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One – Two Punch

06/25/2013

Last week, the stock market got pounded when Ben Bernanke repeated his plan to begin withdrawing quantitative easing.  This means the Fed would buy fewer government bonds than the $85 billion they are buying each month . . . like, say, $84 billion.  In other words, no big deal!  Still, the market did what it does best . . .  over-react.

This week, more attention is being paid to the news out of China that there is a liquidity crunch among the banks.  Monday morning, a noted bear on China predicted that China would experience a Lehman-like collapse in three weeks to six months, because of this liquidity problem.  First of all, Lehman did not have the ability to print all the dollars it needed, while the Peoples Bank of China can print all the Yuan it wants.  There will be no Lehman moment in China!

A little background on China might help.  They have been experiencing a dangerous level of growth in their “shadow banking” system or system of non-bank lenders, such as private banks, pawnshops and payday lenders.  The shadowy lenders were borrowing cheaply from banks and then lending to the non-creditworthy at much higher rates.  We might call that “loan-sharking” in this country.  To curb their growth, China is raising its short-term rates to squeeze the profit margin of these shadowy lenders by reducing money supply.  This caused the interbank-lending-rate in Shanghai (SHIBOR) to spike suddenly and dangerously.  The increase was so large that it was frightening to those who did not understand it.  While still high by historical standards, SHIBOR has fallen considerably since Friday.  China may be many things, but it is not stupid enough to realize their worst fear, i.e., widespread public anger, which would result from a systemic collapse due to a liquidity crisis.  They will flood the country with Yuan, if necessary, just like the Fed has flooded this country with dollars.

Even Rocky Balboa got knocked down after a one-two punch from Apollo Creed but still got up.  The stock market just got a one-two punch and will also get up . . . like it has done so many times before!  

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