Let’s face it-the global economy is not in terribly great shape. First, there’s a huge slump in commodities prices. We’re not just talking about oil here, we’re talking a wide spectrum of commodities-the building materials of industrial economies. They’re down or flat. While it is easy to dismiss the commodities slump on oil prices’ depression, this would totally miss the whole picture. Granted, a large part of the reason why oil prices are depressed is due to Saudi Arabia’s very risky gambit of putting the hurt on North American shale producers, the impact of a cooldown in global demand can’t be understated. Commodities are down because the global economy is slowing down. There’s just less demand all around.
The second reason why the global economy is in rough shape is the absence of political will, as far as Fed intervention is concerned, in the USA. Thanks to the new Republican majority in Congress, it is going to be unlikely that the US will spearhead any further central bank intervention to steer the world away from a financial cliff. There is such a thing as quantitative easing burnout. Besides, many people are wondering how truly effective such moves are-besides inflating asset values.
The third reason to worry is the fact that China is slowing down and Europe is pretty much down for the count. The only bright spot in the global economic picture is provided by the US but its jobs figures barely conceal some worrying trends. Who knows when the negative trends will outpace the positive aspects of US jobs figures and the US joins the rest of developed economies in the dumps.
The good news is that there is one bright spot: China. China’s problem is not recession-it is still growing. The problem is whether it is growing fast enough. China’s GDP slow down is the favorite factoid of many finance cable show pundits. They keep pointing trotting it out to support their thesis. The problem is they underestimate the power and the willingness of China’s People’s Bank to swoop in for the rescue. Thanks to its authoritarian government, whatever the People’s Bank says, the Chinese finance market has to obey. It has shown clear decisiveness in the past and one can bet that Chinese authorities will do whatever it takes to keep the Red Dragon economy from hitting the skids.
With China a firm bulwark against global economic meltdown, investors can be assured that, just like in 2009, there will at least be one major economy in the black when the Crash happens. As powerful as the People’s Bank may be, is it enough? The US Fed has run out of magic economic tricks. Will a China-led recovery be enough? At this point in time, it seems doubtful considering the slump in commodities, near zero interest rates, and other factors. It just seems there’s not too many shelters available for capital if the equities markets take a bath.