Tuesday, January 22, 2008

The economic proof is NOT in the Chinese pudding, but the fear is in Bernanke

For months now, Wall Street bulls have been saying any “slack” or “slips” in the U.S. economy could easily be picked up by China. Or India. Well, Monday’s Asian stock market tanking put paid to that theory. Jim Jubak provides analytical details:

The death of this belief in "global decoupling" is likely to have three effects:

• It will shift the harshest bear market action from the U.S. to overseas markets, as overseas investors discover that their economies are slowing, too.
• It raises the odds of a "bear market rally" in the not-too-distant future. Such a rally would leave the bear market intact and end in another painful market downturn.
• And though the death of this myth is essential to finding the bottom in the current bear market, the final end of the bear still depends on a recovery in the U.S. financial and housing sectors, which now looks unlikely until early 2009.

The danger of slowing economic growth is a months-old story to U.S. investors — one reason that the major U.S. market indexes are currently flirting with the 20% loss that defines a bear market. But it's something new for investors in overseas markets, many of whom thought that those economies would be immune to a U.S. recession.

Plus, as Jubak points out, Europeans, like Americans, are familiar with the ideas of stock markets and their vagaries. In China, especially, this is a novel concept; you’ll note that on Monday, the Chinese (and Indian) markets sank far more than the U.S. market on Tuesday (helped, albeit, by the Fed rate cut).

Meanwhile, expect the post-recession recovery to be weak. Says who? Jim Jubak?

No, Ben Bernanke. Now you know just how much panic, and gloom, was behind that rate cut.

Plus side? And, yes, there is one. At least we’re not getting Greenspan bullshit. Now, if Bernanke only can prove to have a pair of Paul Volcker cojones, we’ll be OK in the longer term.