If that’s the only “Bazooka” China is packing, we’re in even bigger trouble than I thought! I say that because the furious rally Chinese policymakers managed to ignite earlier completely fell apart into the close.
The Dow Jones Industrial Average not only surrendered a 350+ point gain, it plunged at the end of the day, finishing down by 205 points. All the other major averages also closed in the red.
Things looked much better in the early morning hours. That’s because after another 7.6% wipeout that sent the benchmark Shanghai Composite Index cascading through the 3,000 level, the People’s Bank of China took several steps. They’re exactly the kinds of financial “Bazookas” that then-Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke tried when our markets melted down in 2007-2009.
In China’s case, the PBOC …
Cut the country’s equivalent of our benchmark federal funds rate by 25 basis points (a quarter of a percentage point) to 4.6%. That was the fifth reduction since November.
Lowered its one-year deposit rate by 25 basis points to 1.75%.
Slashed the required reserve ratio for Chinese banks by 50 basis points. The RRR move is designed to free up more money for lending to the real economy, and to offset the impact of capital flight on domestic liquidity.
|China’s markets are the source of much uncertainty in the world today.|
China is making these moves because it’s in the midst of a massive economic and market crisis. The Financial Times reported yesterday that the country has shelled out more than $200 billion to support its stock market through share purchases and other measures. It has also spent another $200 billion to support its currency in the wake of the country’s landmark devaluation the other day.
China does have a massive pile of reserves – more than $3.6 trillion at the end of July. But it has been blowing through that money at a faster and faster rate to defend its markets.
Officials seem to have decided they can’t afford to spend it all on artificially propping up stocks anymore. That’s why the Chinese market has plunged 22% in just four days — wiping out $1.2 trillion in market capitalization in the process. Policymakers are now shifting to rate cuts and other measures that they believe will get them more bang for their buck … er … yuan.
So is it enough? Will the latest rate cut succeed where the previous four failed? Or is Asia still only, say, partly through the Asian meltdown, just like we were only partly through our own meltdown when Bear Stearns went under?
I wish I could say I was optimistic. But today’s disastrous failed rally is another bad sign, one that signals – that we have likely passed the peak of the central banker bubble. Indeed, my warning about getting more cautious than I’ve been in several years – issued a few weeks ago before the market collapsed — is proving right on target.
|“Will the latest rate cut succeed where the previous four failed?”|
If I’m right about the big picture, then the “Autopilot Market” that central bankers gave us is now morphing into something else. Something much more volatile, dangerous … or potentially very, very profitable if you know how to wisely use investments like leveraged and inverse ETFs and options. As a matter of fact, I helped subscribers in my Interest Rate Speculator service rack up multiple, triple-digit profits in yesterday’s roller coaster session. And I believe those kinds of opportunities are going to be coming fast and furious in the days and weeks ahead.
So what do you think? Is China “fixed” now? Or is this more like when Bear Stearns failed? As you probably remember, policymakers intervened to help merge the failing firm into JPMorgan Chase (JPM), sparking a rally in the short term. But then, markets gave it all back and then some later.
What can be done to stop the bleeding overseas and here in the U.S.? Anything? Or are markets finally overwhelming policymakers around the world? Use this link to add your thoughts at the Money and Markets website.
In the wake of yesterday’s crazy market action, several of you weighed in on what is going on and what you expect to see happen next.
Reader Donnie S. said: “The Fed governors have all been too busy putting out fires in their wastebaskets to notice that the building is burning down around them, so don’t count on the Federal Reserve or foreign central banks to intervene to stop the bleeding. Most investors are suffering from ‘normalcy bias,’ which leads people to believe since something has never happened before in their lifetime, that it never will happen.
“Normalcy bias also leads people to interpret warnings and inaccurately reframe information in order to form and project an optimistic outcome, which leads investors to ignore serious situations against all evidence. In short, normalcy bias is a pain-killing drug which numbs a person to an impending crash like today and tomorrow and the next day.”
Reader Ivano added: “I am tired of the whiners. Mature savers are those who are suffering from the ‘welfare for the rich’ monetary policy of Greenspan and especially crafty Mr. Bernanke. They printed money out of thin air to support their evil, filthy-rich, parasitic Wall Street buddies.”
Reader Howard weighed in with this observation: “After encouraging their own investors into margin loans, the Chinese government is learning this as well: Real wealth is found in the gainful employment of productive assets.”
Finally, Reader Stu said: “So who was asleep at the switch when the Dow was down close to 1,100 points? Apparently no one. Alas, the plunge protection team (PPT) has about as much control over our stock market as the Chinese government does over theirs. God help us all.”
Thanks for the comments. I’ve been warning of increased volatility and rising risks all summer, and the action over the past few days certainly suggests those warnings were on target.
It appears that China has lost control of its markets and economy in this downturn, much like officials here lost control of U.S. markets and the U.S. economy in the 2007-2009 meltdown. That means we’re likely in for even more turmoil in the weeks and months ahead.
So where do you stand? Is this just the first of many large wipe outs? Or was this week “the bottom”? How are you modifying your investment strategies in light of all the volatility? Add your comments to the mix at the website as soon as you can.
Losing money in a stock market rout is bad enough. Not being able to cut your losses because you can’t access your brokerage account to trade is even worse. But some online brokers reportedly had trouble yesterday due to a surge in activity. USA Today reported that customers of both TD Ameritrade and Scotttrade encountered glitches in yesterday’s manic session.
Amid all the macro market turmoil, there is actual corporate news out there worth mentioning. Electronics retailer Best Buy (BBY) reported adjusted, second-quarter profit of 49 cents a share, beating the average estimate of 34 cents. Same-store sales grew at a 3.8% rate, almost four times the 1% that analysts expected.
Meanwhile, amidst all the craziness yesterday, I didn’t get a chance to mention that utility Southern Co. (SO) said it would buy AGL Resources (GAS) for $66 per share. That sent shares of AGL up by more than 32% on a lousy day. Southern bought AGL to expand its natural gas infrastructure business, further diversifying its business beyond the providing of electricity.
Will Vice President Joe Biden make the Democratic field a little more crowded this election season? He’s apparently considering it, according to the Washington Post. Family issues are a primary determining factor, and we likely won’t get a decision for a few more weeks.
So did you have trouble executing trades yesterday (or did you even make any)? What do you think of the ongoing consolidation in the utility sector? Any other thoughts on the news of the day you’d like to share? Then hit up the website and let me hear from you.
Until next time,