Investors have finally realised the US is struggling – and now it’s all up to China: Gottliebsen

Last night’s fall on Wall Street was significant because the market was reacting to information that we already knew. In other words, while the optimistic analysts in New York might have dreamed there was going to be some miraculous US recovery, anyone who looked at what was happening around the country knew recovery had to be a slow process.

You can’t have rapid recoveries when the engine room of US growth, the American consumer, is bleeding because of huge house price falls and about a fifth of them are underemployed–more than twice the official jobless figure.

In the case of Europe there are good signs from Germany, and even in the UK there is some good news, but the overall situation is tough. For the moment there is joy because we have avoided a sovereign debt default. But demand in Europe is not going to drive significant growth.

So it’s all down to China and Asia. Rampant bulls like the Australian Treasury are saying China will grow at 9.5% or above. But my people on the ground in China say the Chinese want to slow it down and that growth rates are likely to fall below 9%. As long as it does not fall below 8% the Chinese can handle the social implications of the slowdown.

If that happens in China then it’s good longer term news because it means a China bubble has been avoided.

When the Dow index was approaching its August peak of 10,698 I pointed out that while US and European economies were not booming, they are making progress and although China is slipping, the Chinese government seems to have the situation under control. If share markets had kept rising it would have helped a US turnaround. Now we find that as the official figures confirm what we knew close to the peak (ie. slow progress), the share market tanks as if it suddenly understands what is happening.

If this fall continues then it will confirm what I originally feared – that the rally is a product of the enormous amounts of money on the sidelines. As I pointed out last month before this latest share rise, the global mutual funds were overweight in cash by $US1.5 trillion, while US banks have $1.18 trillion in the Federal Reserve. That money receives almost no return. Most was simply being stored in cash because of fear of a double-dip recession, or something worse – another crisis in the global banking system. When the rally starts many of those on the sidelines fear they are going to miss out and they plunge in.

If our markets keep falling as the news confirms what the market should have known, then we have clearly been experiencing a rally based on cashed up people jumping in. But if the markets were to steady in the face of the slow growth confirmations then that’s better news.

The Dow index rose about 1,000 points between July 3 and August 10 – a rise of just over 10%. In two days it has lost almost 30% of that rise. This is a traders market.

This article first appeared on Business Spectator.