Is the Asian Crash a Precursor or Endpoint?
The last two days have not exactly been the 1929 crash, but it is looking pretty grim. With US markets closed for MLK Jr’s birthday, world markets, particularly in Asian, have been dumping like they are trying to cling to whatever value remains. If the markets stabilize in the next day or two, and investors start looking for bargains, perhaps this is just a blip. But if a drop is based on poor fundamentals, as this one may be, dark days could lie ahead.
I am inclined to think that this is a serious ‘correction’ that will not result in total panic, but it is not a coincidence that the markets are bottoming out. India’s index dropped more than 10% in 24 hours, while Japan and Australia saw the biggest one-day dumps in more than 15 years. What is so concerning is that most of this is based on concerns about the US mortgage crisis, which has bad loans spread throughout the globe. This is bad both in that a lot of companies are holding worthless IOUs, and also because it could mean an overall recession in the US, the world’s biggest market.
China has a major stake in the US’s success for a number of reasons, not the least of which that the government holds an enormous amount of US debt and US hard cash. The Chinese markets are particularly concerning because many investors are not as sophisticated as in Europe and America. In 1997/8 ‘contagion’ struck the Asian economies (although China primarily avoided damage). However, this time around, with many more Chinese holding stocks, and a population that has turned unified panic into an art form, it’s very difficult to predict what might happen. China has been driving global growth over the last few years, but what happens if the Chinese markets continue to slide. Would enough paper wealth vanish to stop the Asian miracle?
In India the stock market dropped more than 12% Tuesday, before gaining a little bit back. This was despite the fact that the country is expecting breakneck growth of 8-9% this year. China’s markets lost 7% following a 5% slide the day before. Hong Kong fared even worse. Imagine the damage that could be inflicted if investors around the world look at Asia and believe that this is more than a blip? Where would growth originate?
It does not look like the second Asian Financial Crisis, but then again it did not look like the first one a decade again. And now China’s currency is no longer pegged, one of the keys to keeping Beijing a source of stability as the continent crashed around it.
Hopefully this is the end, but it might just be the beginning.
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bobby responds:
Posted: January 22nd, 2008 at 11:19 pm →
Burn baby burn. The US markets have opened now, and not looking too good…even with the big fed cut.
nanheyangrouchuan responds:
Posted: January 23rd, 2008 at 2:17 pm →
A good point was made on NPR this afternoon (US time). The 81-82 crash happened during very high interest rates (9-12%) so the Fed had alot of room to move. Not so here, and the US gov’t is barred from lending money to businesses and banks at 0% interest.
China’s success has been due to US and EU consumption. The US consumer is tapped out: no more home equity, can’t get refinancing, ARMs resetting, high food and fuel costs and a realization that our depression era relatives were right all along (save, save, save). And someone like Suze Orman is becoming a financial cult figure. Now the problem is spreading to Europe.
But this isn’t just a US, China, EU, developed or undeveloped problem. This is due to too much paper leveraging paper around the world and non-real wealth being traded electronically. Regardless of politics, the Great Depression can be looked at as “the market”, which is as much a system as any system in science, was out of equilibrium. The US, Asian and EU central banks are acting against the market, not with it and they will lose and the entire world must deal with the consequences.