and we’re probably closer to a de-leveraging cycle than not. The pullback we are experiencing shouldn’t be a surprise to anyone.
Should we be buying hand over fist right now?
I don’t know (no one does). Regardless, I am using this opportunity to add to my favorite ideas slowly. We could easily go lower and I hope it does so we can buy more of our favorite businesses at bigger discounts to their intrinsic values.
Happy Labor Day!
Please, share your thoughts in the comments section below as I learn just as much from you as you do from me.
ABOUT THE AUTHOR:
Lukas Neely is a former Hedge Fund Portfolio Manager and author of the Amazon #1 bestselling book (valuation), Value Investing: A Value Investors Journey Through The Unknown. His work has be cited on such sites at TED, Wall Street Journal, Bloomberg, ValueWalk, CBS, GuruFocus, and Seeking Alpha. He is also the cofounder of Vantage Investment Research, the provider high quality investment idea generation, serving investment funds, portfolio managers, and sophisticated investors. http://investorvantage.com/blog