June 21, 2011

Short-term: 2 green, 2 yellow
Intermediate-term: 3 yellow, 1 red
Composite: Neutral

Pretty significant improvement in the market. Still more characterized by a reduction in selling pressure than by an increase in buying pressure but that is also rather typical in a V-type bounce.

There does appear to be a cash crunch in Asia – originating in China. Short-term interbank rates have doubled in the last week and short-term interest rates are now over 8% and the highest in 3 years. The government has ordered banks to increase reserves which will mean that they are going to be pulling loans/credit from their customers. And the yield curve is now sharply negatively sloped — which means only very short-term loans will be available. Monetarily, this usually indicates a recession is being forced. This will likely have an impact outside Asia because Asia is the source of the global demand for commodities and the main engine for economic growth in the world.

These two are very contradictory forces. The Western equity markets are bouncing while Asian credit markets are indicating a future deflationary squeeze on global trade. It’s usually safer to assume the credit markets are smarter than the equity markets. I don’t think this time is different.

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