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China Cash Crunch Trumps Bernanke in Stock Market Crash

June 22nd, 2013 | by Morris Beschloss | Comments

What started as a scramble for the doors when Fed Chairman Ben Bernanke warned about continued Fed easing next year, turned into a two-day abandonment of commodities, as well as stocks and bonds, as the trading exchanges evolved into garage sales.

The one-two punch that rocked investors of all types was a fear, not only of a halt in Fed easing, but a stop in China’s participation in Treasury bond auctions due to an unexpected Chinese cash spigot shutoff, ordered by the Beijing central government. This means that there is no major fallback position anywhere in the world. This is igniting selloffs in stock and bond markets everywhere, with no indication of a quick snapback. It’s a rare instance when every sector is selling, and noone is buying. There now seems to be no port in this storm, as commodities such as gold, silver, copper, stocks, bonds, and exchange traded funds are all going down with the same sinking ship.

If there is any solace to be gained from the current debacle, it is that the hundreds of billions that are coming out of global markets, with all things traded, will eventually have to find a home somewhere.

Unlike Japan, when the post stock marketing crash in the early 1990′s turned into a 12% per household personal savings rate, the U.S. phenomenon will likely result in a future rebound, since American’s are not prone to keeping money under their mattresses. In effect, the froth that had topped the market averages in a three month period has been taken away in an unlikely three day selloff.

The good news is that this summer solstice storm does not compare to October 19,1987, where a nine-month period with a 40% gain was wiped away in a 24% wipeout over a long bleak weekend.

Since the U.S. economy, cash flow and corporate earnings have actually improved slightly during the first half of the year, a return to a rebound may be at hand relatively soon; since this crunch is not reflective of any major economic deterioration.

The greatest irony of all is that Chairman Bernanke’s prediction of a tapered ending may now have to be postponed. This is because the giant crutch that the Fed wrought will have to be kept in place to prevent a long-term market collapse. This could crush any hope of a long-term reversal underfoot, with further disastrous consequences.

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