Jay Reding.com

The Chinese Flu

The Dow plummeted today, following the mass selloff in the Shanghai markets. The Chinese markets, which have been growing at unsustainably high rates over the last few years are now beginning to see a restoration of economic equilibrium, which is sending shockwaves across the world financial markets.

I’ve argued before that the Chinese economy is not going to grow forever, and this may be an indication that the China bubble is bursting. The Chinese have some deep structural problems in their banking system that could make things even worse for them. The Chinese economy is in many ways similar to the Japanese economy before their major economic downturn.

In many ways, this is reminiscent of the October 27, 1999 “mini-crash” that also originated in selloffs in the Asian market and eventually spread to the rest of the world’s financial markets. Despite that crash, the US was largely unaffected and the US economy continued to do well. Hopefully this “mini-crash” will follow suit.

The fundamentals of the US economy are still solid, but this is another reason why policymakers can’t kill the goose that laid the golden egg. Things like tax hikes, protectionist measures, or increases to regulation all make the US economy more prone to international effects rather than less — and if that happens, it could mean that another downtown in the Chinese economy could have lasting harmful effects for the US economy.

2 responses to “The Chinese Flu”

  1. Mark says:

    I tend to agree that it’s a blip. Ever since it became obvious to investors that Democrats were gonna take over Congress, the Dow has been expanding at a blistering pace. The insurgence continued almost ceaselessly since the Democrats made their victory official last November….right up until today.

    Seriously though, the performance of the stock market is based entirely on instant gratification. If a corporation makes Enron-esque moves that improve the bottom line for the near-term, you can count on investors rewarding them for it. This was the case during the late 90’s era of blistering stock market growth, and is very likely the case today, with any number of corporations operating on a “good for today…we’ll worry about tomorrow when it gets here” basis. If anything, days like today are something of a relief to those who respect the law of gravity.

  2. Eracus says:

    “Seriously though, the performance of the stock market is based entirely on instant gratification.”

    Why, thank you, Mark, again, for that absolutely brilliant analysis!! Instant gratification!! Who knew?? I just don’t know how I could have missed it. Have you talked to Warren Buffett about this? I’m sure he’d like to hear more about your fascinating theories explaining stock market behavior. Maybe you could even give Peter Lynch a call?

    I’m sure they could use your help….