If you invested a hundred dollars in the stock market at the beginning of January, it’s now worth around ninety five dollars and it only got that far because of a couple good days last week. What most investors noticed was not only that markets went down, that happens all the time, but the chaotic way the decline happened.
January’s historically a month the stock market does well—but not this year. Instead of a good, or even moderate month, we saw stocks plunge in gut-wrenching, multi-day, triple-digit bloodbaths. The up days in January were just as volatile the other direction in alternating cycles of boom and bust. There was little going on in the U.S. economy to account for the sudden selloffs. This time domestic markets were at the mercy of economic forces in far off lands.
What Goes Up Can Come Down – and Stay There
After six years of double-digit stock market gains, it was easy to get sucked into a complacency that led us to ignore multiple warning signs that the good times couldn’t last. Many learned the hard way why we repeatedly begged our readers to consider rebalancing to lock in gains from high flying stocks and increase the percentage of liquid hard assets and municipal bonds in their portfolio. So the real warning here is what the current volatility says about the markets of the future.
The China Syndrome?
There’s a lot being made of the slowdown of the Chinese economy but China alone wouldn’t be causing such precipitous volatility in global markets. The real root of the slowdown is that China is such a big consumer of commodities and, when China stops buying then smaller countries dependent on that commodity trade start to suffer. The next obvious question is why so many developing nations are dependent on international trade and to get that answer we have to go all the way back to the end of World War II.
We’re Looking at You, IMF
So many small countries are dependent on international trade in commodities because the world’s loan shark, which we call the International Monetary Fund, will only lend developing nations the money they need to build infrastructure if they also agree to focus on building international trade and, for most them, that means exporting commodities like oil, rubber, palm oil and food products. That’s been the IMF’s focus since the end of the Second World War and it was effective, for a while…
It Worked, Until it Didn’t
The IMF’s focus on international trade worked, although not always optimally for the U.S., until Chinese manufacturing slowed down last year and the U.S. dollar took off. That double whammy backed up and swatted the budget of nearly every developing nation on earth. Seventy years of pro-commodity monetary policy ran smack into a perfect storm of bad news for commodity prices.
The Vicious Circle
Now we’re stuck in a downward cycle of commodity prices that’s crippling the budgets of dozens of small nations that have become, or been made, dependent on commodities. They suddenly found themselves unable to make payments on the money they borrowed, so the IMF went to have a talk with them. The Fund will restructure their payments but only on IMF terms, which is always, you guessed it, more international trade. With the IMF pressuring small nations to do more of what’s not working, that drives commodity prices even lower in a vicious circle that keeps a sizable fraction of the earth’s population mired in poverty. Poor people don’t buy things and when people stop buying things, corporate profits take a nosedive.
It took the world seventy years to get where we are today and we’re not going to get out of it anytime soon. The IMF’s one-size-fits-all approach has left the developing world in a bind with no easy path to a more secure tomorrow. We’ve also put the problem in charge of coming up with the solution. In the meantime we’re all being dragged down by the weight of dozens of small countries struggling to make ends meet. That’s how we got where we are today and that’s why the destructive volatility we see today is going to be with us for a very long time.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.