Market forces (a.k.a. customers)

Who is pulling the strings of the global economy? Certainly not the ‘authorities’. LOUIS COUTTS

By Louis Coutts

Do you know what is happening? More importantly, do you know what is going to happen tomorrow? More importantly still, do you know what is going to happen in six months or a year or three years?

There is a slight chance that you can predict what is going to happen tomorrow because things are largely set in concrete. However, just yesterday people paid $US140 a barrel for oil and later in the day the same oil sold for $US133 a barrel. 

Now, you figure it out. Someone who believes that they know what is going on pays a price 5% higher for the same product that is bought a few minutes later by another person who believes they know what is going to happen.

You can go on the web today and see “special oil report” indicating that oil will go to $US187 a barrel; not $US190 or $US200, but that odd figure of $US187. How precise!

The people who provide the report offer to open an account for you to buy oil. For heaven’s sake, it is a bargain at $US132 or even $US140. Do you know that you can go to a different web site and see predictions that oil will fall out of bed because of all the speculators pushing up the price of oil beyond market demands. Who do you believe?

There is some interesting background stuff that doesn’t hit the headlines. In 2003, the Chinese authorities (I am not quite sure what that means) required banks to have 6% of their liquid assets in reserve. That is, they could lend 94% of their liquidity. Interest rates were cheap as chips. Guess what happened? You are dead right. A fantastic boom in China and the sharemarket took off through the roof.

The other day, the Chinese authorities (probably a different set of guys to those mentioned in the last paragraph) increased the liquidity requirements of Chinese banks to 17.5%. That is almost a 300% increase in reserve requirements. I don’t know what 11% of Chinese liquidity means, but I am sure it is beyond comprehension.

All that money has been removed from the financial system in China. Is that serious? You bet. While all that has been going on, the Chinese sharemarket index has dropped 50%. In other words, an enormous amount of money has been removed from the financial markets in China and stock holders have seen their asset lose 50% of their value.

But don’t worry, we are told. The Chinese are suckers. They need our iron ore and our coal and will pay whatever price is necessary, so we are in economic Nirvana.

Well, I read an interesting article in the Harvard Business Review the other day. Before 2005, China was a net importer of steel. Since 2005 it has become a major exporter of steel, despite the fact that its domestic requirements have increased.

They need coal to make steel and sure, China imports a lot of coal from Australia, but the authorities (here they are again) protects the steel industry from this increase by subsidising the cost of coal. China therefore produces steel that kills steel from other markets. One day, when China feels that it has enough steel and the authorities decide that there is another “pillar” industry, they will turn off the taps to the steel industry and start subsidising another “pillar” industry. In one year, they were able to use subsidies to convert China from being a net importer to a net exporter just simply by turning a tap.

China is also subsidising the price of oil in order to gain international competitive advantages. Perhaps at some stage the authorities will decide to turn off this tap.

Will oil go to $US187 or $US193.34076? Who the hell knows? More likely it will trade a lot lower than it is at the moment.

At some point in time, there will be a trade off between the cost of subsidising Chinese industries that compete internationally and the cost of staying alive in Western society and its ability to purchase Chinese products.

There are so many imponderables out there in the market at the moment that predicting the future is like taking a ticket in a lottery. Historically, there is only one factor that has consistently demonstrated its predictability, and that is that market forces ultimately prevail.

Do the Chinese or American or Japanese “authorities” determine the market forces? I can’t believe that they do, otherwise I would have to give up my profession as a management consultant.

Wherever you live, just take a walk down the street of the shopping area and see who is spending money. Sometimes it is you. These are the people who ultimately determine market forces, and they are called “customers”.

All the big shots and “authorities” who think they are the ones calling the shots have forgotten that they are totally dependent upon muggins – and millions of them, just like you and me.

So, if you want to grow, perhaps tomorrow is not the time to expect growth; but if you stay close to your customers and never forget that they control our commercial lives, at some point in time, you will dish it out to the “authorities” and make them respond to the voice of the customer.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

To read more Louis Coutts blogs, click here .