A lot has been said elsewhere about the rapid decline of the Chinese stock market over the past week, which has made the start of the Western New Year a bit unpleasant. Charlie Bilello of Pension Partners wrote a solid piece that puts the first week of 2016 into perspective relative to historical data. If January turns out to be anything like 1980, we are in good shape. Keep your hand away from the panic button. Urban Carmel takes a longer-term view in his January Macro Update at The Fat Pitch and notes that, “The balance of the macro data from the past month continues to be positive.” And finally, in a meeting I attended yesterday (see below), economist Dr. Nourial Roubini appeared somewhat sanguine about the global economy.
A Financial Bubble Bursting
The below chart puts the Chinese stock market in perspective. In less than a year, the Shanghai Composite Index shot up from a level just over 2,000 to a peak of over 5,100 in June of 2015. Yet over the past year, the Index is down a mere 3.25%, versus the S&P 500 Index, which is down 4.80% over the same period.
[graphiq id=”bL7KoGawNVP” title=”Shanghai Composite Index (Closing)” width=”600″ height=”494″ url=”https://w.graphiq.com/w/bL7KoGawNVP” link=”http://time-series.findthedata.com/l/5193/Shanghai-Composite-Index-Closing” link_text=”Shanghai Composite Index (Closing) | FindTheData”]
A Sanguine Roubini
So what’s the issue? The larger concern is that the Chinese economy continues to decline and has a hard landing (economic growth falls to less than 4%, and approaches 0%), thus sending the global economy into a recession. However, economist Dr. Nouriel Roubini, in a small, engaging meeting I attended yesterday, expressed the fact that this scenario is not likely. Dr. Roubini is instead projecting a bumpy landing for China, and expects economic growth going forward to be in the 5 – 6% range. China’s slowdown is part of a broader global slowdown, and is impacting more leveraged segments of the global economy, such as the emerging markets.
A bigger issue expressed by Dr. Roubini is how to get the global economies growing again. Worldwide, there is a savings glut and [capital] investment slump. Consumers have yet to spend new-found savings from a decline in energy prices, and Dr. Roubini noted that this typically takes some time. The more immediate impact of the decline in oil prices is the negative economic impact on employment and capital spending in the energy sector, along with issues related to the credit markets in that sector. As a result, Dr. Roubini sees a soft U.S. economy in the first half of this year, with a pickup in the second half.
Other key points from the meeting with Dr. Roubini include:
- The current risk-off episode could last 2-3 months, but is not the start of a broader global slowdown
- Inflation is not an issue this year, especially in the U.S. where energy prices are falling and wage growth is not accelerating
- Expecting the Fed to hike rates three times this year, versus two for market consensus and four for the “Dot Plots,” but will be dependent on growth and inflation numbers during the year
- Favors Europe and Japan on a local currency basis
- Not expecting U.S. yields to move too much due low inflation and global liquidity glut
Here are a few articles of interest from this past week:
Enjoy the weekend.
Meili Zeng contributed to this article.