Global Markets Fall ... Watch Out Below ... The Results of 'Malinvestment'

The carnage in global stock markets continued overnight and it looks like it will be another big down day for U.S. stocks. 2016 is starting off very badly in the market, to say the least.

China's market fell another 7% after only 30 minutes of trading and their stock market promptly closed for the day. Japan and Europe followed China down, and oil has now fallen in price by ~7 in the past two days. Other commodities are showing similar declines as too much global capacity, driven by China, meets too much global supply. And when that happens, prices fall.

China is slowing and our global interconnected economies are feeling the pain. So what's ahead for China? To paraphrase what President Obama's pastor Jeremiah Wright once warned (when repeating the words of Malcolm X), 'China's and the debt driven world's overcapacity chickens are coming home to roost,' both in China and around the world.

There's too much debt and too little demand. Couple that with the rest of the world's export driven countries and America's import oriented and excessive debt driven lingering subpar economic recovery, and it's easy to see why things won't get much better anytime soon.

Meanwhile, the U.S. continues to improve, albeit at a sluggish pace. We're not doing great, but we definitely are 'the best house in a bad global neighborhood.'

China Halts Trading After Market Tumbles More Than 7% briefly discusses the long term issues facing China:

" Trading on China’s stock market was halted on Thursday for the second time this week, as stocks plummeted in Asia, and then fell in Europe, over concerns about the country’s currency and the health of the economy.

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Futures trading indicated United States markets might open down by about 2 percent on Thursday, following a sharp sell-off the day before.

The markets in China closed after only 29 minutes and did not reopen, with the main index in Shanghai down 7.3 percent. Other Asian markets slumped as well.

“Obviously, it doesn’t look good, it doesn’t look good at all,” said Hao Hong, the chief market strategist at Bank of Communications International, the overseas arm of a big Chinese bank.

It has been a rocky start to the new year in global markets, with worries over China shaking the confidence of investors around the world and creating volatility in the markets. The big fear is that China’s economy is slowing down, crimping global growth.

Since then, investors have been unnerved.

American stocks tumbled on Wednesday, as the value of the Chinese currency sank and another economic report showed signs of trouble. The price of crude oil dropped more than 5 percent, with stockpiles growing and the threat of Chinese demand slipping.

On Thursday, the price of benchmark West Texas Intermediate oil was down just more than 4 percent at $32.68 a barrel by midmorning in Europe. . . .

The options for the government go far beyond the market.

To shore up the economy, China could further reduce interest rates so as to help the real estate market. It could also further increase its already considerable stimulus spending on infrastructure.

While such measures might help in the short run, they would only add to one of China’s biggest problems in the long run: a huge overhang of debt that was used to finance poorly judged investments. Many of those investments, like high-speed rail lines built in smaller provincial capitals for political reasons, may struggle to generate enough of an economic return to cover the interest on the money that was borrowed to finance them.

“The more you try to alleviate, the worse it gets in the long term,” said Viktor Shvets, the head of Asian strategy at Macquarie."

Summing Up

Chinese attempts to control economic activity and stock market prices are failing, as always eventually happens when government intervenes and misallocates resources in an attempt to control economic activity and the free market.

What's happened in China is a classic case of 'malinvestment,' the result of using an abundance of freely available low interest debt to make poor brick and mortar investment allocations.

The recent U.S. housing bubble and its aftermath are continuing examples of government induced debt driven malinvestment and its lingering negative consequences.

My plan is to sit by and wait for the sun to shine brightly again in America, which it will do over time and is actually peeping out from behind the clouds presently. In that regard, low oil prices are a real positive for U.S. consumers and businesses.

Finally, for those who remember the U.S. market's one day fall of 23% on October 19, 1987, this ain't nothin'.

As I did way back then, I'm keeping the faith now and staying the course for the long haul, even though the short term ride isn't likely to be a pleasant one.

That's my take.

Thanks. Bob.