Why does the market have to correct? It has to correct because the rally is long in the tooth. Market bears have griped about the lack of a correction (which is a decline of 20% or more) for a long time. However, even more upsetting is how long it’s been since the market had a garden variety pullback- a 10% decline.
Well, they had to feel a lot better on Friday as the market stumbled out the gate and never regained equilibrium.
There are a bunch of theories on why the weakness, including news out of China and Greece, however many point to the higher core-consumer price index (CPI) as the biggest source of pressure. The core number does not include food or energy prices. However, that number, while in a declining long-term downtrend, is higher this year and Americans are now worried about inflation.
If inflation becomes an issue, it will force the Fed to hike rates, although June is off the table, more and more mavens are calling for September.
Turn Those Machines Back On!
On Friday, equity markets around the world, including the United States, were hit hard when China loosened rules to make shorting stocks easier. Well, they took a page from the character Mortimer Duke, to "Turn those machines back on!"
The People’s Bank of China (PBOC) announced a dramatic cut in reserve requirements to 18.5% that will unleash $194 billion into their economic system.
This big move in China leaves its reserve levels significantly higher than America, which is still far too high at 10%.
For all the trillions pumped into banks, Main Street has been shut out by rules ostensibly sold as punishment and a way to curb risk at those same banks.