Shanghai Flu
As with most stock market sell-offs, it’s not one thing. But in this case, China plays a big role — maybe a deciding one. Market followers awoke Tuesday to the unsettling news that the main Shanghai stock index had plunged about 9% overnight on growth fears. China’s communist bosses plan to begin their annual policy meeting March 5, and some think they might tighten economic policy.
China’s leaders are making noises about their economy growing too fast. This year, for the fifth year in a row, GDP is expected to grow at least 10%. Since 1990, it has averaged 9.8%. But after a remarkable 15-year building boom, bad debts have piled up, and China’s rulers fear an inflation spike. Remember: The June 1989 Tiananmen revolt was fueled not just by a desire for more freedom, but by anger over high inflation.
That may explain why China’s No. 3 leader, Wen Jiabao, warned on Tuesday that it will take 100 years for China to become a democracy. For now, he said, the country will focus on “sustained rapid growth.” “Sustained” is the key word. Today, China is big enough — $3 trillion in total output — that when it sneezes, the world catches cold. That includes the U.S.
But are all the U.S. stock market’s ills the fault of China? No. Investors may also be starting to worry about Iran’s push for nuclear weapons. Until Iran is stopped, either through military strikes or hard-nosed diplomacy, the world economy is at risk.
Investors have also seen an unusually fast decline into disarray and outright incompetence by the new Democrat-led Congress. After years of criticizing President Bush, the Democrats have displayed a frightening lack of concern for America’s security — reminding everyone they’re still the party of Jimmy Carter.
We could probably add Alan Greenspan’s comments to the mix. The former Fed chairman remarked Monday that the U.S. could slip into recession this year due to a slump in housing and the federal budget deficit.
Taking those comments and the events in China and Iran to heart, U.S. investors now have priced in a more than 50% likelihood of a Fed rate cut in the next couple of months — down from a probability of virtually nil just weeks ago.
Yes, Tuesday’s decline appears to be a serious break. But let’s not forget that we’ve had four years of steady market gains thanks to tax cuts that set off one of the least-heralded economic booms in history. And while the Dow was off 3.3% and the Nasdaq 3.9%, those were only the biggest drops since March 17, 2003, and Dec. 9, 2002, respectively. Scary, but not records by any means. |
