Salient to Investors:

More and more analysts are pointing to problems in China and other markets as posing a real threat to the American economy.

Raoul Pal at the Global Macro Investor said the global GDP pie is shrinking and cites the dollar’s upward move against nearly all emerging-market currencies. In past emerging-market booms and busts the party always ends when the dollar takes off, and loans in relatively cheap dollars that financed real estate and consumption booms are no longer available and so growth slowed. Viz Latin America in the 1980s, Southeast Asia in the 1990s.

Merrill Lynch said that for the year through August 19, the worst-performing investments in dollar terms were Brazilian equities -45%, Russian bonds -43%, Indonesian equities -26%, Turkish and Korean equities – 25%, and Mexican equities -22% versus US equities +8.7%: all driven by the gradual slowdown in the Chinese economy.

4 out of 5 of the world’s largest banks are Chinese according to their 2014 balance sheets. McKinsey estimates the Chinese debt ratio at 280+% of GDP.

Albert Edwards at Société Générale said:

  • China’s naked support of its stock market bubble confirms that the Chinese growth engine was stopping: once you encourage an equity bubble, it will collapse.
  • The Japanese yen’s sharp drop against the dollar in autumn 2014 was an alarm bell because Japanese exports compete aggressively with currencies in Thailand and Korea, and so a precursor to the Chinese currency move. One of the causes of the Asian emerging market crisis in 1997 was ending their currency pegs with the yen.

Jeffrey Sherman at DoubleLine said:

  • The spike in junk bond yields last summer as equities rose was a warning sign.
  • Given slow growth in China, the outlook for growth in the US is extremely fragile and not in a good position to survive an increase in interest rates.

David A. Stockman said:

  • China can now manufacture 1.1 billion tons of steel, almost twice domestic demand and versus 100 million tons in the late 1990s.
  • Iron ore is the canary in the steel mine, signalling the violence of the global deflation that is underway. The price correction to just under $100 a ton creates problems for big iron ore-producing countries like Australia.

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