Tuesday, February 27, 2007

Meltdown

Wall Street and other major financial centers continued to fall after Chinese stocks suffered their worst one-day sell-off in a decade. China's Shanghai Composite dropped almost 9 per cent, according to the Courier Mail. For Wall Street, it was the worst day since the September 11 attacks. Investors are worried that China's booming economy has hit a rough patch. "There’s the fear of the Asian contagion. Chinese stocks – which had been going strong – faced their worst slump in a decade. Some U.S. stocks, including Coach Inc., Tiffany & Co. and Alcoa, tumbled on fears of troubles in China." Here's the situation so far:


Mining and energy shares led the market rout, with economically sensitive sectors such as construction and building materials also hit amid renewed concern about slower economic growth in the United States and China. The FTSEurofirst 300 index of leading European shares closed 2.86 per cent lower at 1,506.05 points, its lowest level since January 11 and erasing nearly two thirds of its gains since the start of the year.

Sentiment was also hurt by an 8.8-per cent slide in China's benchmark Shanghai Composite Index -- its biggest daily percentage fall since 1997 -- amid fears that authorities would crack down on the speculation that drove shares to record highs. Traders said the slide did not appear to be triggered by concrete news, but the tumble came a day after the main index jumped to an all-time high, bringing its gains for this year to 14 per cent. The market soared 130 per cent last year, making it the world's best-performing major market.

Resurging worries that slower growth in the red-hot Chinese economy could cap demand for basic materials such as oil and metals prompted investors to lock in their profits on energy and mining stocks. Heightened risk aversion sparked by mounting geopolitical tension surrounding Iran's nuclear program also hit equities.

Commentary

Well functioning markets reflect the available information, and the Shanghai Composite Index mirror its expectations of China's coming economic performance. China is not expected to do well; and so the Index fell. The sell-offs rippling through capital markets across the globe are reminders of how important interrelated developments are in a globalized world. Terrorist groups in Waziristan, the nuclear weapons research of Ayatollahs in Iran and the management of the Chinese economy affect everyone.  World capital markets are able to spread risk and revalue assets quite efficiently. But the ponderous political system, which seems capable only of going in circles does a far worse job of managing the the flow of political and military action across boundaries. Perhaps we have already developed the mechanisms for coping, in a rudimentary way at least, with the economic side of a globalized world. But as the puerile debate over Iraq in the the political arena shows, there may be a way to go before the policy side catches up.

One of the most difficult aspects of acting in today's global environment is that there is no easy way of spreading around the risk and 'smoothing out' the consequences of political action. Paul Kenger at Townhall relates the story of how Ronald Reagan conspired with the Saudis to manipulate oil prices -- and he omitted the mention of bleeding the Red Army in Afghanistan -- to win the Cold War. Seymour Hersh has a long article in the New Yorker where he claims that America is now playing the Sunnis against the Shi'ites -- and vice versa -- to win the war on terror. But Hersh can't make up his mind over who to root for, which doesn't seem to bother him much for so long as he can boo George Bush. But Hersh is probably right in saying that, in a world where we must often support one enemy to fight another, the distinction between the Good Guys and the Bad Guys can change in a heartbeat. Anyone remember Yalta? It took a long time to sell-off that stock.

9 Comments:

Blogger The Wobbly Guy said...

It's almost ten years since the last major crash. The global economy is due for another one. Happens every ten years, by my reckoning.

So I'm holding off from buying a car and hanging on to my savings. When the time is right, I'll go in.

2/27/2007 04:16:00 PM  
Blogger dla said...

The US GDP at $13 trillion, China's GDP at $2.6 trillion. I'll have to Google it later, but I wonder just how much money is swinging from US to China in trade.

2/27/2007 04:38:00 PM  
Blogger Wayne said...

The Bank of China raised its discount rate by .5% last week to 10%. This means that every bank must reserve $10 for every $100 it lends. This was the fifth such increase in about 18 months. The present US discount rate is 6.5%, making a bank loan in the PRC 50% more expensive than in the US. With many stock indices up 35 to 40% in 2006, any stock margin loans became much more expensive last week. You are correct that heavy industries will have a harder time. The BoC has been signalling its worries for some time, but market players suddenly decide to pay attention. wparman

2/27/2007 04:50:00 PM  
Blogger Habu1 said...

In a 12,600 DOW a 400 point correction isn't a crash.

One of the reason we will hear more about i the coming days is that the DOW's computers had a glitch that when corrected gave readings of a 160 point drop within minutes...that no doubt will be covered by Investors Business Daily.
What was the correction 3-4% range?

In '85 it was closer to 25%....that was a crash.

2/27/2007 04:55:00 PM  
Blogger PapaBear said...

The more worrisome aspect of the Chinese stock market, is that investors are relying on the assumption that the Chinese Communist government will allow them to have their profits.

They are assuming that China will never follow the standard practice of Communist governments over the last century, and grab their invested money at some opportune time

2/28/2007 05:07:00 AM  
Blogger Brock said...

"Well functioning markets reflect the available information, and the Shanghai Composite Index mirror its expectations of China's coming economic performance. China is not expected to do well; and so the Index fell."

China's market is not a well-functioning one, so the rest of this statement does not hold. The SCI mirrors investors expectations of stocks on the SCI; nothing more. Since the vast majority of China's economy is not on the SCI, I am not convinced that this market correction extends to the whole of the Chinese economy. The more likely scenario (in my mind) is that investors realized that the SCI stocks have been over-bought, since the benefits of having access to China's very imperfect capital markets are not that great.

I agree with the larger point of the post however, that the world's capitalist economic system is far more efficient and resilient than its political one.

"One of the most difficult aspects of acting in today's global environment is that there is no easy way of spreading around the risk and 'smoothing out' the consequences of political action."

On the contrary, I think one of the strengths of today's political environment is that the risks associated with direct confrontation have fallen so far that we now (for the first time) have the ability to confront ANY AND ALL our enemies directly. The USA went to Yalta because it had to choose between the German-Japanese Axis and Soviet Russia; taking on them both wasn't an option.

Hersh's problem is that he still thinks that we have to choose between various factions of bad guys, when that simply isn't the case. Free-Market Capitalism has won, and is doing the heavy lifting of moderating political extremism in Germany, Japan, India, China and Russia for us. We don't have to use our nuclear arsenal to intimidate the Great Powers of the world, because the capitalist factions within those nations will do everything in their power to keep the money-boat un-rocked. This allows folks like Hersh and Murtha to act irresponsibly (they believe consequences can be largely contained, which is true so long as terrorists don't get WMD's), but don't lose sight of this great benefit and freedom. You'll notice that only the lunatic fringe thinks that we need to have a Yalta arrangement with Iran.

2/28/2007 06:21:00 AM  
Blogger RWE said...

One day in October 1987 the Dow fell from 2000 to 1500.

On that same day the Ayatollah Khoumani announced that a state of war now existed between Iran and the U.S.

As Habu says, yesterday was not a crash. I theoretically lost $24,000 yesterday - which takes me back to the middle of December 2006.

Now, about that war with Iran thing. Anyone got a handle on where we are on that?

2/28/2007 07:53:00 AM  
Blogger Jamie Irons said...

RWE:

You wrote:

I theoretically lost $24,000 yesterday - which takes me back to the middle of December 2006....

May I have your broker's phone number?

;-)


Jamie Irons

2/28/2007 10:17:00 AM  
Blogger Dan said...

RWE - watch Mars Attacks man! The parable of our little epicycle here. We're somewheres in the middle...

2/28/2007 06:37:00 PM  

Post a Comment

Links to this post:

Create a Link

<< Home


Powered by Blogger