China to the Rescue
Many traders and investors believe that the global stock market rally is really nothing more than another deck of cards similar to what investors saw from 2003 to 2007. During the 2003 – 2007 rally the Dow Jones Industrial Average rallied nearly 90.0 percent in five years. The catalyst for that rally was low interest rates by the Federal Reserve Bank. As we all know this is the same catalyst for the current rally with a few extra doses of stimulus.
This time around the extra stimulus is the new accounting rules for the large major banks that are supposedly too big to fail. The FASB mark to market accounting is completely changed. The banks do not need to down its old liabilities. If it did they would all be insolvent. Then the Fed funds rate which is the overnight lending rate to large major banks such as J.P. Morgan Chase & Co.(NYSE:JPM), Bank of America Corp.(NYSE:BAC), Well Fargo & Co.(NYSE:WFC), and Citigroup Inc.(NYSE:C) is at zero percent, so the banks can borrow money basically for free from the Federal Reserve Bank. Then you have have the Federal Reserve Bank actually buying U.S. Treasuries everyday with money that is created out of thin air. Wouldn't we all like to do that? Plus there are countless government spending programs taking place everywhere. Do you remember the 'cash for clunkers' program or the $8,000 home buyer tax credit just to name a few. Point blank this is all unprecedented stimulus to basically rescue a broken and even broke economy.
Next we move this story to China and the rest of Asia. We the public have been sold that China is the growth engine of the world. Well, it is true that China and India can produce goods and services cheaper than anyone else to to it's low labor costs. China and India both know this and are enjoying their new found wealth. China even goes so far as to buy nearly $1 trillion in U.S. Debt. The reason that they do this is so that the United States continues to purchase their goods that they produce so cheaply. If the U.S. economy takes a nosedive who is going to buy all those fine Chinese trinkets? Remember, most goods that are invented or developed in the United States such as the I-pod or some other electronic gadget is manufactured in Asia. China needs the United States as much as the United States needs China. China and Japan are both now buying European debt.
The European debt problems are growing on a daily basis. One country after another seems to have rising record bond yields nearly everyday. Spain, Portugal, Belgium, and Italy are the countries that are most spoken about when it comes to debt, however, France should be watched closely too. What makes them exempt from the same problems as the other European nations when it comes to debt? Keep an eye on France and remember you heard it here.
Can China bailout the world in order for the world to continue to buy it's products? Is this not the same money revolving back to the nation. China lends to the United States and Europe so the U.S. and European consumer can continue to spend money on Chinese products. How long can this game of hot potato last? Well, the low interest game in the United States lasted five years from 2003 – 2007. This current game by the central banks around the world may last a while, however, this time the outcome could be much worst. Lets all enjoy the inflation rally while it lasts. It is a global economy, unfortunately, when it ends it might be a global collapse.