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If the Chinese Market Sneezes Will the U.S. Catch a Cold?

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...and if the Chinese market catches a cold will global markets get pneumonia?

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"There must be some kind of way out of here"
Said the joker to the thief
"There's too much confusion
I can't get no relief
Businessmen they drink my wine
Plowmen dig my earth
None of them along the line
Know what any of it is worth"

"No reason to get excited"
The thief, he kindly spoke
"There are many here among us
Who feel that life is but a joke
But you and I, we've bee through that
And this is not our fate
So let us not talk falsely now
The hour is getting late"

All along the watchtower
Princes kept the view
While all the women came and went
Barefoot servants, too
But outside in the cold distance
A wildcat did growl
Two riders were approaching
And the wind began to howl


All Along the Watchtower
by Bob Dylan




How many pandas can dance on the spire of the Empire State building?

Perhaps we are about to find out something about this East/West balancing act. Appropriately the May 17th edition of The Economist pictures a Panda stranded – Kong like – atop of the Empire State building. Maybe his pained expression is because he is Fay Wray-less? Maybe, it's because the single engine planes this time around are being steered by the U.S. Congress which hopes to tame Panda.

Can't we just all get along? Rumor has it Panda is just looking for his cousin Boo. Be that as it may, this week top Chinese officials go face to face with U.S. lawmakers. The joker and the thief. Unhappiness over soaring trade deficits with China that exploded to a record $233 Billion last year will dominate the agenda.

The talks come as increasing winds of frustration over China policy whip up politicos in the US. China currency policy, intellectual property theft, as well as counterfeit product and trademark infringement are at the center of a mounting congressional storm.

There is a clear sense of frustration with China in political circles and in a number of industries throughout America, treasury secretary Henry Paulson acknowledges. There is a conspicuous sense that Chinese currency manipulation and unfair competition is becoming embedded in the American psyche whose hegemony is being challenged.

Paulson notes that both Washington and Beijing are counting on concrete results that can serve as a "signpost" for future progress, but unless China allows its currency to appreciate meaningfully and soon, U.S. lawmakers will not be easily pacified and there is "just not a possibility but the likelihood of legislation." Does Paulson hum "there must be someway out of here" in the shower these days?

Any legislation that smacks of tampering with trade, of tariffs and sanctions could be a tripwire that sends Hoofy sprawling. Two riders are approaching.

In the stampede, anticipating a market turning point can be a stunt better off left to magician David Blaine who makes levitation look easy. Many have gone broke trying to bet on market turning points. But, betting on and trying to call such an inflection point without a confirming sell signal based on the price action seems to be different than anticipating such a turn. In the words of legendary trader Bernard Baruch, "successful speculation is about anticipating the anticipators."

Inflection point: the Shanghai composite which orbited past 4000 last week, just three weeks after hitting 3000. The Hong Kong market was rocketing similarly just before the handover from British to Chinese in 1997. The future was so bright you needed sunglasses. Maybe some of those counterfeit Chanels or Guccis.

We remember that the upcoming Olympics in China is an interesting turning point, as the government is working overtime to present the country's best face.

At the same time Chinese officials in an undemocratic regime are nervous about 10 million small investors who have opened new brokerage accounts this year. Chinese crowd mentality has turned a deaf ear to warnings from government officials as well as the increase in reserve requirements. The population's voracious appetite for stocks seems matched only by the panda's appetite for bamboo. Apparently they can consume 40 pounds of bamboo and then are hungry again in an hour.

The peoples' working group of China may decide to exercise a heavier hand this year less their house of cards comes toppling down just in front of the Olympics.

Inflection points along the watchtower? The first only futures product to provide efficient, 24 hour, global, electronic access to the Chinese market is introduced May 20, 2007.

Inflection points along the watchtower? If memory servers, the introduction of puts and calls on the Nikkei index began in December 1989 just weeks before the Japanese market topped out – a peak which has not been revisited in 17 years.

The introduction of futures on the Chinese index may be a structural/technical catalyst at the Chinese roulette table. It may be a trigger that tips the bouncing ball to green – as in double zero, especially if Chinese officials want to show the population that the speculative sauce is both sweet and sour.

Why is it important what happens in China? If the Chinese market sneezes will the U.S. catch a cold? If the Chinese market catches a cold will global markets get pneumonia? Up until the Chinese stock shakeout in February, it was what happened in the U.S. equity market that set the pace and told the tone for the rest of the world. However, the February swoon represented a sea change. Now, world markets in unison react and hang from the same bamboo. Where does an 800 pound Panda get relief – wherever he wants.

The pandas, kept as pets by Chinese emperors, were believed to have magical powers that can ward off natural disasters and evil spirits. Nothing there about U.S. lawmakers.
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