Federal reserve chairman Ben Bernanke on Friday stepped up pressure on China to let its currency strengthen. To fight rising inflation, China ordered banks to cut back on lending and raised required reserves by 50 basis points which is the second increase in 2 weeks and the 5th time in 2010. The move will take the banks reserves to 18.5% a record high. The announcement came after the close Friday. Inflation hit a 25 month high of 4.4% last month. China is mulling price controls on food and some materials. Letting the Yuan rise is another option. China has criticized the Fed for Quantitative easing.
Something has got to give here. The US is economically going to go down the drain if the Fed steps aside. The Chinese will not let the Yuan rise because they do not want to lose their competitive edge. The US wants to cut the deficit and inflation is spiking overseas. The US is still 60% of the worlds economy and without it every body falls apart. The US has artificially supported its stock market and borrowed trillions to support the states and unemployed. The Chinese and emerging countries have proceeded as if nothing had happened in the US or Europe. They are now importing the inflation that the lower dollar brings. The whole thing is coming to a head.
The net net is the same as it is for any overheated market. The last one of these kind of markets to break was then US real estate market. That market supported the orgy of spending in the US that carries the emerging countries. The US real estate market became so hot that interest rates were raised to slow it down. The problem is you can't slow down a speculative market bubble without a crash.
The emerging market bubble which was tied to the US and European real estate markets is being taken down just the same way that the real estate markets were taken down. Inflation required the central bank to raise rates and cut lending. The result was a crash in real estate prices. The central bank then began the process of pouring money down the rat hole of the derivatives markets that was left behind by the real estate debacle. That pouring is still going on and the hole will take years to fill.
The outcome for the emerging markets and commodities is very predictable. They will crash just like the real estate market did. The day of that crash is coming closer and the actions of the Chinese are telling me that. The pressure on Bernanke to stop carrying us and the pressure of huge deficits in the US and Europe is building. There is big trouble in River city and you can see it coming.
Meanwhile all of the players are long commodities and emerging market country stocks. That is where the hot money is going. In 2005 all of the hot money was in Real Estate and it created a bubble. That is where I believe the emerging markets and commodities are now. The China Central bank is faced with the same problem that faced the US in real estate in 2005. The real estate move was unsustainable and real estate was in weak hands. The situation in China is the same, hot money is chasing growth and the result is unsustainable inflation and a bubble. They now have to deal with it the same way Central banks always deal with hot markets. They crash them and that is what the hikes in interest rates and cuts in lending in China is all about.
One of these days the China central bank will raise rates and cut lending and get it right. That is the day that the crash comes. It will come not only in Stocks but in Commodities and Gold. The dollar will take off on a flight to safety move that will knock your socks off and the hot money will be trapped. The idea that you have to get out of the dollar is NOT a good one but it is completely accepted by everyone except of course the Central bankers. If you can't believe this take yourself back to 2005 and what you thought about real estate then.
Mikey
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