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Do Not Blame China For U.S. Dependence On Debt, Deficits, And Low Rates

Apr. 11, 2018 6:00 PM ETSPDR® S&P 500 ETF Trust (SPY), IVV, DIA, QQQ, GSY, MINT93 Comments
Gary Gordon profile picture
Gary Gordon


  • Many in the financial media describe the current corrective activity in stocks as a function of the possibility of a "trade war" with China.
  • In truth, tariffs and trade disputes are a bit of a sideshow.
  • The real danger in poking the panda is China's ability to severely slow down its purchases of U.S. Treasury bonds.
  • If China, the largest holder of U.S. Treasuries, does not buy enough U.S. government sovereign debt, other buyers would need to step in. They’d do so, but that would occur at higher interest rates.
  • Higher borrowing costs will hurt consumers and companies alike, hampering the economy as well as stock buyback plans and stock prices.

Over the 10 trading days (two weeks) through April 6, the S&P 500 averaged a daily range of 2.3%. According to Dana Lyons of the Lyons Share, that kind of volatility ranks in the 94th percentile since the S&P 500 began in 1950.

Similarly, it is uncommon to see at least seven 1%-plus price swings in a brief period like two weeks. We actually had eight. More remarkably, it is rare to witness this type of price movement when it is confined to a total range of 5% or less. How unusual? Less than 1/10 of one percent of trading sessions in the S&P 500's history.


In the chart above, it appears that the occasions (14 in total) may have acted as a warning sign. For example, in 2001, big price swings accompanied by range-bound markets (< 5%) preceded the painful bearish depreciation of 2002. More ominous? The same thing happened leading into 2008's financial crisis. In 2004, however, it was "much ado about nothing."

Here in 2018, the volatility alongside range-bound stocks may indeed be relevant. Why? Volatility is inversely related to financial system liquidity. It follows that as long as the Federal Reserve (and other prominent central banks) remains committed to removing liquidity by reducing bloated balance sheets, one can expect the volatility to increase.


In the same vein, committee members at the Federal Reserve appear determined to hike shorter-term interest rates. Yet longer-term rates have not responded as much as central bank planners would like. Consequently, we are looking at the flattest yield curve since 2007.

On the surface, there may not be a problem with 10-year Treasury bond yields mimicking two-year Treasury bond yields. Or 30-year Treasury bond yields resembling five-year Treasury bond yields.

On the other hand, neither the U.S. stock market nor the U.S. economy has ever

This article was written by

Gary Gordon profile picture
Gary A. Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. He has 30 years of experience as a personal coach in “money matters,” including risk assessment, small business development and portfolio management. He favors tactical asset allocation strategies over "set-it-and-forget-it" investing.Gary is often asked to consult as an educator. He has taught financial concepts in Mexico, Singapore, Hong Kong, Taiwan and the United States.As a Certified Financial Planner (CFP), Gary has distinguished himself as a reputable and trusted investor advocate. Gary’s participation on local and national radio has spanned more than two decades. He writes commentary at his web log, TheStockBubble.com.

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