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What is the Biggest Question in the Markets Right Now?

Now that the S&P rallied over 60 pct since last March 2009, and pretty much all other markets except housing and real estate have also rallied (anything connected to financial markets that received the half of the several $trillion of US and other central bank emergency money infusions beginning big around March 2009) it begs the question when there will be a correction. Or a crash.

There is a hint in the above paragraph. Namely the US alone engineered about $1 to $2 trillion of quantitative easing. That means that the US bought all US mortgages by buying mortgage bonds for example. The US was the buyer of last resort - for everything. Including foreign markets, without making a laundry list of them.

The BOE, Bank of England, also did likewise, and the BOJ-Bank of Japan has been doing QE in all but name for 15 years now.

The hint is that all of these banks have to abandon QE (monetizing markets by buying anything in trouble) and this begins for the US end of March 2010. That is for the US, England and Japan. Japan will resist this but is already up against a sovereign debt wall with way, way too much debt at around 300pct of their GDP. The danger level for that number is anything over 100 pct. The US is reaching 100pct just around this year. Greece is at the level of over 100pct but is broke and has huge fiscal deficits… but the rest of the West is already flirting with Greek like bond problems developing (trouble brewing in world Sovereign bond markets).

In any case, the end of this massive financial stimulus for markets is ending. That which began in March 2009, is ending in March 2010. What goes up must come down as they say…

China too is tightening

China also figures here. Two months ago China began tightening credit. Since with their roughly $1 trillion of direct stimulus after the panic crash of world markets and production after Fall 2008, which led to an incredible 30 pct drop in Japanese and Chinese exports, China is now pulling that back. They raised their bank reserve requirements which pulls money out from the lending market, which has propelled financial and real estate bubbles there, and is fueling inflation now.

And, a big wild card is how will the markets react when China lets the Yuan rise about 5%, which is the scuttlebutt going around. That ties nicely with the following theory I have:

China readying for a major macro economic change

China is preparing for a post US centric consumer economy, and is going to focus on Asian and interregional trade with others like Asia, and resource countries like Canada, Africa (good luck) and South America in places like Brazil. And China is still making huge new long term energy deals with energy producing countries like Iran, Saudi, Venezuela. And Africa of course, the Chinese are buying everything they can there. Which won’t last unless they send in Chinese armies to keep hold of their African projects, something already happening in part.

But all of these listed trends mean that the world of financial market props is changing now to a ‘post crisis’ stage. And that will most certainly lead to deleveraging markets again. One wonders how long the markets will tolerate the US, England, Japan, and China tightening credit and pulling out excessive liquidity (propping up markets) which tightening all started roughly in the last two months.

Biggest question right now

So the biggest question is how will markets react when world QE ends (in this phase) in end of March 2010, or rather after world QE has been being phased out starting two months ago. I made note many times to subscribers that every time China began its credit tightening, usually first by raising bank reserve requirements, world markets tanked within roughly two months. We are now two months after China announced raising bank reserve requirements to reign in out of control lending there.

So, aside from a potential Chinese Yuan revaluation of 5% and what that means (a great deal) the first hurdle markets must jump is end of March and the first month or two after. Will we see a massive world stock correction and a commodity correction?

We have seen this movie before two times. One was when China tightened before Summer of 2008, and markets crashed. There also was similar tightening by China before the 2007 stock crashes, again about several months before that began and the SSEC crashed from its highs around 5000-6000 to around 3000 now.

China monetary policy is markets’ focus

In fact, what is very interesting is the rapidity of any market reactions to China credit - literally instantaneous selling the moment it’s even mentioned. Reminds me of how the markets reacted to anything the Fed did for the last 50 years…

We have some basic defensive strategies to cover these potential events - a market crash and a possible Yuan revaluation. In any case we have made some incredible calls for the last two years on the overall markets, calling huge swings in the USD, currencies, gold and commodity markets at key times, predicting trends that lasted 6 or more months out from our calls. There is a chart showing several of the major ones we called in the last 2 years on our site. Our newsletter is 44 issues a year with mid week email alerts.

Copyright 2010
Christopher Laird
Editor in Chief
Prudent Squirrel

Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be  verified by you if you think it’s important.

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