Why People Are Frightened Of The Stock Market

Good Morning Everyone:

      We are seeing another selloff with shares dropping in price. What's going on? Employment numbers are great. Company profits are great. The housing market is great. Fuel prices drop daily. So why is everyone scared?

      The simple answer is two-pronged. On one side you have dropping oil prices that are cutting revenues at major oil companies and in certain states that depend on selling oil for a big part of their revenues (Russia, Saudi Arabia, Azerbaijan, Brasil, Canada, Venezuela,etc) When times were good in the oil market, these giant oil companies and foreign governments borrowed trillions of dollars. Banks and big investment funds were literally "tripping over their shoe laces" to hand money to these entities. Now there is the serious possibility of major defaults on these loans made in good times. This could mean huge financial losses that could threaten the very existence of some financial institutions and investment funds.   

       The other prong of the problem is China. Its erratic stock markets are just a part of the problem. The other part is China's huge $28 trillion dollar debt.(Please see below.) If there was a major default on the huge debt it would have the same effect as a a major default in the oil sector.

       The astute investors and money managers look out to the edge of the horizon and beyond. They see the real possibility of a "Category 5 storm" hitting us. I do not frighten easily. I am frightened now.

Bernanke: Don't Worry, China's $28 Trillion Debt is an "Internal Problem"

$28 Trillion "Internal Problem"

The blue ribbon award for ridiculous comment of the day goes to Ben Bernanke who dismissed China's $28 trillion debt pile as an "internal problem" only.

This revelation came from the Asian Financial Forum held in Hong Kong where Bernanke Downplayed China Impact on World Economy. 

 "I don't think China's economic slowdown is that severe to threaten the global economy," said Bernanke at the Asian Financial Forum held in Hong Kong.

Bernanke argued that the global economy was more troubled by a global savings glut, which had long been a drag on investments.

Bernanke also said the $28 trillion debt pile facing China was an "internal" problem, given the majority of the borrowings was issued in local currency. According to consultancy McKinsey & Co., government, corporate, and household debt in China had already hit 282% of the country's gross domestic product as of mid-2014.

Bernanke said the correlation between different markets is higher than that between markets and the economy. He pointed out that worldwide market selloffs in times of distress was natural due to global asset allocations. "The U.S. and China are not as closely tied as the market thinks," Bernanke said.

Contrary to Bernanke's views on the global impact of a Chinese slowdown, the IMF said in its latest World Economic Outlook Update released on Tuesday that "a sharper-than expected slowdown in China" was a significant risk that would bring "international spillovers through trade, commodity prices, and waning confidence."

Savings Glut Question

Actually, I have to ask: Which is more ridiculous: Dismissing $28 trillion debt as an "internal problem" or proposing $28 trillion debt is indicative of a "savings glut"?

Mike "Mish" Shedlock

       

Read more at http://globaleconomicanalysis.blogspot.com/2016/01/bernanke-dont-worry-chinas-28-trillion.html#cEbs8T6KDkkJVeEh.99