The Great Depression Online

Great Depression Online Archive Issue:

A Warning Shot from China

Great Depression Online
Long Beach, CA
May 07, 2010

Inside This Issue You Will Discover…

*** Give It Time
*** China Running Out of Steam
*** A Warning Shot from China
*** And More

Give It Time

What a joker these markets are.  Just when we thought Treasury yields could only go up…something completely and utterly unexpected happened.  They didn’t go up; they went down.  In fact, they went down a lot.

On Tuesday, 10-Year Treasury yields fell from 3.70 to 3.61 percent.  On Wednesday, they fell to 3.55 percent…the lowest they’ve been all year.  By Thursday they skidded to 3.40. 

All along the way stocks got clobbered too.  Then, yesterday, a trader made a typographical error…triggering an avalanche of automated trades.  “I think the machines just took over,” said Charlie Smith, chief investment officer at For Pitt Capital Group.

Quite a knee slapper, indeed.

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Of course, decreasing yields shouldn’t have been a surprise at all.  What’s more, we should have expected them.  For with each whiff of financial instability, investors have rushed to U.S. Government debt for safety and security.  At the moment, Europe’s problems have taken investor focus off America’s own financial problems; namely, its $1.5 trillion budget deficit.

“The problems in Greece are rattling the market partly because they are reminiscent of the subprime mortgage crisis in the U.S. that at first appeared contained,” reported AP.  “That bad debt cascaded through the world’s financial system and pushed the U.S. economy into recession at the end of 2007.”

Following Monday’s announcement of the joint European Union and International Monetary Fund bailout of Greek Sovereign debt, the question on everyone’s mind is: If the contagion spreads to Portugal or Spain, could they be bailed out too?

Yes?  No?  Maybe?  Give it a little time and we may find out.

China Running Out of Steam

Our advice, in the meantime, is to pause, look, and listen.  Global financial markets are going haywire.  Stocks, bonds, gold, oil…you name it, they’re all adjusting.  Adjusting to what, we don’t quite know.  But perhaps it’s an increasingly frequent cycle of debt crises, panics, and bailouts.

As these cycles unfold they’re becoming increasingly disruptive to society.  For example, on Wednesday rioters took to the streets of Athens to hoot and holler and howl against government austerity cutbacks that will accompany the bailout.  Before it was over, three bank workers were dead from smoke inhalation after rioters set their bank ablaze and trapped them inside.

In other news, Fitch Ratings cut its outlook for Goldman Sachs to negative from stable on Wednesday…

“The Rating Outlook revision to Negative incorporates recent legal developments and ongoing regulatory challenges that could adversely impact Goldman’s reputation and revenue generating capacity.  Goldman’s franchise and market position are potentially vulnerable to scrutiny by stakeholders, and like peers, may be affected by the industry’s regulatory evolution.”

And over in China, the economy may finally be running out of steam…

“The market is telling you that something is not quite right,” Mac Faber, publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview earlier this week.  “The Chinese economy is going to slow down regardless.  It is more likely that we will even have a crash sometime in the next nine to 12 months.”

A Warning Shot from China

Speaking of China, have you seen their stock market lately? 

Since April 9th, the Xinhua China 25 Index has dropped 15.3 percent.  This may seem trivial to you or you may take it as a warning indicator.

Note that in late 2007 and through 2008 the Chinese and U.S. stock markets were highly correlated.  This held true during the rapid price collapse in September 2008.

“The Chinese market weakened more than the S&P 500 right from the start of September,” explained Charles Hugh Smith at Daily Finance, “but it was the steep drop in China stocks around Sept. 17, 2008, that was clearly a warning shot that all was not well.

“As late as October 12th to 13th, China stocks rose sharply along with U.S. markets to ‘only’ losing 20% of their value from Sept. 1.  But the weakness presaged in September came back with a vengeance, and the Chinese market plummeted to horrendous losses exceeding 50%.

“What can we conclude from this study?  Though Chinese and American stock markets are highly correlated in terms of peaks and valleys, relative weakness in Chinese stocks appears to have offered a ‘heads-up’ of trouble ahead for global markets.”

Based on this latest warning shot from China, this week’s stock market selloff may only be just the beginning.


M.N. Gordon
Great Depression Online

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