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Quotable – A dash for trash may yet become a flight to quality (Excerpts our emphasis)

“For many, the unsettling feature of the post-March bounce is that it was driven by a dash for trash. Undercapitalised banks and companies with overstretched balance sheets have been in the vanguard. Still more worrying is that the S&P 500 index is once again way above fair value as measured by the cyclically adjusted price earnings ratio, which is a multiple of average earnings over 10 years.

“…The pattern of the stock market upturn is likewise perfectly logical. Since the collapse of Lehman Brothers last year, it has become clear that governments have no appetite for further systemic shocks. So big banks are in clover because their capital position continues to be subsidised by the state. Loose monetary policy delivers easy profits by cutting their borrowing costs and increasing their interest spreads. Increased concentration resulting from bail-outs means that pricing power is strengthened.

“…A more profound question is whether the stock market has sufficiently grasped the nature of the post-crisis model of capitalism the world is moving towards. Governments will be exercising greater control over the management and levels of profit in banking, the motor industry and elsewhere. Regulation will increase, as will taxes. And the populist backlash against bank bonuses threatens to spill over into a wider resentment of profits and wealth creation.”

                             John Plender, Financial Times

FX Trading – Does it matter?
Chinese stocks got whacked overnight, down 6.7%. Will it matter? If the story about China finally increasing domestic demand proves true, evidenced by increasing exports from the Asian countries into China, it could likely blunt any negative impact of falling stocks in Shanghai. But, we won’t know that till we know it.

The daily chart below is a bit convoluted, but it compares Shanghai Stocks (red line) vs. S&P 500 (black line) vs. 10-yr T-note Futures (maroon line) vs. Aussie-USD (blue line).

The price action of the stuff above will show us if the break in China’s stock market matters.