All over the world and one after another, economic miracles are turning to nightmares, stock markets are crashing, and governments are losing control.
I’ve recently been to Brazil and China. I’ll be in Russia next week. I talk frequently to friends in Western Europe, North Africa and South Asia. And I can tell you flatly:
- People are in shock, groping for answers, searching for someone to blame, often contemplating radical steps — either to rebel or to escape.
- The progression from boom to bust is taking place far more quickly than anyone dreamed possible just a few months ago.
- And it’s accelerating.
Moreover, it’s now more than just a canary in the coal mine for the U.S. economy; it’s starting to impact us more directly.
It’s reducing U.S. exports … cutting the foreign earnings of U.S.-based multinationals … raising the specter of a global recession … and beginning to spread fear to U.S. stock investors.
To see exactly how, let me take you on a whirlwind world tour.
Our first stop is …
Brazil. It’s the second-largest economy in the Americas, with a bigger GDP than Italy, India, Russia, Canada or Australia; and it’s also the emerging market suffering from the most perfect storm.
Brazil is where I went to high school, got married 46 years ago, and have visited at least that many times since. One side of our family in Brazil was very close to the former president and also knows the current one; the other side hates them both.
Regardless of political persuasion, however, all are in shock. No one expected Brazil’s economic decline to hit this hard and this fast.
At first, they thought it was just a passing phase, triggered mainly by a corruption scandal at Petrobras, the national oil giant caught red-handed in a national bribery network involving some of Brazil’s largest companies.
But then came sweeping federal investigations, dragnets and arrests of prominent CEOs. These, in turn, paralyzed new contracts for construction, forced massive layoffs and helped drag the whole economy down.
Still, no one dreamed that corruption and politics alone would be enough to do lasting economic damage, and they were right in this sense: There are other, even more damaging, forces at work.
- Crashing global commodity prices are gutting Brazil’s export revenues. Brazil’s currency, the real, is down by over a third this year alone.
- Foreign investment capital has dried up, while domestic capital has fled the country. And …
- Just last week, the country’s credit rating was downgraded to junk, catching investors by surprise, sending the currency into a nosedive, and threatening to deepen a recession that’s already Brazil’s worst recession in 25 years.
Biggest losers among U.S.-based multinationals: General Motors, ExxonMobil, Texaco, Cargill and Ford, plus a long list of others, including many of America’s largest banks.
Our second stop is …
Canada, America’s biggest trading partner in the world.
Quietly and without much fanfare, it has just slipped into an undeniable, clearly-defined recession — two consecutive quarters of outright economic contraction.
Moreover, the deterioration of Canada’s economy is not just a recent phenomenon. Over the past nine years, Canada’s ranking among all OECD countries has slipped across the board — down from 10th to 7th in terms of employment, from 7th to 12th in GDP per capita, and from 13th to 18th in household debt.
All these numbers — and more — are now the worst since the 2008 debt crisis. And with commodity markets — especially oil — still slumping, any hopes for a prompt recovery are sorely misplaced.
Mexico, the second largest importer of U.S. goods in the world, is just a quarter or two behind Canada, heading into a slump that could be equally deep, if not deeper.
Economic growth is slowing dramatically. Oil-intensive regions already in recession. The Mexican peso has plunged to 17 per dollar, its lowest level in modern history.
And those are just the near-term problems.
What’s more worrisome are long-term ills that are only made worse by recession. Three years ago, for example, more than half the population already lived in poverty. Now, their ranks have jumped by another 2 million!
In a small — but not atypical — town outside of the Federal District, there’s no running water, no electricity, no proper sewage. Children struggle to find food. But they’re not alone. The UN reports that 20 million of Mexico’s children live on less than $1 a day, which means that every second child in the country lives in poverty.
And all of this is even before Mexico follows Canada into recession!
I won’t list all the U.S. companies that do big business in Mexico. There are far too many.
France, the world’s 6th largest economy, is bigger than the combined economies of Switzerland, Saudi Arabia and South Korea. But …
Its megabanks, also among the largest in the world, are up to their ears in derivatives and bad debts.
Its total debt has soared to about 280 percent of GDP.
Its unemployment rate is stuck at 10.3%, just one-tenth of a percent from its highest level in nearly two decades.
And now, France’s entire economy has flat-lined, delivering zero growth and relapsing into what one economist calls “its role of sick man” in the eurozone.
Russia, by far the world’s biggest country in terms of land mass, is also the country with the least political will to escape its own, home-grown version of the Perfect Storm — Western sanctions, Russian import embargoes, crashing oil and gas prices, a collapsed currency, nose-diving stock prices, and worse.
Reason: All of this economic suffering and sacrifice are being widely promoted as nationalistic virtues — not only by the Kremlin, but also by the government-controlled press and government-organized social media.
Their pitch to Russian citizens: “This is great news! The pain you feel now is nothing compared to what we endured years past. And the pain we’re inflicting on the West is a lot worse than they’re causing us. We’re winning! Rejoice!”
Fanning this fervor, the Russian airwaves and Web are flooded with emotional testimonials by people in the West, bemoaning the impact of Russia’s embargo on Western imports … side by side with reports from enthusiastic Russian farmers, who are portrayed as doing good, and doing well, for the sake of Mother Russia.
The end result is an anomaly virtually unheard of in the West (and, with the obvious exception of North Korea, even in the East):
You have an economy sinking into depression, a stock market on its rear end, and a currency gutted by half or more. And yet, at the same time, you have a president whose approval rating is still an astronomical 72% (down a bit from its peak, but not by much).
What’s even more unusual is that, unlike almost every other country in the world struck by economic crisis, you have a central government in Russia that’s so thoroughly enjoying its popularity that it has done virtually nothing to counter the economic downtrend. In fact, if anything, Putin & Company are often more intent on doing precisely the opposite — launching new campaigns that, by accident or by design, perpetuate the economic crisis.
The biggest losers in the United States: Big oil, led by ExxonMobil, but also a host of others that had, until recently, boasted of their inroads into the Russian market.
China is also shooting itself in the foot, inadvertently taking steps to sabotage a recovery in its financial markets.
Hard to believe? Yes. But true? Absolutely! The New York Times explains it this way:
The police have been dropping in on investment firms and downloading their transaction records. Senior executives at China’s biggest investment bank have been arrested on suspicion of illegal trading. A business journalist has been detained and shown apologizing on national television for writing an article that could have hurt the market.
The Communist Party’s response to China’s months-long stock market crisis has been swift and forceful. … The authorities have imposed a range of extraordinary restrictions on the sale of stocks — and backed them with the full weight of a security apparatus usually more focused on political dissent than equity trades.
In the immediate term, all this may have slowed the Shanghai market’s biggest crash since the global financial crisis of 2008. But it’s also doing two more things:
First, it’s scaring away foreign capital. Who in his right mind would want to buy any stock on any stock exchange if he feared it was a one-way street — buying allowed, selling forbidden. And indeed, we already hear voices of fund managers with a stake in China who are either plotting an under-the-radar retreat or vowing never to go there in the first place.
Second, it’s creating even more serious doubts about the economy. “If Beijing is so willing to rig their stock market in full view, imagine what they could be doing to pump up their economy — and their economic stats — from behind the scenes!”
The big suspicion: Not only is the central government embarking on huge amounts of economic stimulus that costs them a fortune, but they’re also engaging in statistical jury-rigging that doesn’t cost them a penny — until, that is, the charade is unmasked.
The suspicions are so rampant, that few in the West now believe China’s estimate of 7% GDP growth is for real.
For all they know, it could be 5% or 4%, and soon, even an outright contraction. Moreover, they may not discover the truth for months or years.
In the meantime, major U.S. corporations with a lot to lose in China (Apple, Yum Brands, Intel, Boeing, Starbucks, Walmart, Tiffany, Western Union, Master Card and many others) are in the dark. They can’t be sure about what’s happened — let alone what’s going to happen.
Don’t underestimate the severity of these declines overseas.
Don’t underestimate how quickly they could spread.
And, most important, don’t ignore their potential impact on your investments right here in the United States.
Good luck and God bless!