Avoiding Risk: Gaining by Not Losing
The global economy is more like a living, breathing thing than a static monetary concept. What gives that living economy breath are goods and services moving between countries. The flow of those manufactured products and services facilitate an exchange of money. The product flow we can see, but the money flow behind it, though less visible, is in many ways more important.
Consequently, when we get news that Chinese exports fell an alarming eleven percent in January over the same period last year, that’s a signal there’s something very wrong with the health of the global economy. That is, in fact, the seventh straight monthly decline and significantly below the median forecast. To provide some perspective Chinese exports fell in December as well, but less than one and a half percent, well within the normal range of fluctuation.
Goods and services are not a one-way flow, either. If China’s exporting less, that means they’re manufacturing less, and that means they’re also buying less from others. That fact is reflected in a greater than fourteen percent drop in imports. That backs up on countries that sell China raw materials and it quickly becomes apparent that, in our new globally-connected economy, there’s no place to hide.
China Hard Landing
While it’s tempting to cheer the economic calamity of a country that’s no friend of the United States, keep in mind that China’s woes are already backing up on our shores. Our recent stock market meltdown didn’t start here in the U.S., but with a crash in the Chinese stock market. Their troubles very quickly became our troubles and China’s continuing woes will almost certainly also become our ongoing problem.
What Goes Around, Comes Around and Around and Around
If it were just China we had to worry about, the situation would be bad enough. But the problem is literally global in scope and impact. Nations including Brazil, South Africa and Venezuela ship raw materials to China and their currencies have been in freefall since Chinese manufacturing took a tumble. The issue for the U.S., aside from the reality that it’s never good from an economic or humanitarian standpoint to have massive nations going belly-up; is the fact that most of them owe us money; in some cases a lot of money. Economists call it sovereign corporate debt and the details of how money from the U.S. ends up financing foreign corporations are a bit convoluted, but the fact remains that a cash crunch in emerging markets will also end up hurting investors here.
A Wave of Global Deflation
With the outflow of foreign cash reserves that China’s currently experiencing the eventual certainty will be a devaluation of the yuan. China’s still denying they need to devalue the yuan but keep in mind they said the same thing in August, right before they devalued the yuan three days in a row, causing the August Crash. But for the damage it does to our portfolios, China devaluing its currency would hardly be a headline anyway. For forty years the Chinese were shameless currency manipulators; it’s how they managed to gut the U.S. manufacturing industry so efficiently. But now the consequences are even bigger as small army of emerging market countries will subsequently have to devalue their currencies to stay competitive.
Global Recession Risk
All of the potential chain reaction disasters that are floating around out there have now moved Bank of America Merrill Lynch to raise its assessed risk of a recession to fifty percent. BofA recognizes the new vulnerability of U.S. markets to global instability and the financial giant sees little consolation from Wall St., saying, “[T]he fundamentals for the equity market are worse than for the overall economy.”
What it all adds up to is a 2016 that’s fraught with peril. Wise investors are shifting their wealth out of high-risk investments toward less volatile bonds and liquid hard assets. There’s just too much potential for greater losses ahead to gamble your hard earned money.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.
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