Jan. 21--With Wall Street in full ugly retreat midday Wednesday, a panel of experts on CNBC tried to get a handle on things, uttering some scary phrases like "full-blown deleveraging spiral" to describe turmoil in the global economy.
With each sentence, it seemed, the Dow Jones industrial average lost another 10 points. Down 517, down 527.
But if you hung in there and listened past the fear and jargon, you also heard enough from the experts to be reminded of some salient facts: The U.S. economy continues to add jobs while the service sector expands. U.S. banks are strong, the housing market's in recovery, weak oil prices benefit all of us by driving down gasoline prices. In a way, said one of the experts, the gargantuan sell-off in New York is ... an overreaction to problems elsewhere.
No one segment on one financial news channel will sink or save the markets, but wouldn't you know it? Soon the Dow was on a noticeable recovery trajectory. Down 500, down 400, down 300. The Dow closed down about 250 points. The price of oil was down again too, hitting its lowest level in more than a decade.
The market's collective wisdom Wednesday served as a reminder that the pain and fear we're seeing unleashed is not primarily attributable to what's happening in the U.S. economy. Unlike, say, the Great Recession of the last decade, triggered by American banks making bad bets on mortgages, this is a mess that's global in nature, due in large part to the slowdown in China but also in Russia, Brazil and other so-called emerging markets. On Tuesday, the International Monetary Fund trimmed its expectation for global growth to 3.4 percent for the year, saying the formerly highflying economies of the developing world face a new reality of slower growth.
China this week reported its lowest annual growth rate in 25 years -- 6.9 percent in 2015 -- though you'd be smart to chop down that number because of China's notoriously unreliable statistical reporting. China's slowdown is wreaking havoc globally because it's such a key engine of growth. Plummeting stocks, low oil and copper prices, a strengthening dollar -- that's due to China.
The second beat, which you're hearing more about, is concern over how China and the rest of the developing world are going to be able to handle all the debt they took on in recent years to fuel the growth they thought was guaranteed. According to The Wall Street Journal, foreign banks have lent $3.6 trillion to companies in emerging markets based on growth expectations that haven't panned out. What's going to happen to all that debt? The IMF said it's worried, and so were the TV experts. One warned of the international "deleveraging spiral," conjuring a panicked future where credit goes dry and assets are dumped.
There's a dizzying amount to think through here. But in the globalized economy there is now a direct connection between your 401(k) and the rest of the world, even if you think you're only, or mostly, invested in U.S. blue chips. When, for example, an Indonesian mobile phone retailer called PT Trikomsel Oke Tbk or Chinese steelmaker Sinosteel Corp. borrows too much, you can trace the impact through the global economy back to our tottering markets.
That's the contagion effect we saw in action Wednesday. We wish we could predict with some certainty whether it will now diminish or intensify.
You can find other direct connections between economic events overseas and ramifications here. The U.S. energy industry is exposed to the unexpectedly low demand for oil worldwide, for example, and so are banks that lend to those companies. A prolonged stock market decline will make Americans feel poorer, and they will spend less. Certainly the turmoil is far from over.
The key for U.S. employers, job-seekers, consumers and investors is to keep track of all the moving pieces, including those in the U.S. that might still be humming.
