Danny Vinik recounts yesterday’s worrying economic news:
Wednesday was an ugly day for the global economy. British and German stocks each fell around 3 percent. Greek stocks fell 6 percent. (That’s huge.) In the U.S., a trifecta of economic indicators—retail sales, the producer’s price index, and a manufacturing report—were all disappointing. That sparked an early morning selloff here with investors fleeing into safe-assets like U.S. Treasuries. The interest rate on the 10-year-bond hit a low of 1.86 percent, a drop of more than 16 percent. (Again, that’s really big.) Equity markets closed down around 1 percent and U.S. Treasuries rebounded, closing the day around 3 percent.
This volatility has been a feature of the market during the past few weeks and is a signal that something is not right with the global economy.
The sell-off has continued today. Yglesias is concerned:
On Tuesday, the Eurozone reported that industrial production in Europe had fallen 1.9 percent over the past year. Even the German economy is struggling, leading to fears that the Eurozone will fall into a third post-crisis recession. Since the Eurozone never addressed the underlying problems that led to its last crisis, a new European downturn could plunge the world into another round of big financial scares.
The difference is that this time around the Chinese economy is also slowing, as is Russia’s, as is Brazil’s. It’s basically bad news everywhere.
Annie Lowrey asks if the problem is Ebola:
At least right now, Ebola poses little direct risk to the global economy. It is the fear of Ebola — a fear that the virus might reduce travel, hurt industry, slash trade, or just foment uncertainty — that seems to be rattling the markets.
It’s been engineered by the monetary scientists at the Fed, who’ve pumped $4 trillion into the economy since 2009 in an attempt to strengthen an economy that is fundamentally not as strong as it looks. Despite the Fed’s best efforts (and I agree that they needed to do something, especially in the beginning), the real economy simply hasn’t caught up to the markets. Unemployment has ticked down, but wages still haven’t ticked up. It’s no accident that weak retail sales in the U.S. were one of the economic indicators that triggered the sell-off. As I’ve said many times before, you can’t have a sustainable recovery, one markets can really believe in, until you have the majority of the population with more money in their pockets.
The reality is that this hasn’t happened in the last few years, and for many people, decades (the average male worker today makes less in real terms than he did in the early 1970s).
Matt O’Brian’s bottom line:
[T]he global economy still hasn’t recovered from the financial crisis. And this time, policymakers don’t look as ready to ride to the rescue. The Federal Reserve is about to finish winding down its bond-buying program and is beginning to talk about when to raise rates. The European Central Bank is debating whether it should do too little too late or too late too little about Europe’s lost decade. And China’s central bank is reluctant to open its monetary spigots any further for fear of fueling an even bigger bubble. This means that the world’s central banks are all either pulling back or not pushing ahead despite weak growth. And that’s why inflation is disappearing everywhere.
Leonhardt’s explanation is simpler:
There are many reasons stocks are falling, from the worries about the condition of the global economy to the unknowable forces that often cause market fluctuations. But beyond those immediate factors, there is also the simple fact that stocks are expensive.
When stocks are expensive — relative to their earnings — they have less margin for error. Small pieces of bad news have the potential to make investors more anxious, because current prices are based on a relatively optimistic view of the world. Such optimism can crumble quickly.
The Dish 