Market mayhem: Summer blip or a serious dislocation?

Patrick Young
Patrick L Young is CEO of niche crowdfunding platform HanzaTrade and an advisor to fund managers throughout the world. Born in Ireland, he is an active investor in the “New Europe” amongst other emerging markets and is an active Co Founder of grassroots startup group "Mission ToRun." Home Page: http://patricklyoung.net Twitter: @FrontierFinance
© Ralph Orlowski
The mainstream media retains a minuscule attention span which leaves fruit flies resembling long-term thinkers. Thus suddenly misplaced optimism lazily received via an economically illiterate Western political caste, has declared it’s a crash, a meltdown! “Black Monday!”

Now, this is pretty ugly and of course in a world where the economy involves 7.3 billion people and an economy worth circa $20 trillion in annual trade, the losses sustained in stock markets are invariably seriously vast numbers way beyond the spending of normal citizens. If this is ‘a storm in a tea cup,’ the beverage must have been poured from one majestically vast pot, goes the argument...

However, this is no sudden activity which has caught us all by surprise. Although precisely timing such events is always difficult to evaluate, generally speaking dams with leaks will burst sooner or later and the cracks have long been apparent, as noted previously.

READ MORE: ‘Politics of the insane: Welcome to the euro’

True, the US economy has been growing, but not as sensationally as it would if the government had a vestige of economic competence, as opposed to Obama’s quixotic social justice warriors cum foreign policy flip floppers. Almost 75 months into the US upswing, I noted this was likely as good as it gets.

Since the great recession of the last decade, Europe has fallen into an abyss, unable to recover from the last recession while the next one appears imminent. Thus the burden of growth has been significantly falling onto Asian shoulders, particularly in the ‘Middle Kingdom’.

Thus the current economic conundrum is being powered by, at best, a brief pause in China’s multi-decade growth spurt. In other words China catches a cold, the rest of the world (having become increasingly reliant on its growth), fares worse still.

The runes have been clear for some time. Global commodity prices have dived as Sino-centric demand dries up. Thus nations such as Australia to Canada all the way to Africa are on the precipice of recession as well. It’s time to face the truth: Not even the massed ranks of American tourists in peak driving season can keep the oil price above $40 a barrel.

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Markets are also slowly coming to terms with the end of Quantitative Easing. That funny money fad is ending. Western economies are fast running out of ‘fire power’ aka both credit and credibility, to keep soaking the soggy economy with more disastrous central bank delusion that they can somehow keep the wheels turning through monetary shuffling alone.

READ MORE: Black Monday: Wall Street plummets 1000 points at opening bell

Meanwhile, the US is perched on a curious precipice: In one sense the economy is too weak to suffer higher interest rates but, at the same time, a rise in the cost of credit is inevitable. Bond markets cannot sustain the gravity-defying low yields of the QE-funded years. When average companies with (at best) modest balance sheets can borrow at barely 4 percent above the same level as government securities, the system is awash with cash and a pullback is looming.

That said, one key reason why markets are pulling back right now is somewhat technical. The northern hemisphere summer holiday season has filled the beaches and emptied the dealing rooms of many senior staff. As markets have less liquidity, a selling frenzy can accelerate much faster than in a fully staffed marketplace.

Moreover, the Chinese government has eroded confidence through high-handed interventions which, while beloved of the hard left, simply will never work in a globally interconnected economy. Closing, or restricting, free markets always fuels panic. Thus a credibility gap has opened around the Beijing government which unnerves those who also see militaristic saber rattling in Korea.

Turning back to Europe, investors behold a slowly festering pit of despair from the Atlantic coast through the Mediterranean to the Aegean. It is increasingly clear that the EU has simply lost the economic growth plot due to its self-obsessed political machinations.

I have already noted how 2015 in the absence of coherent Western government, would likely mark ‘A Year of Borrowed Time’ and so we find ourselves on the cusp of dislocation as the economic cycle has almost certainly peaked.

However, the current tidal rip is probably not ‘The Big Kahuna’ - albeit a big storm in a massive tea cup. Expect a slightly more moderate marketplace soon when traders return from holidays and investors perceive value in battered stocks.

Nevertheless, global markets and the world economy have turned from their expansionary cycle into the periodic retrenchment which is a standard of economic life. Expect markets to bounce in September but after that, all bets are off…
The hope is China gets to grip reflating its economy, the worry is many Western nations have substantively missed the upswing altogether as the economic weather is turning stormy.

In truth, is this the end - that amazing massive downturn in the economy? Almost certainly not. The beginning of the end? Alas we’re probably well past that point. Expect a bounce next month but prepare to strap in as the next bit gets very choppy indeed.

Alas, the end game increasingly looks like a major global recession just when many nations are ill-prepared for even a modest downturn and political leadership appears an afterthought in many nations.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

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