On Wednesday, January 20, the DJIA took a 100-plus point leap over the equity cliff edge. As for why, well, the experts of Wall Street set their sites 7,400 miles to the east, on China. Here, the following headlines from the day step in:
- "US Stocks Slide On China Concern."
- "US Stock Rally Shanghaied"
- "Bears Dig A Hole To China."
Here's the gist: The Dow and company got wind that China's Banking Regulatory Commission (CBRC, for short) told its banks to cease lending in January. Despite the CBRC's flat-out denial of said rumor, the specter of fear still managed to suck the optimism out of the U.S. marketplace. In the words of one news source:
"People are concerned that the stock rally so far has been driven by liquidity. If China's pulling away, it's the first step in tighter monetary policy..." (MarketWatch)
"First Step" my asparagus. Fiscal tightening by China's monetary authorities is a long-established practice. Ever since China's economic steed charged out of the gate -- after decades of not even having a horse in the race -- its officials have had their hands tightly on the reigns:
- December 2006: China's Banking Regulatory Commission urged lenders to call in all outstanding loans, discourage the creation of new mutual funds, and deter foreign inflows.
- January 2007: China's Security Regulatory Council revealed that 70% of the companies listed on the Shanghai Stock Index were "not good by Western standards and will probably lose money."
- May 2007: China's Finance Ministry triples the "stamp tax" on stock trades.
- June 2006 to October 2007: China's Central Bank raises the bank reserve ratio NINE times to a 10-year high of 13%, all the while increasing interest rates FIVE Times.
YET -- from June 2005 to October 2007, the Shanghai Composite Index bulldozed over every attempt to cool it down, soaring 500% to an all-time record. All the while, the United States stock market joined in the boom to never-before-seen heights.
Then, on January 12, 2010, the CBRC raised its reserve rates to 16% for the first time since June 2008. That day, one news source stated the obvious with this remark: "China Becomes First Major Economy To Slam On The Brakes" while the rest of the world puts its monetary-easing pedal to the metal.
On January 12, the CBRC also raised the interest on inter-bank loans and short-term treasury bonds in order to prevent an overheating of economic growth.
And once again, China's stock market continued to rally right alongside the Dow Industrials in the full week following the CBRC's most recent lever pull. So, the very notion that US stocks all of a sudden found China's long-standing policy to be cause for concern -- is straight out ridiculous.
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(Editor's Note: The January 15 Short Term Update prepared for a powerful losing streak in the Dow and wrote: "In terms of wave analysis, it seldom gets any better than this. The upward pattern is over. On a near-term basis... this means that this afternoon's reactionary bounce, whether it bleeds into next week or not, will be completely retraced once it ends." Flash ahead: Over the last two days, the Dow has plunged over 300 points, putting the index in the red for the year.)