The Market's Fine Print

No, it's certainly not politically correct, an awkward phrase that Donald Trump himself might avoid. Sadly, the editor of the old brain box won't wield the sharp, red pencil he once did, sometimes giving a pass to dubious tropes like "Chinese fire drill" whenever they seem, well, inappropriately appropriate.

There doesn't seem to be an etymological consensus regarding where it came from, but many wag an initial finger of blame toward British pilots during WWI. With empirical swagger, these early flyboys quickly assigned "Chinese" as the definitive synonym for incompetent, shaky, and slipshod. For example, whenever someone would land a plane on the wobbly side, he might henceforth be indelicately referred to by barrack-mates as "One Wing Low, the Chinese Ace."

Needless to say, American cousins did not exactly have to be schooled in the ways of Asian ridicule, disrespect, and bigoted caricature. From the mocking of coolie labor in the late 19th century to the stereotypical strokes of Charlie Chan movies in the 1930s to Hop Sing's emotional command of Ben Cartwright's kitchen in the 1960s, we've certainly worked our own black magic on the "Chinese" adjective.

I'm not sure about the exact harnessing with "fire drill," but the catchphrase became fairly standard in the U.S. military from WWII through Vietnam. If heard at all today, it probably refers to the classic car prank when all passengers jump out when the light turns red and race around the vehicle like a frantic game of musical chairs. Ritchie Cunningham and Fonzie did it all the time.

Besides the periodic antics of nostalgic teenagers, "Chinese fire drill" has been pretty much relegated to the dustbin of antiquated ethnic slurs. Good riddance, I guess.

And yet ...

There's something about the chaotic market action of the last two weeks that begs to be described as a Chinese fire drill. Indeed, tiptoeing around the unfortunately freighted phrase strikes me as blind as ignoring the rogue elephant in the room. You know, the one with his tusk currently lodged in the backside of Wall Street and commodities.

I'd be willing to bet at this point that the third quarter of 2015 will someday be remembered by some clever economic historian in just such a manner. But the reference will be more descriptive than disparaging, accurately noting a critical moment when the world's second-largest economy stumbled enough to trigger a serious global reaction of confusion, uncertainty, and headlong liquidation.

When China aggressively devalued the yuan on Aug. 11, it dramatically confirmed the worst fears of leading economists: The nuclear reactor of global growth was cooling fast, perhaps in the direction of meltdown. While these ominous tea leaves are difficult to precisely read, most domestic and foreign investors decided to initially err on the side of panic.

For example, the Shanghai Composite Index over the last two weeks has imploded by nearly 30%. And before bouncing higher Wednesday, the Dow Jones Industrial Average pulled back by roughly 10% over the same time period. Similar causality reports are available from equity and commodity markets all around the world.

Few falling stones make this kind of ripple. Indeed, it's almost impossible to exaggerate the global economic engine that is China. From 2004 through 2014, China's surging GNP climbed from $2.4 trillion to $10.4 trillion, powering through the period with an annual growth rate of roughly 40%.

Neither Paul Bunyan nor the Jolly Green Giant ever reported such growth spurts.

In the process, China developed a gargantuan appetite for global commodities. As of 2014, China represented the following share of world consumption: iron ore, 55%; pork, 52%; aluminum, 51%; nickel, 51%; steel, 48%; copper, 45%; zinc, 45%; soybeans, 30%; and oil 12%.

Given such dominance in so many markets, it's not difficult to see why so many investors and markets have nervously rushed to China's sickbed. They know that enough sneezing in Beijing could signal world pneumonia faster than you can say "centrally managed capitalism."

Of course, that's the big question. Do these disruptive sniffles flow from nothing more than a passing allergy, or do they portend of something more seriously debilitating? I can only defer to the real doctors of Sinology and international economics in the room.

But I think it's safe to acknowledge a good deal of confusion among the keenest China-watchers, both those within and outside the Great Wall. Some suggest the ongoing slowdown is nothing but a necessary pause as China transitions from an investment-driven economy to a more sustainable model based on consumer spending. Others fear that growth is even cooler and vulnerable than the political elite dare to admit.

Clearly, a big part of the substantial market instability and volatility world traders are now experiencing is tied to the unique incongruity of the Chinese system, an almost impossible combination of extremely restricted political freedoms and freewheeling economic enterprise. Anticipating motives and reactions and plans of a government with such cross purposes will keep many up at night for a long time to come.

As far as U.S. agriculture is concerned, we can only hope China's economic downturn is both shallow and short-lived. Since so much of our bread is buttered by export demand, let's hope China's ability to support world commodity markets is not compromised enough to trigger a domino effect, one that would cripple foreign demand for U.S. commodities.

An unannounced fire drill like this certainly gets the heart pounding. Is it just another safety precaution, or do you smell a faint whiff of smoke?

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

(AG/CZ)

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