Is The End Nigh?

Stock Markets around the world suffered huge falls yesterday. All triggered by a near 10% fall in the Shanghai Stock Market.

The falls were so rapid that the traders were unable to complete deals yesterday, meaning that the trades will have to be done today and so the markets will suffer equally sharp falls today.

Will this trigger a downturn? I think it might, as all the ingredients are there for a slowdown in the world economy. Even the venerable Alan Greenspan said only on Monday that the US was in for a recession. When the US has a recession, so does most of the world.

The imbalance of the carry trade (this is the rest of the world borrowing from Japan at 0.5% interest rates) has helped to boost markets, but the position has to be 'unwound' in the long term as it boosts excessive risk taking. In the US and UK the asset bubble caused by the cheap money, in houses, equities, minerals and even money (in the form of consumer credit lending) in fact in almost everything, has helped maintain a frothy economy despite many of the fundamentals being wrong. For example, the high UK tax burden should have held our economy back recently, the carry trade explains why not, along with cheap goods for China that it finances which hold down our inflation.

If the Chinese Government does intervene more in its burgeoning economy then this trend will last. In some ways to get the pain done now in a short slowdown is better than letting it carry on for another year.

However, if you have investments in ISA's and other liquid assets, think about doing something. When the markets collapse if you sit still you lose the most. Think about switching to cash or defensive stocks if you can.