Wee! This is becoming a weird form of time travel.
Twenty-five trading days ago the SP 500 was just 0.1% below its all-time high of 2131 recorded on May 21. Since then we have traveled backwards about 415 days!
Do not fret, however. Beijing has called in the Red Cavalry—otherwise known as the PBOC.
In standard central bank fashion, the latter injected (even) moar credit into the Chinese economy via a 25 bps rate cut, reduction of bank reserve requirements by 50 bps and mainlining about $25 billion directly into the banks via reverse repos. Under the latter procedure, the PBOC takes collateral and gives banks cash for a few weeks and then rinses and repeats—over and over, for as long as it takes.
Of course, in recent weeks China’s officialdom has also been feverishly trying to prop-up its currency in order to forestall a tsunami of capital flight. In the last six quarters more than $800 billion of private capital outflows had Beijing scared silly. They were actually sending the paddy wagons out to arrest people for attempting to sneak their capital out of the land of red capitalist miracles.
In fact, according to Soc Gen today’s PBOC actions will inject about $106 billion of fresh cash into the banking system, including bank reserves freed up by the RRR cut. Apparently, however, during recent weeks China had drawn down its FX reserves in attempting to prop-up the yuan by an even great amount. That means they drained the banking system first, and have now flushed the same liquidity back in.
Push, pull. Tighten, ease.
These are acts of desperate, stupid madness, and here’s why.
Twenty-five years ago, Mr. Deng discovered the printing press in the basement at the PBOC and let it rip——including a 60% devaluation of the RMB in one fell swoop. Soon