On the heels of the Shanghai plunging another 5% for the second straight day before rallying to close positive, today one of the greats in the business sent King World News a fantastic piece that warns the chaos in China is now spreading to other Asian nations, and also includes an important note from Barry Habib about inflation and the bond market.

King World News - Richard Russell - China's Destructive Bear Market May Spread To The U.S. Within 30 Days

August 19 (King World News) – From Art Cashin’s notes:  “Overnight And Overseas – Shanghai sold off over 5% in the morning but he government woke up during the lunch break and they managed to close up 1.2% solely on the late day rescue. There were also rumors of bank easing and/or further stimulus. Hong Kong didn’t buy it and closed down 1.2%.

Tokyo dropped 1.5% and Korea fell 1.0%. Vietnam devalued their currency with rumors of more shoes to fall in the region and elsewhere.

The China volatility has sent most European markets lower with Germany leading the way down about 1%. The yield on the U.S. ten year is flat at about 2.19%. Gold and oil are mixed with small changes. The Euro rallied slightly against the greenback.

Replacement Value Is Important — This morning we get July CPI and it comes at a time when inflation levels are critical to the Fed’s timing. Yesterday, my good friend, Barry Habib, the mortgage maven, dropped a note on a possible twist. Here’s a bit of what Barry wrote:

“Tomorrow’s CPI Report for July could prove to be very interesting. As you know, the July reading for 2015 will replace July of 2014. And the Core July 2014 was just 0.1%. So a reading that matches the consensus estimates of 0.2% for July 2015 would bring year over year Core CPI up to 1.9% from the current level of 1.8%, and a lost closer to the Fed’s 2.0% target.

And a tick up in CPI could cause some problems for the Bond market. The current 10-year Treasury Note Yield is just under a ceiling of resistance at 2.19%, which is the 100-day Moving Average. A break above this ceiling would likely push yields towards the band of 2.25% – 2.31%. As we have been saying for a while, the Bond market would like to see the Fed hike rates to stay ahead of inflation. But in the absence of a Fed tightening, Bond investors will protect themselves from the erosion of their fixed returns, caused by inflation, by demand a higher rate.

As Pasteur would say — Chance favors the prepared mind.

Consensus – We get a bit of a one/two punch today, with CPI possibly influencing the Fed and then the Fed minutes at 2:00. let’s see if that moves us out of this range. The action will continue to be a key influence on equities. Stick with the drill – stay wary, alert and very, very nimble.”

***ALSO JUST RELEASED: Bill Fleckenstein On China, Europe, Silver, Retailers, Inflation And QE, Plus A Bonus Q&A CLICK HERE.

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