The Return of the Safety Trade

Barely a week ago, we called it the China Sneeze Play. Once again, world markets catch cold after China starts sniffling.

Rumors abounded yesterday that the China Banking Regulatory Commission asked several banks to stop making loans. The CBRC’s chairman denied it, but then the Bank of China — one of the country’s biggest banks — announced it is curbing its lending.

Today comes word that Chinese GDP grew an annualized 10.7% in the fourth quarter, moving China ever closer to eclipsing Japan as the world’s second-largest economy. Consumer prices jumped sharply in December.

All that stimulus is getting the world’s armchair economists hot and bothered… now they’re afraid Chinese authorities are going to start running a cold shower.

Lo and behold, the “safety trade” is back in play. The major US indexes fell over 1% yesterday, and continue to slip as we write. Gold tumbled the most in a month, slipping below $1,100. But Treasuries rose and the dollar index stands at 78.5 — up a full point since Tuesday.

“There are two main emotions that drive investors – fear and greed,” explains Bill Bonner. “Lately, greed drives them to buy emerging markets, stocks generally, and commodities. Fear drives them to dump all their risky investments and head for cover. They believe cover is found in the dollar and in U.S. Treasury bonds – traditionally, the world’s safest credits.”

Not that this alters the sell side of our new Trade of the Decade. Fear will overwhelm U.S. Treasury debt. Just not right away. Just remember how giddy everyone still felt about U.S. stocks in January 2000.