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In the U.S., interest rates have been artificially low since the dotcom bust of 2000, when the U.S. Federal Reserve pushed rates down from 6.75 per cent to 1.75 per cent within 12 months. That set off the U.S. housing bubble which burst in 2008. That led to another round of rate cuts, creating a six year uninterrupted boom in stocks which has just collapsed. So here we are.
A whiff of a slowdown in China and things have come apart.
One of the big ironies is that China’s growth was supposed to carry us along by creating demand for our raw materials. We pretended that their economy and stock markets were mature. We overlooked the fact that a one-party, Communist state with a veneer of free market capitalism does not have the same rule of law, openness and transparency we take for granted.
Such things as arresting bloggers for spreading rumours, the government says caused the market collapse. Or at the height of the selloff, saying local governments can now use their pensioners’ retirement funds to invest in stocks. Measures that seem more aimed at showing that the government is all powerful have shown the opposite.
In the U.S., six years of near zero interest rates and an experiment that created billions of dollars out of thin air, gave investors the message the market is risk-free. American share prices rose accordingly, rising 80 per cent between January 2009 and Wednesday. Now the game of chicken is when will rates rise.
The U.S. economy is saying the time is now. Growth was 3.7 per cent in the second quarter. The labour market is tightening and inflation has been slightly higher in each of the last four months. The sensible thing to do would be to raise interest rates, however slightly, if only to send a message and stop another bubble from building.
Here at home, Statistics Canada says consumers spending pulled Canada out of a technical recession. The 75-cent (U.S.) dollar is at a levels not seen in a decade, which will mean inflationary pressure for imported food and all forms of manufactured goods we buy.
This is a market correction of significant proportions. It may be short and sharp, or it may be long and lingering depending on how the real economy reacts. It may be tough to take the gyrations, but what it does do is set the stage for the next big rise.
Take the long view
<bullet> There are safer ways to invest in China than its stock markets. Multinationals that do business there have financial statements you can read and understand. For example, CAE sells flight simulators and has pilot training centres there. Bombardier has been selling transportation equipment in China for 50 years. Dorel Industries bought two Chinese companies last year that make furniture for kids.
More columns by Adam Mayers