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The
biggest question for the next several months for markets is what?
Now
that the S and P rallied over 60 pct since last March 2009, and pretty much
all other markets except housing and real estate have also rallied (anything
connected to financial markets that received the half of the several
$trillion of US and other central bank emergency money infusions beginning
big around March 2009) it begs the question when there will be a correction.
Or a crash.
There
is a hint in the above paragraph. Namely the US alone engineered about $1 to
$2 trillion of quantitative easing. That means that the US bought all US
mortgages by buying mortgage bonds for example. The US was the buyer of last
resort - for everything. Including foreign markets, without making a laundry
list of them.
The
BOE, Bank of England, also did likewise, and the BOJ-Bank of Japan has been
doing QE in all but name for 15 years now.
The
hint is that all of these banks have to abandon QE (monetizing markets by
buying anything in trouble) and this begins for the US end of March 2010.
That is for the US, England and Japan. Japan will resist this but is already
up against a sovereign debt wall with way, way too much debt at around 300pct
of their GDP. The danger level for that number is anything over 100 pct. The
US is reaching 100pct just around this year. Greece is at the level of over
100pct but is broke and has huge fiscal deficits… but the rest of the
West is already flirting with Greek like bond problems developing (trouble
brewing in world Sovereign bond markets).
In
any case, the end of this massive financial stimulus for markets is ending.
That which began in March 2009, is ending in March 2010. What goes up must
come down as they say…
China
too is tightening
China
also figures here. Two months ago China began tightening credit. Since with
their roughly $1 trillion of direct stimulus after the panic crash of world
markets and production after Fall 2008, which led to an incredible 30 pct
drop in Japanese and Chinese exports, China is now pulling that back. They raised
their bank reserve requirements which pulls money out from the lending
market, which has propelled financial and real estate bubbles there, and is
fueling inflation now.
And,
a big wild card is how will the markets react when China lets the Yuan rise about
5%, which is the scuttlebutt going around. That ties nicely with the
following theory I have:
China
readying for a major macro economic change
China
is preparing for a post US centric consumer economy, and is going to focus on
Asian and interregional trade with others like Asia, and resource countries
like Canada, Africa (good luck) and South America in places like Brazil. And
China is still making huge new long term energy deals with energy producing
countries like Iran, Saudi, Venezuela. And Africa of course, the Chinese are
buying everything they can there. Which won’t last unless they send in
Chinese armies to keep hold of their African projects, something already
happening in part.
But
all of these listed trends mean that the world of financial market props is
changing now to a ‘post crisis’ stage. And that will most
certainly lead to deleveraging markets again. One wonders how long the
markets will tolerate the US, England, Japan, and China tightening credit and
pulling out excessive liquidity (propping up markets) which tightening all
started roughly in the last two months.
Biggest
question right now
So
the biggest question is how will markets react when world QE ends (in this
phase) in end of March 2010, or rather after world QE has been being phased
out starting two months ago. I made note many times to subscribers that every
time China began its credit tightening, usually first by raising bank reserve
requirements, world markets tanked within roughly two months. We are now two
months after China announced raising bank reserve requirements to reign in
out of control lending there.
So,
aside from a potential Chinese Yuan revaluation of 5% and what that means (a
great deal) the first hurdle markets must jump is end of March and the first
month or two after. Will we see a massive world stock correction and a
commodity correction?
We
have seen this movie before two times. One was when China tightened before
Summer of 2008, and markets crashed. There also was similar tightening by
China before the 2007 stock crashes, again about several months before that
began and the SSEC crashed from its highs around 5000-6000 to around 3000
now.
China
monetary policy is markets’ focus
In
fact, what is very interesting is the rapidity of any market reactions to
China credit - literally instantaneous selling the moment it’s even
mentioned. Reminds me of how the markets reacted to anything the Fed did for
the last 50 years…
We
have some basic defensive strategies to cover these potential events - a
market crash and a possible Yuan revaluation. In any case we have made some
incredible calls for the last two years on the overall markets, calling huge
swings in the USD, currencies, gold and commodity markets at key times,
predicting trends that lasted 6 or more months out from our calls. There is a
chart showing several of the major ones we called in the last 2 years on our
site. Our newsletter is 44 issues a year with mid week email alerts.
We
are also going to raise our prices significantly very soon. If you wanted to
come in at present prices, now is the time…
We
invite you to stop by and have a look.
Chris Laird
Prudent
Squirrel
Chris Laird has
been an Oracle systems engineer, database administrator, and math teacher. He
has a BS in mathematics from UCLA and is a certified Oracle database
administrator. He has been an avid follower of financial news since
childhood. His father is Jere Laird, former business editor of KNX news AM
1070, Los Angeles (ret). He has grown up immersed in financial news. His
Grandmother was Alice Widener, publisher of USA magazine in the 60?s to 80?s,
a newsletter that covered many of the topics you find today at the preeminent
gold sites. Chris is the publisher of the Prudent Squirrel
newsletter,
an economic and gold commentary.
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