The Great Recession of 2008 was supposed to abate by "2010, maybe 2011," said the pundits. Some were more pessimistic, adding a few more years. Here we are now seven years later and the global economy has not recovered. By some metrics, such as income inequality, we are actually far worse off. So, what will 2016 hold for the global economy and the region, and where should you put your money?
The Shanghai and Shenzhen indexes rung in the New Year with major crashes in both stock exchanges. The bourses were down 5 percent on news of continued malaise in the manufacturing sector. The lifeblood of the Chinese economy, manufacturing, has put up negative growth numbers for the last five months. The 5 percent drop triggered circuit breakers that halted trading for 15 minutes. Within minutes of trading resuming, the markets slid another 2 percent, which setoff the second circuit breakers suspending trading for the day. All told, markets were down 7 percent, wiping off nearly half a trillion dollars in market capitalizations.
During the major market crash this summer, Chinese markets slid nearly 40 percent before being propped up by various measures taken by the government. Short-selling and insider selling were largely prohibited in a move to artificially keep the markets afloat. Some of the restrictions on insider selling are set to be removed later this week. Households make up the vast majority of trading activity on the national stock exchanges, and many may have preemptively dumped their holdings in anticipation of further sell-offs later this week and next.
How does the mini-crash in China on Monday impact global investors? China is second only to the United States in terms of the breadth and depth of its stock exchanges; therefore, a major crash not only impacts institutions that trade the bourses but will most hurt domestic Chinese traders. If individuals incur huge losses on the stock market, confidence in exchanges will be tarnished for a generation. Even worse for the short-term, spending power of individuals will be diminished. With consumer consumption a growing part of China's overall economy, the importance of its discretionary spending ability cannot be overstated. If cash in pockets dry-up, so too will spending and balance sheets of retailers. This will further put pressure on labor markets, and a vicious cycle will take hold. Ironically, the ability of the one-party government to make decisive decisions will help shore up markets in the short-run.
As expected, the interconnectivity of the global economy means what's bad for China is also bad for everyone else. If European retailers struggle in China, Europe will be affected. If Chinese manufacturers are unable to afford European high-tech machinery, again, Europe will take a hit. Predictably, European bourses followed China's lead falling across the board. The German DAX was down over 4 percent in Monday afternoon trading while the British FTSE and French CAC were off over 2.5 percent. With the European Central Bank already on edge and doing its utmost to shore up confidence in European markets and push labor markets back to full-employment, a Chinese crisis couldn't come at a worse time.
American and Japanese markets also appear to be impacted by the Chinese crash, with the Nikkei already down over 3 percent near the close and U.S. markets poised to lose over one 1 percent at the open on Wall Street. The weekend news out of the Middle East, Saudi Arabia cutting off diplomatic ties with Iran, couldn't come at a worse time for the United States. U.S. President Barack Obama has anticipated removing some sanctions on Iran as part of a nuclear disarmament deal and normalizing relations with Iran just as the Saudi's appear to have cut them off. A united front against DAESH appears to be out of reach with this latest development, which is bad for everyone. A continued slide in oil prices will only continue to hurt Russia and other oil exporters, and add even more uncertainty to an already uncertain economic climate.
With Asia hurting, Europe unable to return to pre-2008 levels and the United States only weeks past its first rate hike in a decade, the global economy appears to be on track for another major crisis. Which asset should you be invested in during a crisis? The simple answer is cash. Invest in cash denominated in the currency you have debt in. If you have no debt, a basket of currencies including your national currency would be best. Stay away from equity markets unless you have a multi-year time horizon and debt markets unless you plan to hold to maturity. Here's to a fruitful 2016 with health and happiness for all.