kelaido

China: Olympic Fever and the Market

Not only is the reserve 'useless' domestically, $2 trillion has not much use outside of China as well. The $2 trillion reserve will continue to depreciate through inflation, devaluation and most significantly, dilution (through the FED's printing presses). China is not even allowed to buy Maytag, hardly a top quality asset, with its reserves. A direct consequence of buying iron ore to make steel to build bridges is a price increase of 96% just this year alone, on top of an equally massive increase last year. As long as China runs a trade surplus and US$ maintains its 'reserve currency' status, China has to continue recycling the US$ back to the US, with nothing major or worthwhile to spend on that would not trigger massive increase in prices internationally or price inflation domestically. Just imagine the price impact of China trying to build a strategic oil reserve as in the US, using its US$ reserve. The consequent demand destruction arising from the price explosion will render the objective of utilising its US$ reserve a pyrrhic success.

$2 trillion is a meaningless milestone in their balance sheet.

Irrespective of the reserve holding, China can choose to stimulate its domestic consumption to spur growth, or slipping into the dreaded 'recession'. The handcuffs here is inflation. Yes China can copy the US which gave away $160 billion to its citizens to buy more LCD TVs. But why stop at $160b? The UK Telegraph reported yesterday that broad money supply in the US declined by $50 billion in July, the sharpest contraction in modern history. You can only throw so much credit at the consumers to spend, much like too much antibiotics too often will kill you.

The gain in SSEC yesterday is indeed impressive, with highest volume traded since July 10. It is a bit early to call yesterday a major turn, but holding above 2500 for rest of week will be key. The low of 2284 on Aug 19 established visibly positive divergences on SSEC's technical charts. The market is primed for a meaningful rally. Near term, this is more likely than not a bear market rally carrying the trademarks of being fast and furious. To alter the landscape, SSEC must overcome its next formidable resistance at 2950. If the latest low of 2184 is broken again, it is very easy to see more downside coming, govt intervention or not. Nasdaq gave back 90% of its gains after the Tech Bubble burst. A 90% retracement can easily send $SSEC down to 1400. Bear that in mind.