At the moment the panic seems to have subsided. And all it took was a word from China, the new lord and master of the financial universe. On Thursday the Chinese authorities let it be known that they intended to do nothing. Equity markets around the world thunderously celebrated.
Huh? Well, under these circumstances, the Chinese doing nothing is a wonderful thing. You see, the Chinese government holds about $600 billion in government bonds issued in Europe. That's right -- the bonds of Greece, Portugal, Ireland, Spain -- the so-called "PIGS" nations who have been in the throes of a credit crisis that has rattled the whole world.
It's not that these countries are intrinsically going out of business. It's just that if bond holders panic and refuse to lend them more money when their existing bonds come due and have to be replaced, they'll be forced into insolvency for lack of financing. China, the single largest holder, signaling that it has no intention to reduce or abandon its existing investments was a huge risk off the table.
Don't think the Chinese can't move the bond world. They can. They have. Why do you think in December 2008 the Fed announced it was going to buy billions in mortgage-backed securities -- and then in March 2009 upped the number to over a trillion? It's because the Chinese wanted to sell. If that Fed hadn't bought them, who would have? Not me!
Same thing for European bonds. If the Chinese had wanted to sell, who would have bought them? The European Central Bank, the equivalent of our Fed, doesn't have the statutory authority to do that. They've already bent their rules a lot in the PIGS crisis, but that would be tearing up the rule book and studding the shreds in the trash compactor.
How about European banks? Sorry. The banks of France, Germany and the Netherlands already own more than twice the PIGS debt that China owns. They aren’t interested in owning more, believe me.
So with China a solid holder, and with the announcement several weeks ago that the stronger countries in Europe will bail out the weak ones, I think the crisis really has passed.
But so what?
Does that mean the fantastic bull market that took the U.S. stock market up 80% from the March 2009 lows to the April 2010 highs will just get right back into high gear and make another sensational leg up? I really doubt it.
There are plenty of people who think that's what will happen. They see the 12% drop in stocks since the high last April as just a brief and necessary correction in a great bull move.
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Investing § Thanks for Nothing, China. Really.: Luskin: China's nod to European bonds defuses a crisis, http://url4.eu/3pCIE
RT @BrkingBusiness: Thanks for Nothing, China. Really. (Ahead of the Curve) http://bit.ly/9akkWS via http://topicfire.com/Business
Thanks for Nothing, China. Really. (Ahead of the Curve) http://bit.ly/9akkWS via http://topicfire.com/Business
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