Why did the US stockmarket
react so violently to the news of weaker than expected retail trade?
This was the apparent cause of tumbling US equity prices – but in fact,
there were several far more important geopolitical factors in play. The
G7, whose meeting in Washington the Chinese diplomatically avoided,
decided to criticise China for failing to revalue its currency. Also,
“US sources” said that the US might erect a tariff against Chinese
goods if China failed to revalue. And the world suddenly noticed
America’s monster “twin deficits” and decided that some marginal
adjustment of US stock prices was in order.

This is one of those
moments when the economic plates shift. We can’t predict whether or not
this is the big one, like the observers portrayed in the “Supervolcano”
program on ABC TV on Sunday night. Odds are it isn’t. But the
suddenness of the decline in US and therefore global share prices shows
the potential for real damage if and when the big one comes along. The
imposition of punative tariffs greatly worsened the economic downturn
in 1931 after the liquidity splurge of the 1920s. We sincerely hope the
US administration is not silly enough to repeat this massive mistake.

Overnight
saw a degree of stability reemerging in the US markets, with stories
that US equity prices are not all that out of line with “fundamentals”
such as PE ratios. Markets will remain jumpy, and fixing the US twin
deficits is far more important than floating or up-valuing the Yuan.

Some relevant history is summarised here.

Peter Fray

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