It ain't over till the Fed Lady sings: Insana

Early in my career, several great market observers, from my late colleague Ed Hart at FNN to market technician John Bollinger to NYSE floor legend Art Cashin, all taught me the importance of listening to "the message of the markets."

Markets are discounting mechanisms. In other words, markets often anticipate future economic trends rather than simply react to them. There is a large body of evidence to support this belief system, despite some comments to the contrary.

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

Nobel Prize-winning economist Paul Samuelson once quipped that, "the stock market has forecast nine of the last five recessions." And it's true that single market moves can often be misleading, as a correction in stocks doesn't always presage a correction in the economy.

But when taken together, markets can be very useful guides in telling us where the domestic, and global, economy is about to go, especially when they are all sending the same signal at the same time.

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Whether there are buying opportunities in the wake of this particular stock market swoon, global stock, bond and commodity markets are flashing a yellow, if not red, warning signal about the prospects for future growth and the re-emergent threat of deflation.

In addition to bear market declines in China and Hong Kong, as well as other emerging markets, global interest rates have again plunged, a sign of lower expectations for both growth and inflation. Economically sensitive commodity prices have crashed, from oil to copper and from soybeans to steel, signaling the rising risk of global recession.

Credit spreads are widening significantly, often an indicator of stress in a financial system, if not here at home, then elsewhere, especially in China.

Outflows from emerging markets are said to total $1 trillion, driving down currencies in those countries and causing significant distress in their financial markets.

That is true from China to Russia and from Mexico to Malaysia. Those emerging markets also dependent on oil revenues are at even greater risk of sliding down an oily slope.

The markets are acting like they did before significant global setbacks, as with the 1997 Asian currency crisis; Russia's debt default in 1998, and subsequent collapse of Long Term Capital Management; and like they did in Japan in 1989; and, to a certain extent, especially in China, like they did before our market meltdowns in 2000 and 2008.

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Having said that, the U.S. is holding up better than the rest of the world. It would seem, then, that this impending crisis is not made in America.

My biggest worry is not about the U.S. markets, nor its economy. I worry about an implosion in China, and the attendant contagion risk it represents. China's main manufacturing gauge touched its lowest level in 77 months, as reported today.

China's policymakers, unlike in prior slowdowns, cannot simply build their way out of this slump. In fact, while many in America worry about the Fed having no tools left to fight the next crisis, or recession, that is even more true in China.

In a real recession, infrastructure spending in China would be redundant. Currency devaluation may have less of an impact than in prior cycles, and large-scale bond buying programs would simply move one form of government debt from municipalities and state-owned enterprises to the central government's balance sheet.

That is a very different process than the Fed's Quantitative Easing. That effort moved private sector liabilities to the Fed, allowing insolvent banks, and troubled corporations, to refinance and recapitalize. China's heavily indebted entities are already controlled by Beijing, so China is only shifting government liabilities around, with no positive impact on China's economy.

In short, China is in deep trouble. That comes at a time when Japan is stalling again. Russia is mired in recession, as is Brazil, and the rest of the western world looks wobbly.

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In the end, I think the Fed has to hold off on raising rates. The U.S. becomes the ultimate beneficiary of the world's travails, as it becomes increasingly energy self-sufficient, regains its cost-competitive advantage in manufacturing, continues to innovate and builds on its demographic strengths.

Still, it is not yet time to buy stocks. While we may be approaching the capitulation phase of the sell-off, it won't happen until the Fed cries uncle.

In the meantime, a domestic secular bull market in stocks, and the continuation of the U.S. economic recovery, such as it is, may have to endure the pain of transitioning from one that is world fed to one that is currently world bled.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He is also editor of "Insana's Market Intellgence," available at Follow him on Twitter @rinsana.