The fate of the global equity market rally now comes down to China.Will it continue to stockpile hard assets? Will the data points continue to soothe and impress? Much is at stake either way.If you grew up in the United States, you know that English literature is one of those subjects they foist upon you in 10th grade or so.I recall very little from English Lit 101.Most of the stories and poems we read (or pretended to read) have become a hazy blur.But after all these years, one poem still stands out.Due to its oddness and simplicity, I have never forgotten it.The poem is "Red Wheelbarrow" by William Carlos Williams, and it goes like this..So much depends upon a red wheel barrow glazed with rain water beside the white chickens.That poem comes to mind as I ponder the odd yet powerful simplicity of this global market rally.If you take a look around, it is quite impressive how everything has moved higher.And I do mean just about everything.Commodities are up.Currencies are up.Emerging market equities (and bourses around the world) are up.Dead duck U.S.Consumer retail stocks are up.Crude oil, which has moved twice as far in half the time in comparison to all previous rallies of the past two decades or so, is way, way up.So what's going on? With apologies to William Carlos Williams, here's the poetic take..So much depends upon a red China stockpile paid for by stimulus beside the massaged data points.Translation for all you non-poetic types. China has taken the "industrial inflation hedge" concept and gone to town with it.It has been stockpiling raw materials and hard assets like crazy, and this in turn has popped the Baltic Dry Index (lots of shipping required) and driven commodity prices up.At the same time, a steady stream of rosy data points on the Chinese economy has convinced investors that all is well, that "decoupling 2.0" is at hand, and that the dragon shall boldly lead us into the land of milk and honey (i.E.Global economic recovery).Stockpilin'.The "industrial inflation hedge" concept was introduced in these pages some time ago (and originally to Macro Trader members some time before that).On April 22nd we observed the following..Hard assets like copper and nickel and zinc are immune to the whims of the printing press, and China will need all those metals and more, in substantial quantities, to build out the vision of economic prosperity it holds for the coming years.And what better time to stock up than in the quiet period before a stimulus- and debt-fueled inflation tsunami returns?We further observed, in that April 22nd piece, that China would employ three specific strategies in its "stealth abandonment" anti-dollar campaign..1) Speak to those with ears to hear (i.E.Test the waters with subtle trash talk against the dollar).2) Quietly circulate the yuan (start small, with the intent of later challenge once strength has accrued).3) Embrace the industrial inflation hedge (buy boatloads - literally! - of raw materials and hard assets).All three elements have come to pass, as predicted and expected, with one major caveat.Your humble editor expected these strategic moves to be deployed gradually and quietly.Instead they have been deployed rapidly and loudly, to a shocking a degree.The dollar trash talk has become anything but subtle.Chinese officials are now making aggressive, vocal demands that the yuan be used in more transactions, even going so far as to call for the issuance of yuan-denominated U.S.Debt (!).And, last but not least, the dragon has gone absolutely hog wild with the industrial inflation hedges.In an eye-opening piece titled "China's Commodity Buying Spree," The New York Times chronicles just how much of a hoarding groove China has gotten into..At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week.Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans.Starting in April, China began stockpiling significant quantities of crude oil.No wonder commodities have been ripping and snorting like the good old days.And no wonder traders are looking around and starting to see inflationary pressures everywhere.The Page One Problem.We went on record expecting this to happen, and it did.Man oh man, did it ever.And it's still happening, right now.Copper and oil are breaking out to fresh highs as I write.The commodity currencies, too, are flying higher than a kite (great news for all of you who took our table-pounding currency diversification advice some months back).That's all a reason to be happy, right?Yes, but to be honest, for me it also creates a reason to be nervous.I look at some of these incredibly extended trends and I think about an old Yogi Berra line. "Nobody goes there anymore, it's too popular." Trends are like people - they can get frail with old age.Trends can also get winded.They need to breathe.What's more, China has been so blunt and upfront in its "down with the dollar, up with hard assets" campaign that I'm starting to wonder how far we are from the "page one" problem.By page one I mean page one of the newspaper.The idea being, you don't make money from news stories that are splashed above the fold in bold headline type.You make money from the story buried back on page sixteen, where few have really cottoned onto it yet.It's the process of migration from page sixteen to page one that produces the profits.By the time everybody and their brother know the deal, it's pretty late in the game.Then, too, I wonder how many checks China can write.Ninety freighters full of iron ore! Damn! Where are they going to put all that stuff? When it comes to hard assets, are they going to just buy everything available.Or only buy as much as they can afford? Is there any distinction between the two?It's very tough to say, of course.We know little about China's hidden intent, and Beijing likes to play it close to the vest.China-watcher energy analysts are so data starved, for instance, some of them are using the free satellite capability of Google Earth to make guesses about where China might (or might not) be storing crude.(Apparently there is a way to interpret building structures and ground movements with oil in mind.).China's strategic intent and spare buying capacity thus become key factors here.If the dragon intends to throw another couple hundred billion directly at hard assets, then maybe the page one treatment won't matter.A buying spree with that kind of aggressive depth and duration could drive a move for quite a long time, regardless of how many caught wind of it.Sort of how oil soared to triple digits and beyond even as the world gaped in awe.But one has to wonder.Could even cash-rich China find itself tapped for funds at some point? I mean, how much aluminum, copper, tin, canola, soybeans and so forth can a country sit on? And beyond a certain point, when the stockpiles pile up to the sky, aren't there more pressing uses for the funds?Dubious Data Points.The other disconcerting thing is the lack of visibility when it comes to China's economy.We are told that China is doing amazingly well, and the official statistics seem to back this claim.Investors certainly seem to believe this, as China's health is the rationale for bidding up emerging markets like gangbusters.But there are all kinds of weird discrepancies on the ground.For example, China's electricity usage has gone down when it should have gone up.That doesn't make sense if factories are humming.And then there's this, via Grant's Interest Rate Observer.In a recent Morgan Stanley fact-finding trip, the analyst who led the trip reported 11 out of 12 investors left Chinese soil with fresh concerns."It's not that the stimulus is not working," the analyst noted, but more that "the trip exposed massive levels of excess capacity.".So it sounds like China indeed has a leg up on the United States in terms of putting their half trillion bucks or so to immediate and aggressive work.But while the mandarins in Beijing know how to move fast, they aren't necessarily the greatest at figuring out what to spend the dough on.One might further think Western investors, as acquainted with the ills of government as they are, would be more skeptical than Chinese locals in regard to anticipating positive effect.But no.The outsiders buy the China recovery story hook, line and sinker, while the insiders maintain their doubts."The local Chinese are clearly skeptical," the same Morgan Stanley analyst tells Grant's, "as savings rates are rising despite government incentives to consume.".So Much Depends.And now we come full circle back to the William Carlos Williams poem.What we are experiencing now, I believe, is a massive sentiment-led rally (or bull move, or whatever you wish to call it).And it is almost all pure sentiment so far, with buying rooted in hopes for the future rather than actual improvements reported."So much depends" on China as savior - the cornerstone and lynchpin of the decoupling 2.0, turn-the-clock-back mentality that has now gripped the globe.My slim hope is that the Chinese really and truly know what they are doing, because, in fueling investor optimism with such flair, they are playing a high stakes game.My worry is that they drop the ball, somehow, and the result shows up as a violent wake-up call for "high beta" assets.Emerging market equities, energy, commodities and the like.What happens next is far from clear.The huge stockpiles could continue to grow at a breathtaking pace - after all, Beijing has plenty of greenbacks to work through - and the dragon's data points could continue to impress, or at least not frighten.But with that said, a stumble from the dragon.And the shock of a sharp, swift deflationary contraction immediately following.Does not feel like a far-fetched scenario at this point.It would certainly have profit potential as a surprise event, given how far the notion seems to be from Mr.Market's mind.
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