Problems in foreign economies can impact the U.S. stock market negatively. One example is the European debt crisis of 2010, which caused the indexes to decline even though the U.S. was recovering from the 2008 financial crisis and 2009 recession.
The WSJ and NY Times both have stories today about economic problems in China and Russia.
By Jason Douglas, The Wall Street Journal, Updated Aug. 15, 2023
China’s central bank unexpectedly cut a range of key interest rates, an emergency move to reignite growth after new data showed the economy slid deeper into distress last month…
For the first time since February, China’s headline measure of unemployment rose, climbing to 5.3%.
The jobless rate for people ages 16-24, meanwhile, had marched steadily higher for six consecutive months to hit a series of record highs, culminating in a reading of 21.3% in June. …
The risk for the global economy is that a prolonged spell of soggy demand in China holds back growth elsewhere in the world by blunting exports of iron ore, crude oil, factory equipment and luxury goods… [end quote]
Beijing stopped releasing youth unemployment figures in its latest attempt to play down negative trends as growth stalls, and global concerns grow.
By Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Lauren Hirsch and Ephrat Livni, The New York Times, Aug. 15, 2023
China’s economy, the world’s second biggest, is in a prolonged slump. Retail sales and industrial production both missed forecasts in July, Tuesday’s data showed. China’s central bank cut a benchmark lending rate on Tuesday, but that was a far cry from the big-bang stimulus measures investors have been hoping for since the country fell into deflation last month.
That poses a challenge for global growth. The I.M.F. has previously forecast that China would account for 35 percent of global growth this year, but that’s looking less likely. The slowdown is hitting everything from commodities to construction, and some big U.S. companies that operate in China don’t expect a rapid turnaround…
Steve Tsang, director of the SOAS China Institute in London, said, “A strong, rich and powerful China under Xi wants to change the world order. A strongman in charge of such a state that is getting weak, poor and unstable will do whatever it takes to stay in power, regardless of its consequences for the rest of the world." … [end quote]
While China is cutting rates, Russia is raising them.
Ruble’s recent slide reflects growing uncertainties as Russia battles inflation, sanctions, labor shortages
Russia’s central bank jacked up its key interest rate at an emergency meeting to stem a sharp selloff in the ruble and resurgent inflation, a response to the mounting financial costs of Moscow’s war in Ukraine.
The bank on Tuesday raised the rate to 12% from 8.5%, a day after the currency temporarily fell past 100 to the U.S. dollar for the first time since the weeks after Russia invaded Ukraine…
Russia is caught between fast-rising inflation and a government that needs to borrow and spend to keep up the war effort in Ukraine, a toxic mix for the economy. It also faces the mounting impact of sanctions and a drastic labor shortage.
Russia’s macroeconomic stability is “now in a more vulnerable position than at any point since the early stages of the war…” [end quote]
China and Russia impact the U.S. on economic, Macroeconomic and geopolitical levels.
China is a large owner of U.S. Treasury debt. They have been gradually rolling off their holdings, much like the Federal Reserve is doing – Quantitative Tightening. This will tend to increase long-term Treasury yields.
China’s low-priced exports to the U.S. have held down inflation for many years. Anything that interrupts this trend will impact inflation.
The slowing of the Chinese economy will reduce sales of U.S. companies that do business in China. These companies’ stock prices will fall as a result.
Due to our intertwined economies and also the threat to Taiwan, China is a bigger danger than Russia. But Russia’s invasion of Ukraine has already cost the U.S. a lot of money and probably will in the future. Hopefully, neither of these conflicts will lead to nuclear war.
I just finished reading Peter Turchin’s latest book, “End Times.” It’s not as good as his previous books but it reiterates the important factors leading to social destabilization and potentially revolution. These factors are growing income inequality, elite overproduction and geopolitical threats.
China’s high youth unemployment rate is a red flag. It’s classic elite overproduction. It’s impossible to say at this time whether and when these frustrated young people will protest, potentially destabilizing China.
The U.S. - focused Control Panel has a benign appearance this week. The markets think that the Federal Reserve will guide our economy to a soft landing. But we need to be aware that foreign events may become significant. Everything is priced for perfection. Stocks are in a bubble.