Two Crises that Hopefully Won’t Derail the Global Economic Recovery Underway

07.09.2015

By Jeff Karan, Managing Partner

The markets got nervous this week for two primary reasons, the ongoing crisis in Greece and the swoon in the Chinese stock market (particularly Beijing’s inability to brake its “collapse.”)

While both events are important, it’s doubtful the economic impact of either will trigger a global economic decline or a serious slowdown in the US.

If Greece doesn’t make serious concessions regarding its pension plan and built in budget imbalances, the Eurozone will most likely tilt towards letting them exit. While it will impose even more humanitarian pain on Greek society, it’s hard to see how it spreads elsewhere. Greece has a population of 11 million people in a Eurozone of 300 million plus, and represents less than 3% of that region’s overall GDP. While Greek banks will be under enormous pressure if the ECB cuts off the spigot, the ECB will simultaneously ensure there is ample liquidity everywhere else to avoid a contagion effect. Greece will suffer – the Eurozone probably not as the banking sector has been recapitalized and other countries have made more substantive reforms.

The other major concern this week is a Chinese stock market that is swooning. But what is really happening in China? While their market is down 30% in a short several months, including a 6% drop today, most media commentators are not mentioning the fact that the Shanghai index was up a full 100% during the last 12 months leading up to this “collapse.” Is this something to panic over? Probably not, unless it causes civil unrest in China, political upheaval, or a clamp down on prior free market reforms (all of which are possible). The politics are worth watching as much as market action, but the damage may be best contained if reality returns to the market, not a return to prior inflated prices. A fall of another 30%, while scary, would bring the Chinese market back in line with the rest of the world’s major stock markets.

Here is a one year chart of the Shanghai Index compared to the S&P Index for perspective:

ShanghaiIndex