An honorable member of the Coffee Shop Has Just Posted the Following:
Three fears now seem to be influencing market psychology: China, oil and the fear of a US or global recession.
China is surely a big enough problem to throw the world economy and equity markets off the rails for the rest of this decade. We saw this in the first four days of the year, when the sudden fall in the Chinese stock market triggered January’s global financial mayhem. But the Chinese stock market is of little consequence for the rest of the world. The real fear is that the Chinese authorities will either act aggressively to devalue the renminbi or, more likely, lose control of it through accidental mismanagement, resulting in devastating capital flight.But, judging by market behavior in the second half of January, the fear about China has subsided, at least for now.
Now that oil prices are stabilizing at a reasonable long-term level, the world economy and non-commodity businesses should benefit. Low oil prices increase real incomes, stimulate spending on non-resource goods and services, and boost profits for energy-using businesses.
Yet, despite these obvious benefits, most investors now seem to believe that falling oil prices point to a collapse in economic activity, which brings us to the third fear haunting financial markets this winter: a recession in the global economy or the US.
Finally, what about the falling stock market itself as an indicator of recession risks? One could quote the great economist Paul Samuelson, who famously quipped in the 1960s that the stock market had “predicted nine of the last five recessions.” There is, however, a less reassuring answer. While markets are often wrong in predicting economic events, financial expectations can sometimes influence those events. As a result, reality can sometimes be forced to converge towards market expectations, not vice versa.
This process, known as “reflexivity,” is a powerful force in financial markets, especially during periods of instability or crisis. To the extent that reflexivity works through consumer and business confidence, it should not be a problem now, because the oil-price collapse is a powerful antidote to the stock-market decline.
In short, nothing about the condition of the world economy suggests that a major slowdown or recession is inevitable or even likely. But a lethal combination of self-fulfilling expectations and policy errors could cause economic reality to bend to the dismal mood prevailing in financial markets.
Read more at
https://www.project-syndicate.org/co...z8or7D5GWwd.99
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01-02-2016, 12:10 PM
Three Fears Sinking Global Markets - Good Read!
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