The market's violent distress signal

A 19 per cent fall in the Australian sharemarket from its April peak suggests there will be significant implications for the real economy - and further pain ahead.

The Australian sharemarket fall today has taken the total decline since the peak on April 11 to 19 per cent. Over the weekend we were all bombarded by so-called experts who said nothing was wrong and it was just the market.

That would be right if the fall was under, say, 10 per cent. But a 19 per cent fall means something is wrong. I have been through these sorts of falls before and, while there are exceptions, they almost always have significant implications for the real economy.

That's why to understand the fall readers need to re-visit my last three comments because this sort of message is not in our newspapers or television commentaries.

The first commentary was on Thursday (Forget rate rises... now comes the employment shock, August 4). I am not sure what the official employment figures will show this week because the statistician is often behind, but the latest Roy Morgan figures show a significant fall in employment. That was before the latest sharemarket crash so it will accelerate and lead to high bank problem loans.

As soon as the market cracked, I alerted readers that big falls in the market usually bring on a significant downturn in the real economy (Black Friday for the markets, August 5).

The market has since fallen further, so be wary about paying top dollar for property. The only event that can hold important sections of our property market is significant Chinese buying.

And finally China is deeply involved in the US humiliation (China sounds a dollar warning bell, August 8).

Much of the recent global speculation has been on the back of low US interest rates. China will start to turn the screw on the delinquent Americans. The Chinese are long-term players and they may not immediately make it tougher for the US to borrow, but they are clearly signalling their intentions.

With tough remarks coming out of China, Wall Street is in for a hard time over the next few years and the US economy will be at best subdued. It could have periods of recession. Europe will be worse.

China of course is in the middle of slowing itself down to counter inflation. My guess is that the US and European economies will do the slowing down.