And, lo, never was the sun shining so bright as it was above Beijing’s massive parade last week, to mark the 70th anniversary of the end of World War II. But while never were things going so right during the extravaganza to trumpet the absolute power and dominance of China’s leaders, the pall of their woes, environmental and economic, may be about to descend on them again.
 
By any means necessary, Beijing made sure the victory celebrations came off without a hitch. To ensure those blue skies, the government shuttered factories and curtailed automobile usage to lift, if only temporarily, the cloud of air pollution that normally hangs over the capital city, just as it had done for the 2008 Olympics.
 
And Beijing also took steps to quell the financial maelstrom that had enveloped the stock and currency markets. As part of those efforts, the authorities investigated brokerage analysts and the media for supposed insider trading and “rumor mongering” as culprits in the 40% collapse in the Chinese equity markets from their highs a few months ago.
 
A leading Chinese financial journalist confessed on state television to stirring up “panic and disorder” in the markets. That confession apparently was effective, as the Shanghai Composite’s rate of descent slowed markedly ahead of the shuttering of the mainland’s markets for the celebrations on Thursday and Friday.
 
And the notion that we in the media can actually influence the markets was bolstered by research by some academics, specifically in our use of what they seemingly saw as inflammatory words in news reports to describe market swings.
 
In a paper by Rajna Gibson Brandon and Christopher Hemmens of the University of Geneva and Matthieu Trepanier of Switzerland’s University of St. Gallen, an examination of market accounts by our corporate colleagues at Dow Jones Newswires from 1998 to 2012 found that a certain “lexicon” was linked to “irrational behavior” by equities. These words included the likes of “daft,” “hysterical,” “irrational,” “perplexing,” “stupid,” and even something as innocuous as “unusual.” The study, by the way, was reported by Bloomberg News, whose reports are wont to inform readers dryly that markets “fluctuate,” rather than inflame their passions unduly, as the academics found the DJ crew guilty of doing.
 
Specifically, the irrational behavior induced by such intemperate verbiage was found to depress stock prices for a few days. Eventually, however, the prices recovered, or reverted to their means. The lesson for investors then would be to use the media’s “panicking” and “paranoia”—to pick an alliterative pair of irrationality-inducing words in the lexicon assembled by the researchers—as a buying opportunity. But Chinese officials apparently are averse to leaving such things to chance.
 
As Anne Stevenson-Yang of J Capital Research wrote last week, in China “markets may only operate within the parameters specified by the government. In an oft-alluded metaphor, free markets are the bird; the government is the cage.”
 
Beyond the curbs on the media, Beijing is relying on administrative measures to prop up the market. Among them: “criminal penalties for failing to support the program of ‘buy high, hold indefinitely’ ” for brokers and major investors, she writes. So, even as the China Securities Regulatory Commission steps back from overt stock purchases, the government apparatus still is working to hoist the markets.
 
Beijing also wants to control China’s currency, the yuan or renminbi, which it recently devalued. The yuan’s exchange rate actually firmed, to 6.3559 to the dollar from 6.4128 on Aug. 25, in the lead-up to last week’s great parade. (Fewer yuan to buy a greenback means the Chinese currency is stronger.)
 
But there is a cost to keeping up appearances with a stable exchange rate as a backdrop to the grand celebrations in Beijing. That price, as Stevenson-Yang explains, is a tight rein on the supply of renminbi, or RMB. The Peoples’ Bank of China could refrain from lending new money to the interbank market, further tightening monetary conditions. A likely result: rising loan defaults by corporate borrowers, she says.
 
Or, the monetary authorities could buy up RMB by selling U.S. dollars to satisfy the demand for greenbacks that results from capital flight, which is ongoing despite government curbs on taking money out of country.
 
That capital flight is landing in high-end U.S. residential real estate, among other places. One clue: A multimillion house that sold in Gatsby country on Long Island was listed with “888” as the last three figures in the asking price, eight being a lucky number for those steeped in Chinese numerology.
 
The monetary mechanics are arcane but key. Selling dollars (actually, U.S. Treasury and agency securities) to slow the fall in the RMB shrinks the PBOC’s balance sheet. This is the opposite of the quantitative easing engaged in by other major central banks: the Federal Reserve, the European Central Bank, and the Bank of Japan, which all bought securities to inject liquidity (and were content or even eager to let their currencies thereby weaken, to boost their economies).
 
With the parade over, the Chinese authorities are unlikely to let tight money worsen strains on the banking system. “A financial crisis would necessitate a quick currency depreciation of at least 10% to 15%, enough to make buying U.S. dollars and moving money over the border seem unattractive. A depreciation of that magnitude would immediately impact currencies across emerging markets, from the peso to the real to the baht to the rupiah,” Stevenson-Yang concludes.
 
That would gain China relatively little, while continuing to batter other emerging economies. While mainland China’s markets remained closed for the parade at the end of the week, Hong Kong slumped Friday, along with most other emerging markets.
 
The bird may be caged in China, but markets elsewhere are flying—or fluttering—earthward.
 
EVEN WITH TRADING ON mainland China bourses suspended, U.S. stocks closed out the second-worst week of the year with losses on the order of 3%, trailing only the 5% drop of a fortnight earlier.
 
The temptation is to blame Friday’s 272-point drop in the Dow Jones Industrial Average on that day’s news—specifically the 173,000 rise in non-farm payrolls for August, which while below forecasts, doesn’t seem punk enough to forestall a liftoff in short-term interest rates at the Federal Open Market Committee’s Sept. 16-17 confab.
 
Without resorting to inflammatory prose, it should be noted that global markets were headed for a rout long before the U.S. jobs numbers were reported an hour before Wall Street equity trading started. Hong Kong and other Asian markets had fallen and European bourses already were diving, as Germany’s DAX entered the dreaded “death cross” (the 50-day moving average falling below the 200-day moving average).
 
We’re heading into a long holiday weekend in which the market is apt to be a major topic of conversation around barbecues, perhaps more so than Hillary and The Donald, Brady’s Deflategate suspension being lifted in time for the NFL season’ kickoff, the drop in gasoline prices, or Serena’s prospects of capturing the Grand Slam.
 
If anything, the hiatus until U.S. markets reopen Tuesday morning may have induced more angst than eagerness among investors ahead of the Labor Day break. China reopens Sunday evening U.S. time, while trading continues in the rest of the world, with Europe and Latin America continuing to be battered. It’s hard to enjoy your craft-brewed IPA as you steal glances at quotes on your phone.

IF YOUR PORTFOLIOS HAVE been lagging, at least you’re in good company, as my colleague Andrew Bary notes in the following report:
 
Big university endowments soon will be reporting their investment results for the year ended June and their performance likely will fall far short of that in the prior 12 months, during which Harvard, Yale, and other major schools had 15% to 20% gains.
 
The markets weren’t as cooperative in the latest year, with the S&P 500 returning 7%, the EAFE index of overseas developed equity markets falling 6% in dollar terms, while emerging markets also were weak. It’ll be interesting to see if the endowments, which tend to be light on U.S. stocks and heavy on alternatives such as private equity and hedge funds, are able to beat a 60/40 mix of U.S. stocks and bonds, which returned 5%. Our guess is that most didn’t do much better than that in the past year, and likely have fared worse since then, with the S&P 500 off about 7% since June 30.
 
Hedge funds generally have been disappointing, and natural-resources investments, which many endowments favor, likely fared poorly, thanks to the plunge in commodity prices.

Performance might hinge on private equity, a favorite of places like Yale. Some big winners, such as Uber, could help endowments’ private-equity results, but not enough to offset drags caused by conventional assets.
 
Endowments need 7% to 8% returns to meet spending requirements and to keep up with inflation. Many probably didn’t hit that target in the latest 12 months and will be hard-pressed to do so in the current year.
 
Public pension funds also are being forced to cut their return assumptions, as The Wall Street Journal reported Friday, to a still heroic 7.68%, the lowest projection since 1989. That’s a less obvious cost of ultra-low interest rates.