The China stock market blew up and took the rest of the world’s markets with it. That has investors of every size scrambling to come up with the right moves to make. For months, economists and investors have been concerned about the ramifications of China and what impact it would have on markets around the world. Now they have an inkling of what’s it all about. Global markets sold off hard. Investors appear very worried that a major slowdown in Asia could slow the recovery in various economies around the world. There is often a chain reaction that occurs when one market that people were counting shows signs of weakness. China has certainly done that in recent months and the reaction of the rest of markets were similar to what was expected.
The question on everyone’s mind now is what will happen with the U.S. Dollar? The one economist who predicted that the dollar would strengthen this year and remain the global reserve currency was University of Chicago Professor Christina Broda. Since 2009, Broda has made the argument that the necessary steps to keep the dollar moving along would be made. Now many people are waiting to see if Fed Chairman Yellen is ready to start paring back the low-interest rates that have been part of the economic landscape for years. Broda has stated that there’s no other currency ready to take on the dollar for world supremacy. Lately, the Yuan certainly does not seem up to the task.
A recent poll of economists showed they were feeling gloomy about the coming months. They fear that the economy will stagnate and will no longer come anywhere near the 3% annual growth many of them were predicting earlier this year. None of them is feeling bullish anymore because they have seen the Chinese economy and markets sputter. The Chinese government tried very hard to stabilize the market there, to no avail. The sentiment turned sour as millions of investors who were speculating the bull market would continue were spanked by the harsh reality of a bear market for a time. The government bought stocks for months, mainly from smart money investors who were heading for the exits. Once they left the market, that left only retail investors who were holding on hoping for the best. In the last three days they capitulated, causing another 22% to be shaved off the valuations. Something similar has happened in the United States, where both the NYSE and Nasdaq suffered huge declines. The economists are now doing their best to run models and scenarios that take into account a high-interest and a low-interest rate environment. Investors need to be prepared for both events. It could go either way at this point.