The strength of economies and stock markets often emerges from periods of weakness. This fundamental concept seems to elude American policymakers who mistakenly believe that the Federal Reserve can magically create favorable conditions in an otherwise bearish market.
In the realm of country economies, periods of economic weakness force businesses and individuals to confront their mistakes and make necessary corrections. The sluggish or stagnant growth that follows signals a path to recovery as errors are addressed. Governmental attempts to 'fight' recessions often prolong them and hinder the subsequent recovery. It is crucial to recognize and rectify errors promptly to facilitate a faster turnaround.
The same principle applies to stock markets. Periods of weakness can be viewed as indicators of upcoming strength, as capital moves away from underperforming companies towards those that demonstrate potential and excellence. Looking back at the turn of the 21st century, companies like GE, Tyco, Enron, Lucent, and AOL were considered giants in their respective industries. However, time has revealed their vulnerabilities and the emergence of new players who outperformed them.
It is worth contemplating the disastrous state of the US economy and equity indices if the Federal Reserve and federal officials had tried to prop up the failing status quo. Thankfully, their attempts were futile, as propping up a weak system would have resulted in more severe consequences.
Shifting our attention to China, an editorial in a conservative publication recently expressed disdain for Chinese President Xi Jinping's plans to support mainland and Hong Kong shares, which have experienced significant declines since January 2021. However, it is essential to recognize that the same critics may have previously argued that the US shares were elevated due to the Federal Reserve's injection of 'easy money.' If the Fed possesses such magical powers, shouldn't the all-powerful Xi be capable of achieving a similar feat?
The obvious answer is no. China's deeply ingrained collectivist ideology elucidates this truth. Under collectivism, failure is not an option, which means there is no incentive for success, and market forces do not efficiently allocate resources away from the inept. Even if Xi were to decree the purchase of Chinese shares, this approach is inherently self-defeating. As buyers enter the market, there must be sellers willing to exit and take their money elsewhere. Both Xi and the Fed proponents fail to grasp that markets cannot be manipulated in such a simplistic manner.
Once again, it is crucial to emphasize that equity markets logically gain strength from periods of weakness. This allows the incompetent to step aside and makes room for more skilled and innovative players to take charge. Consider the companies that gradually replaced the giants of the 21st century, such as Google, Amazon, Apple, Nvidia, and Microsoft. These newcomers emerged to fill the void left by the declining giants, breathing new life and vitality into the market.
We should be grateful that neither the Federal Reserve nor the federal government can rewrite market realities. Similarly, it is fortunate that Xi does not possess the power to do so in China. Unfortunately, it appears that Xi and some American policymakers fail to understand this fundamental principle. Acknowledging the forces of the market and allowing the natural cycle of weak to strong is essential for sustainable economic growth and a thriving stock market.
