October 25th, 2010 12:22 PM by Nick Rapplean
We witnessed a Chicken Little world market last week. China raised short-term rates by 0.25% and the Dow lost 1.5% of its value in response. (No, it doesn’t make any sense.) Oil declined by about $2.50 a barrel. Gold fell roughly $35 a troy ounce. And the euro declined against the dollar.
Let’s look as quickly as possible at why these things happened. First, the general understanding seemed to be that China wanted to slow its economy a bit—so investors all over the world worried immediately that one of the world’s strongest markets was going to slow down. Thus, the price of oil fell because of a concern that China’s—and, as a result, other nations’—economies wouldn’t need as much oil if they were going to slow.
Okay. So stock market investors, also fearful that the world economy would slow, took the DJIA significantly lower. The ten-year T-note, however, could think of little to do other than to wait, shuffling its feet for a day. And the euro, because investors decided (without adequate thought, but that’s an editorial opinion) that the European economy would suffer more from a slowing Chinese economy than would the American economy, took a dive.
In short, it was a big day in the world economy—as it turned out, a lot of sound and fury, signifying very little. But there are, at the least, three important things to ponder here.
First, the world market is really tense, and it doesn’t take a lot to make it run around in circles declaring that the sky is falling. Happily, it seems capable of recovering fairly quickly, but we need to be aware that today’s economy is very capable of panic.
Second, China—which has become a huge question mark in the world economy—wields an immense amount of power today. Ian Bremmer, president of the largest political risk research and consulting firm, has a new book out called, rather chillingly, The End of the Free Market. He argues that countries like China, Iran and Saudi Arabia approach the Market in a very different way from the U.S. For them, it is a political force; they use it to cement their government’s power, to gain some power over other nations, and to increase their nation’s economic well-being.
He recently said, “China has enjoyed double-digit growth for thirty years without freedom of speech, without well-established economic rules of the road, without judges that can ignore political pressure, without credible property rights—without democracy. And the events of the past 18 months have made China more important that ever for the future of global economic growth. This is a big change with enormous implications that we had better start thinking through.”
This past week was a reminder about how much the world is indeed changing—a wake-up call.
The third important matter is that—hello?—China’s move could be seen as a simple and logical response to the threat of inflation. They just ratcheted up their rates a bit. Not that big a deal.
World markets, realizing that, recovered almost instantly…and we all went on about our utterly confusing business, having gained very little wisdom from the experience. The next big deal, of course, is: Will the Fed announce that it really and truly is going to start buying huge quantities of Treasury securities? The markets aren’t as sure about that as they were a little over a week ago. Stay tuned!