China Sneezes, World Gets Sick

“When China sneezes,” the new saying goes, “the world catches cold.” It used to be the United States in the role of the sniffly grump, but events over the last 24 hours are yet another sign of world power shifting eastward.

The People’s Bank of China tightened reserve requirements for its member banks yesterday. We gave you a heads-up the day before Thanksgiving this was in the works. Now it’s a done deal.

The “consensus” view is that China’s aggressive stimulus is coming to an end. Perhaps they’re right. At some point, central bankers in the land of opium and tea must have looked around at the cranes, the office buildings, the shopping complexes, heck, entire cities that no one is occupying, and thought, Maybe this has gotten away from us.

World markets greeted the news as one giant sell signal. No more Chinese stimulus? No more domestic Chinese demand for consumer products and services. The global economic recovery is toast. Darkness will soon envelop the planet.

Stocks worldwide sold off, commodities got whacked, oil fell 2% and gold tumbled some $30. It was a mediocre day for nearly every asset class… except U.S. Treasuries. Ponder the irony: China propping up the Treasury market even as it cuts back on Treasury purchases. Heh. Good times.

Short term, Resource Trader Alert editor Alan Knuckman sees a rally in Treasuries. “Back in mid-2009, we were one of the first to mention the bond bubble and profit handsomely from the decline in Treasury prices. The combination of 2008’s safety position unwinding and increased debt sales put the pressure on prices for our trade. The following sharp decline in June gave us nice profits of $2,200.“

But over the longer haul, “interest rates will rise,” Alan says. “There is very little doubt about that with the current Fed target between ZERO and 0.25. Short-term rates are determined by government monetary policy and remain near historical lows — prices actually went negative because of panic buying in the 2008 collapse — which leaves rates nowhere to go but up. The question is not if rates will go back up, but rather over what time frame they will go back up.”

“All of this movement and the timing is important to us here at RTA, because without rising interest rates, the dollar continues to fall — and a falling dollar is bullish for our overall commodity portfolio.”