Stock markets around the world faced immense volatility this past week.
In a market that typically only experiences a handful of halts per day, this is unprecedented. Plus, it hardly instils confidence in the markets that are already experiencing an increase in fear, as measured by the VIX index.
With China recently experiencing big downward moves in its equities market, the media was quick to point its finger to the East as the source of the volatility. Indeed, China did react to the plunges by cutting interest rates 0.25% and freeing up lending requirements.
This follows a host of recent authoritarian moves from the Asian powerhouse including: Threats to arrest short sellers, suspending trading on over 1,400 listed companies, allowing property to be used as leverage, lowering equity transaction fees and reducing margin requirements to try percent margin traders from selling.
While the Chinese cut interest rates, the United States can’t afford the same luxury, not with them already at a record low 0.25%.
So rather than lower rates to 0% or into negative territory (as we have seen in Europe), the U.S. markets have relied on built-in electronic fail-safe mechanisms by halting the markets and also having the plunge protection team step in to prop things up.
Clearly, central bankers around the globe are growing increasingly desperate in their (mostly futile) attempts to manage this economic downturn, despite the media assuring us everything is fine. (It’s a pity this same media didn’t have the foresight to see the global financial crisis of 2008 ahead of time!)
But so far, the only thing these desperate actions have achieved are to inflate the bubble even more and delay the day of reckoning. No one wants the markets to collapse on their watch, so anyone in power will do everything possible to pass the problem on to someone else at a later date.
To add fuel to the problems brewing in the United States, China has been a net seller of U.S. debt over the past year, and earlier this month, Beijing shed a whopping $180 billion from their almost $1.3 trillion holdings. Think of this as a reverse Quantitative Easing, which is the last thing Janet Yellen and her team wants.
Now more than ever, this is the time to keep a close eye on China. If their stock market continues to fumble and if they continue to sell our debt, get ready for a bumpy ride in stocks and bonds.