The concern in the markets is that China's drive to clamp down on bank lending could endanger a global economic recovery. That helped send the dollar higher against other currencies and pushed commodity prices lower, which hurt the stocks of energy and materials companies.
While there is nothing new about China saying they will slow down their economy, they will actually do it at some point. They kept this up last year attempting to toss around commod prices. Yet while they continue to threaten it is interesting to see how responsive the market has been over the past few days. Triple digit swings for three days. This has not been seen since last Oct if I remember right. Furthermore there is another issue that is internal which would have a far more direct impact.
Cook said questions about the stability of the market are likely to increase as Feb. 1 approaches. That is when the Federal Reserve plans to halt some of the emergency lending programs it set up to help revive the economy. Traders looking to deploy some of the low-cost money circulating through the financial system have helped drive the surge since March.
"Once that cheap cash goes away, what's left?" Cook said. He predicts a "sizable correction" to let the economy catch up with the market.
I find an interesting contrast here. The emergency lending programs were in part intended for banks that were under stress. Yet as of the end of '09 there were around 200 banks that failed albeit most were small yet some were of decent size. Also several were commercial banks. I find this whole concept of stopping the emergency programs especially interesting when Jan '10 foreclosures on homes were expected to increase due to rate resets that were expected to begin on loans from homes purchased in the '06 to '07 time frame.
The idea that the banking crisis is over is quite laughable. We are about to enter further issues and if they do not want to give emergency lending I fully expect they will absorb the banks via the FDIC and back the loans via Fannie or Freddie as they kick Mom and Pops with the kiddies out the back door of the house. This has become a convenient way to "hide" the further collapse from media while floating the economy with all of their phantom money.
From my personal observations, while they have taken the large banks I cannot help but wonder how much money has been funneled through these institutions into the market to attempt stabilization. It appears they are rebuilding Acorn via the banking system. From what I have been able to piece together they might as well hang the Acorn sign out in front of each bank they now own. Yet after so much propping, at some point there must be a reaction to counter the massive build up while there has been virtually no real productivity increase.
Couple all of this with the fact that if China does actually slow its growth, the only way the USA will have to counter that slow down is to force the money banks hold from the phantom printing machine into the market. Once this money gains velocity by being fed into the public sector rather than on books within the market inflation will wreak havoc. It will be interesting to see how this all turns out.
http://finance.yahoo.com/news/Stocks-fall-as-China-clamps-apf-1871468710.html?x=0&sec=topStories&pos=5&asset=&ccode=
