Markets Meltdown

Japan and South Korea Face Emergencies

You’ve no doubt noticed the sea of red in stock and bond markets around the world today, extending and deepening the trend of the past two weeks. But, as I pointed out in my weekly market and economic outlook update today, there is no need for panic in the US. The root causes are not here.

The places where the panic is justified are Japan and South Korea. The leading Nikkei and KOSPI stock indexes closed down more than 12% and 8% today, respectively. This is followed by index futures price declines of more than 7% and 8%, respectively, for both indexes in after hours trading. Each is flirting with stock market declines of more than 30% and 25%, respectively, in less than a month.

Both countries have been trying to fight inflation, and are now in danger of having too much success. The BOJ and BOK need to take decisive action to stave off possible deep recessions and financial system instability. It is likely too late for forward guidance alone, as the rates of decline pose the strong possibility of a loss of credibility in ensuring stable growth.

The nominal shocks in these countries cause real shocks for the global economy, but are dwarfed by the nominal shocks, leading to a net nominal shock in most economies. If Japan and South Korea fix their problems, the increased demand on the dollar and other major currencies will relax, obviating the need for significant policy responses from other central banks. It is unlikely the Fed needs to take much action on the monetary policy front.

However, these twin crises in Asia, coupled with continued rising tensions with China, and even higher and rising tensions in the Middle East, not to mention the war in Ukraine, and rising political instability in many countries, potentially poses a confusing situation for central bankers. The possibility for policy errors may be growing. This is perhaps one reason for the VIX being at crisis levels.

Caution is warranted.

Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.