A rising stock market, like a rising tide, can cover a multitude of interesting
and/or scary things. If the finance guys who really know what's going on are
buying, then the disturbing stories that lead each evening's news must be manageable.
And we, in general, must be okay.
But let the market fall a bit and those headlines suddenly begin to seem both
oppressive and really, really numerous. And maybe we're not okay after all.
To take just a few of the issues that, in the wake of the recent equity correction,
now loom large:
Islamic State, the tiny band of religious crazies that the US armed
to do its bidding in the Syrian civil war is now threatening
to take Baghdad, capital of Iraq and home to a US embassy that will live
forever in the annals of hubristic excess. Actually a small, self-contained
city, the embassy contains all kinds of sensitive equipment, documents and
personnel, and will be defended with (thousands of) boots on the ground if
an Islamic State victory appears imminent -- which it now seems to be. In other
words, we're getting ready to dump another trillion or so dollars into the
hole where we previously dumped two trillion with nothing to show for it but
chaos.
Ebola, a nasty virus that was previously polite enough to stay in Africa,
has escaped and is now touring Europe and the US. Either it has mutated to
become more communicable or the West's protocols for dealing with it are inadequate.
Either way, there is now talk of the disease breaking free and causing a First
World pandemic. See Ebola
pandemic spreading across Europe is 'unavoidable,' WHO warns.
The
strong dollar, meanwhile, has had the same effect on the world
as would higher US interest rates, slowing growth and causing hot money
to leave emerging markets and pour into US Treasuries. So while everyone
is waiting for the Fed to raise interest rates and court the traditional "taper
tantrum" liquidity crisis, the foreign exchange markets have done the heavy
lifting already. See Why a
strong dollar is scarier than taper tantrum.
Japan and Europe are dropping into recessions that could easily become
system-threatening depressions. While US stocks were rising it was possible
to view America as an island of stability in a chaotic world. But when US stocks
start to fall it's much easier to envision an interconnected world where everyone
feels everyone else's pain. Which is the accurate viewpoint, because who will
buy our stuff -- including the bonds that finance our deficits -- if the other
major economies grind to a halt?
Junk bonds, typically a canary in the financial-bubble coal mine, began
selling off in September, just as the dollar started to spike. This was
also easy to ignore while equity prices were rising, but now looks like the
first of many dominoes to fall in a financial panic.
And it's October! All of the above happening simultaneously would be
scary anytime, but coming in the month when some of the most dramatic stock
market crashes have for some reason occurred, this must feel like deja vu all
over again for folks with a sense of financial history.
It's impossible, of course, know whether something is a crisis until it becomes
one. So this might turn out to be nothing more than a hic-up in the permanent
new normal of ever-rising financial asset prices. We'll know soon enough.
