There’s a story that plays out in cycles all over the world’s financial markets: a bubble grows and grows, creating all sorts of wealth and hype. And then suddenly, the bubble bursts. Much of that wealth that was built up is lost. Companies go out of business, and so on. It has happened many times in the U.S., and the Federal Reserve and the executive branch have learned that there are steps that can be taken to prevent such occurrences. Interest rates are heavily monitored. Trading activity is strictly regulated, and sometimes certain impositions–like a moratorium on short sales–need to be imposed. Even big issues, like the housing market crash of 2008, can usually be resolved very quickly.
However, that does not mean that the U.S. economy is immune from events outside of its jurisdiction. For example, the current crash that is ongoing in China has had an impact upon the U.S. economy and the trading taking place within it. Even the best U.S. regulatory efforts cannot expand far into China’s monetary policy, nor should it try as this impacts the efficacy of a free market. The point is, crashes happen, and they are a normal, yet sometimes negative, part of the cyclical market.
The long term impact of this is that China owns many U.S. treasuries, and that if these were to be cashed in, there could be a drain on U.S. holdings. Yes, there’s been a lot of speculation about China buying up U.S. assets so that they could gain a foothold in our marketplaces, but this isn’t likely to happen in this instance. In fact, it’s more likely that the Chinese government was using this strategy as a hedge for an event like what they are currently going through. There would likely be an impact on U.S. stock prices if a mass selling were to occur, but the long term repercussions would not be bad. In fact, if this does occur, you should prepare yourself to profit off of it. Position yourself so that you can make money off of falling asset prices, either with selling short in the stockmarket as a day trader, using put binary options on major assets through a binary broker, or by readying yourself in the Forex market for the most likely occurrences. Some of these things are easier than others and some carry more risk than others, but all stand the chance of making you a lot of money if China decides to sell off U.S. treasuries.
It might seem strange to watch what the government and regulatory decision makers of China are currently doing to help their stockmarket recover, but if it means that you can make more money, it’s worth it. Even if you don’t trade currencies, even if you don’t trade overseas assets, this is something to pay attention to as it could impact what you are doing in your domestic based trading. Just as European traders watch the Fed to see when the best time to go short on the EUR/USD is, U.S. based traders should be watching other governments, too–and not just China. If you want to look back in history, there are always lessons to learn. Japan’s crash in 1989 could be a good place to start. The Nikkei 225 dropped during this extended time while the S&P 500 rose. The difference was the sheer quantity of treasuries involved. China has much more potential to cash theirs in. If this happens, the impact will not be the same, but if nothing does happen, as has been going on so far, expect the major U.S. indices to rise as China’s drop. It’s not a perfect matchup, but it’s a starting point.