The old Wall St. adage runs that ‘stocks are not bought, they are sold’, but the idea here is that they are sold to eager acquirers and that the act of selling does not therefore depress the price too much. The same cannot be said of what we have experienced these past six weeks or so.

If the damage in the major indices—measured from the early December highs—has so far been limited to a ‘corrective’ 10%, others—whether geographically more far-flung or more sector-specific—have not been so fortunate.

Within that latter group, any number of coalmine canaries have been teetering on their perches. At the solid end of economic activity, Manpower is off 20% despite an ostensibly robust job market in its home territory. Fedex has been down as much as 30% from 2015’s highs while Maersk (in USD) has halved.

At the frothier end, the quintessential boom-bust stocks have been chirruping frantically, too. Sotheby’s has shed 55% to hit a six-year low and to return to a price first seen in the boom of all luxury booms back in the ‘Rising Sun’ late-80s. Swatch (again in USD) has endured a slump of a similar magnitude as President Xi’s anti-corruption boys round-up anyone seen wearing too blingy a wristwatch. The swaggering sellers of souped-up Beetles, Porsche, are not far behind that mark. Burberry, likewise, has been more about checks than tartans of late, dropping 40%+ from recent highs.  And if global property king, Jones LaSalle, has only shed 20% so far, the drop has nevertheless threatened to do some serious damage to its previously stellar chart patterns.

Given that many of those at the conspicuous consumption have made their dough peddling fripperies to the nouveaux riches of China or the usual-suspect oligarchs of the oil and mining patch, their current weakness is only to be expected.  But one key distinction nevertheless remains to be made in relation to the ongoing fall in foreign reserves of the supposed ‘savings glut’ nations.

If the drop is being driven by the urge to reduce one’s foreign currency liabilities, the act will initially reduce credit both at home—where, however, the central bank is fully able to offset the decline in the all-important high-powered money—and abroad, but this latter only on the assumption that the original offshore bank lender does not replace its now expiring asset with the securities being sold by the central bank (perhaps in indirect form as a repo extended to their actual non-bank buyer, or as a knock-on if their purchase by a third party displaces some other holding of his). Hence, this will potentially—but not inevitably—act to contract ’liquidity’ abroad, especially in securities markets. Money rarely ‘moves to the sidelines’, remember: the bulk of it is extinguished along with the position it was originally called into being to finance.

Conversely, if the efflux is based on domestics trying to acquire assets abroad, effectively all that occurs is that the CB ‘privatises’ some of its reserve holdings. In this case, both net and gross external positions will be unchanged in magnitude, if in less easily mobilized form should the superstructure later crack and assistance be required. Similarly, the desire for foreign investments will be undiminished in aggregate if perhaps altered (along with spreads or relative values) in composition.  Here, too, the CB can mitigate local effects but only at the risk of replenishing the well which others are more than happy to help empty.

Markets will feel a world of difference between the two cases so we must be alert to which of them is taking place.

THE ABOVE IS AN EXTRACT FROM WORK WHICH APPEARS AS THE THE FULL IN-DEPTH MONTHLY,  ‘MONEY, MACRO & MARKETS‘, AS OFFERED ALONGSIDE THE SEMI-MONTHLY ‘MIDWEEK MACRO MUSINGS‘,AND PUBLISHED BY HINDESIGHT LETTERS.

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