The gold price continued to tumble yesterday.
But it wasn’t the only market feeling the pressure. Most commodities slid too.
Most reports placed the blame on China’s weak GDP data. The people who write market reports have to find reasons for market moves, and that was as good a reason as any.
But China’s data was just the latest in a long line of hints that things are not as rosy for the global economy as perhaps markets have priced in.
In short, the recent sell-off could just be a sign that investors are finally experiencing a nasty wake-up call…
The ‘Fixes’ Start to Come Undone
In the first quarter of this year, China’s economy grew at an annual rate of 7.7%. That was less than the 8% expected. It also compared to 7.9% in the fourth quarter.
Now, 7.7% is hardly disastrous. But people are pretty sceptical of China’s data at the best of times. If 7.7% is what they’ll admit to, what’s the real data like?
More importantly, it’s all part of a bigger trend. The concern for markets is that a lot of the good news that was priced in at the end of last year is starting to unravel.
The real worry about China is that it was meant to be fixed. The Chinese leadership was meant to be doing ‘whatever it takes’ to prop up their economy. Instead, it looks as though they’ve decided that cracking down on property bubbles and corruption are a bigger priority than keeping the boom going.
That perhaps shouldn’t come as a surprise. In China, high and rising property prices only highlight the gap between the haves and the have-nots. If the ‘have-nots’ start to believe that there is no hope of ever becoming ‘haves’, that’s when people start to talk about revolution.
So there’s no sensible reason for China to encourage stratospheric property prices. And who cares about the stock market? Everyone knows it’s a big roulette game anyway. If China wants to generate a ‘wealth effect’, what it really needs is a better social safety net.
This is bad news for the mining sector and commodity prices in general. It’s not great for luxury goods producers either.
And there’s no guarantee that China will be able to ‘rebalance’ easily away from infrastructure, and towards consumers. A full-blown hard landing might be a necessary part of that. That wouldn’t be pretty for lots of companies – many US-listed – that have pinned their hopes on Chinese growth compensating for weakness everywhere else.
So it’s small wonder that the Chinese economic news rattled markets so badly.
Don’t Leave Out the Eurozone and the USA
Of course, it’s not just China. Europe is another area that was meant to be fixed. Mario Draghi was meant to be doing ‘whatever it takes’ to save the euro. But life is more complicated than that. Draghi has to juggle the demands of many masters, and the Germans are in no mood for bailouts right now.
Draghi may have won breathing space for the eurozone last year. But instead of using it to find ways to help out troubled nations like Greece and Italy, Europe seems to be hoping that the mere promise of European Central Bank action will hold things together. The strict line taken with Cyprus shows that the idea of ‘sharing the pain’ with their fellow Europeans has not yet taken hold across the eurozone.
This looks likely to end in yet another crisis. And if that happens, either Draghi will have to deliver, or someone will have to leave the eurozone.
Finally, there’s the US. The US was meant to be fixed too. The housing recovery was turning back into boom. The discovery of shale gas meant lots of new jobs and new opportunities.
That’s all true. But nothing goes up in a straight line. Hopes have risen rapidly enough now that any economic data that fails to beat expectations is seen as disappointing.
That’s a problem, because recent data has been awful. The latest monthly jobless figures were woeful. Surveys on manufacturing and consumer confidence have been rotten too.
Investors were getting so used to being optimistic about the US economy that they didn’t even seem that worried about the prospect of quantitative easing (QE) being tapered off this year.
Now they’re having to re-evaluate. And even the prospect of more QE might not cheer them, if it seems that the results from this last batch haven’t achieved much in the ‘real’ economy.
Plenty of people have been waiting to ‘buy the correction’ in this market when it arrives. But now that it’s here, they might be tempted to hold off a little longer, to see how far it goes. If we don’t see some good news out of the US soon, I suspect we’ll see stocks fall further.
How does that affect you? It’s easy to get jittery at points like this. Particularly after 2008, it can feel like every slide in the markets is the forerunner to another epic crash.
But don’t panic. Stick to your plan.
John Stepek
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in MoneyWeek
From the Archives…
Australia: The Home of World Beating Dividend Stocks
12-04-2013 – Kris Sayce
Investors: Ignore Japan’s Yen Devaluation Game
11-04-2013 – Murray Dawes
What Japan’s Economic Disaster Means for Australia
10-04-2013 – Dr. Alex Cowie
Gold Bulls About to Win the War
9-04-2013 – Dr. Alex Cowie
A Better Inflation Bet Than Gold…Stock Market Investing
8-04-2013 – Kris Sayce
