Sharemarkets dip, but the global economy keeps getting stronger: Kohler

Yesterday’s 5.8% Shanghai shellacking triggered a global stockmarket sell-off, including a 2.4% Wall Street wallop this morning.

Now I’m peering at a five-year chart of the Shanghai Composite index, looking for bubbles: 2650 to 6000 from January to October 2007, down in a straight line to 1700 in November 2008, up in a straight line to 3500 earlier this month and then – whoops – down vertically to 2870 last night.

Is 3500 a bubble 18 months after 6000? Hmm. Chinese stocks have had a pretty good run this year – up 90% to 4 August, and still up 58% after a 17% correction so far.

The run up was caused by combination of being oversold last year in reaction to the drop in world trade and the immense fiscal and monetary stimulus going on in China. Liquidity is given, and now liquidity is taken away – last month the Peoples’ Bank ordered the largest commercial banks to slow down their lending, so some of them have done that, a bit.

The fundamentals, meanwhile, continue to improve. Yesterday Citigroup’s Beijing-based economist, Ken Peng, also lifted his growth forecast for China from 8.2% to 8.7% in 2009 and from 8.8% to 9.8% in 2010. He says China’s growth outlook is showing more signs of durability.

And also yesterday Japan joined France and Germany in pulling out of recession.

In the United States financial conditions are continuing to improve and there is little doubt the Federal Reserve’s Open Market Committee is gathering at the exit door, looking for a way to get out of the monetary stimulus, because it worked.

Later this week they will gather at Jackson Hole Wyoming for the annual central bank conference, where the tone will be a rather more reflective and relaxed than the previous two conferences that were held in the midst of panic in August 2007 and August 2008.

There is little doubt that global recovery is underway. However, US consumers have not yet joined the party because 32.2% of all mortgaged homes in the US are still in negative equity. In Nevada it’s 66%, Arizona 51%. They don’t much feel like spending, and who can blame them.

As a result the US might post another negative GDP quarter, but it will be touch and go.

But there is far more chance of a V than a W as the global economy beetles out of recession. The way things look now, a double dip could only result from a sudden rise in US foreclosures, a deepening of its housing and banking recession and a collapse in the US dollar.

That is a possibility with the Obama Administration becoming mired in an appalling health care reform debate as it struggles with a most incredible blowout in the budget deficit, but the return to health of the US financial sector is the key offsetting factor.

Share prices and the inventory cycle have been surprising on the upside on the way out of recession, as usual, and share prices got well ahead of the game and investors are now locking in some profits, also as usual.

The best headline in the world about this sharemarket correction today is in Business Spectator: “Wall Street sinks on correction worries”.

That’s exactly it! It corrected because it was worried about a correction.

This article first appeared on Business Spectator