After a lot of excitement regarding China’s actions, the market shrugged it all off and rebounded strongly at the end of the week to actually post a gain of over half a percent. Despite that, however, the Dow is still down for the year by almost 2%.
The risks to the global economies continue to exist but the market, for the time being, wants to look past them. The actions by the Chinese government, which look to us to be almost panicked, are being discounted as actions that will enable the Chinese currency to become a tradable currency just like the Euro, the Pound and the Dollar. We believe that the Chinese government used this as cover for what they were actually doing which was attempting to provide strong stimulus for a rapidly declining economy.
No economy is immune from recessions not even that of the Chinese. The problem, of course, is that so many of the countries that are barely getting by are so reliant upon the Chinese economy for their growth. If China falters, they will probably go under.
The analysis that we gave you last week still stands. The global government debt is so huge that it is starting to choke off global growth. Countries are finding that making their debt payment uses up all their excess reserves and they have nothing left to use to actually grow their economies. It is the equivalent of someone barely being able to make the minimum payment on their credit card.
When we have a recession, revenues decline and the ability to make that minimum payment becomes suspect. Our concern is that, once the realization sets in that much of this debt cannot be serviced, there will be a domino effect of countries announcing that they cannot meet their financial obligations.
We have already seen this happen in Portugal, Italy, Spain, Greece, Iceland and Ireland. These countries have all been bailed out because there was sufficient money to do so. On the horizon we have Puerto Rico, Brazil, and Argentina that are now essentially bankrupt. There are many other countries that have not made the news that are equally close, if not there already. If the number of countries that cannot pay their debt gets out of hand, confidence will be shaken and that is when everyone runs for the exits.