The REAL big story for financial markets today… Which no one is talking about
by Graham Summers
Originally posted on October 22, 2010
YOU HAVE TO READ BETWEEN THE LINES ON THIS ONE. Few commentators realize what the BIG story is for the financial markets today. The BIG story is not the mortgage fraud, the corruption, or the computerized trading (although the last one dominates US stock markets’ daily action).
No, the big story is the monetary actions of the massively indebted US vs. the credit cooling China.
Indeed, while Bailout Ben Bernanke and several his cronies at the Federal Reserve have been braying for additional QE and currency weakness, China has been aggressively restricting credit lending, raising interest rates, and generally making moves to cool its overheated system.
In plain terms, this is a conflict between the world’s old superpower (its largest debtor nation) and its rising new superpower (its largest creditor nation). It represents the largest conflict in global financial markets as well as THE most significant development to watch for those looking to successfully trade the markets.
Don’t forget, this was ALSO the big story dominating the financial markets in 2008 as well. I know, the banking Crisis took the headlines. But it was China’s stockpiling of commodities that created the massive “inflation trade” imbalance which saw oil at $150 a barrel, commodities across the board exploding higher, and the US Dollar hitting a 20 year low.
Remember how that played out when the trend reversed? Commodities and equities collapsed across the board as the US Dollar exploded higher. This, in turn, kicked off the Dollar short-covering explosire, which began the chain of events leading into the Autumn of 2008.
Now, consider that we are in precisely the same environment today. Once again, talk of the US Dollar collapsing is everywhere. The whole world is piling into commodities, especially Gold. And US traders are actually MORE bearish on the US Dollar today than they were in 2008.
The reason I bring all of this up is that I am beginning to pick up on signs that the US and China may in fact be trying to reach some kind of backroom deal on the “currency” issue. Given the current lopsided balance of the financial markets, you can imagine the impact this deal would have if my suspicions prove correct.
Let me explain.
As you no doubt are aware, over the last six months, the US has routinely vilified China as been a currency manipulator and the source of our financial and economic woes. China, in turn, has responded to these claims by pointing out that the US Federal Reserve is damaging the world financial balance… while also making veiled threats of the dreaded “nuclear” option (China actively dumping US Treasuries).
This essentially is an oversimplified version of the dialogue occurring between the two countries for most of 2010. Then, suddenly, the US does a 180 with Treasury Secretary Tim Geithner stating that the world currencies are “roughly in alignment” and that there is no need to “devalue the Dollar” but to maintain a “strong Dollar” policy.
Granted, these comments are coming from one of the biggest stooges in history. But they DO represent a sudden dramatic change in Geithner’s rhetoric. And given their close proximity in timing to China’s first interest rate hike in three years, I can’t help but wonder if something is going on “behind the scenes” between the US and China which most analysts (AND the markets) are not discounting.
Indeed, the US Dollar is giving hints of this, putting in what could be a potential bottom and reversal. Of course, it could be a GIANT head-fake, but the bounce from the multi-year trend line is something we need to take seriously in the context of Geithner’s and China’s recent statements/ moves.
Have China and the US struck a “backroom” deal in which the US will drop the anti-China rhetoric and make moves to potentially halt a collapse in the US currency in order to calm its largest creditor (and THE one player whose moves ALL US bond holders are watching closely)?
If so, then the lopsided inflation trade could be in for a SEVERE reversal which would see commodities and stocks collapsing as the US Dollar rallied a la 2008. Could Gold and Copper be telling us this is the case? Both commodities are seen as terrific discounters of future inflation. And both have reversed as of late and look to be potentially correcting.
Right now, all of the above is mere conjecture based on me noting a sudden change in the mood between China and the US. We’ll only know for sure on November 3 when the US Federal Reserve announces whether it will be implementing a MASSIVELY anti-Dollar QE 2 program or something smaller and less destructive.
If it’s the latter, then you can bet that the US financial markets will undergo a SEVERE mood change and reversal. Remember, ALL of the actions since mid-August has been fueled by speculation that the Fed is going to issue a HUGE QE 2 program on November 3. If traders are disappointed and the Fed announces something small or doesn’t announce anything at all, then my theory of a China/ US deal gains a lot of weight… and the markets are in for a rude surprise.