It’s the model, stupid…

It’s not about interest rates, or dividends or technical trends or any of the other hyped nonsense which passes for commentary, and last night we had the proof. Global indices fell, mostly as a result of the realisation that if commodity prices remain low mining dividends are under threat. Meanwhile, the big disruptors – Alibaba, Facebook, Netflix – didn’t fall. Some will say this is because they don’t pay dividends. This is irrelevant – they make so much money that they could, whereas the miners won’t because they can’t.

The more important question is what is wrong with the global economy that has pushed commodity prices down. We can point to falling demand in China (true) or a glut of oil because of cracks in OPEC (also true) but this doesn’t address the root cause of the problems, which is a fundamental shift from a goods economy to an information economy. Why should this matter? Because when there is information in the system, it becomes more efficient, meaning it uses less “stuff” to satisfy demand. Example 1: If you knew where a parking space was, you would use less petrol driving around. Example 2: It is cheaper buying a camera battery on-line because the retailer doesn’t need expensive retail property, so you pay less.

And so on. It seems to be a good reason why the on-line Chinese companies are doing so well (has anyone noticed how strongly they have performed in the past few months) – a more efficient China could mean a less polluted China, and that is pretty important to the Politburo, including Xi Jinping. By the way, I can’t prove this on a macro basis (yet) and by the time it is proved the opportunity to profit from it will have passed, so it is probably not worth trying.

Meanwhile it seems to be the case that the old economy stocks are under the pump, but the new economy companies continue to make new highs. Everything runs out of steam eventually, but not yet, apparently.

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