Daily Digest

Daily Digest - September 8

Tuesday, September 8, 2009, 11:25 AM
  • China to diversify out of U.S. dollars
  • China, Bernanke, And The Price Of Gold (H/T SaxPlayer00o1)
  • And just in case you thought 4pm on Friday means Blue Label on the rocks time for HAL9000, you were wrong ... 
  • U.S. Government The New Sub-Prime Lender
  • Peter Schiff (Video on definition of inflation, H/T SpillDenmark)
  • Deflation Interview on FSN WithRobert R. Prechter, Jr.
  • Chart of the Day - Journey Into Deflation (Video)
  • Faltering Construction Loans = More Bad News for Banks
  • A Surge in Homeless Children
  • Gold Wars, Part III: Return of the Gold Standard (PLEASE DON'T READ IF YOU DON'T WANT TO SEE A BIBLICAL QUOTE)
  • Soaring junk bond defaults

Economy

China to diversify out of U.S. dollars

According to an account published in the Daily Telegraph by Ambrose Evans-Pritchard, the Chinese government is quite anxious about money printing in the United States and the effect this printing could have on China’s dollar denominated reserve assets. 

For months now, the Chinese have signalled growing unease with U.S. monetary policy. And now comes the clearest signal yet that they are moving away from the dollar.  Cheng Siwei, a former vice-chairman of the Standing Committee, said point blank that the Chinese central bank was actively diversifying new reserve assets away from the U.S. dollar and into currencies like the Yen and the Euro.  He also mentioned Gold as an alternative the Chinese are exploring.

The $2 trillion in U.S. dollar reserves the Chinese already have are a sunk cost.  Going forward, the Chinese are free to do as they wish with incremental additions to reserves. To the degree that they sell dollars and buy gold, Yen or Euros, there can only be downward pressure on the U.S. dollar.

China, Bernanke, and the price of gold (H/T SaxPlayer00o1)

Where is the gold going to come from?

And just in case you thought 4pm on Friday means Blue Label on the rocks time for HAL9000, you were wrong:

U.S. Government The New Sub-Prime Lender

To make this upcoming “train-wreck” even worse still, the U.S.'s spendthrift, baby-boomers are starting to retire, and their retirements are grossly under-funded – even if the U.S.'s pension system can remain solvent (see “CalPERS is unsustainable”). With real estate comprising 75% of the assets for these financial lemmings, and with these boomers needing to come up with trillions of dollars just to come close to maintaining their standard of living, there is no mystery as to what they will be selling – year after year after year (see “U.S. pension-crisis: the $3 TRILLION question”).

Peter Schiff (Video on definition of inflation, H/T SpillDenmark)

Deflation Interview on FSN WithRobert R. Prechter, Jr.

Mp3 / Windows Media / Real Player

Chart of the Day - Journey Into Deflation (Video)

Faltering Construction Loans = More Bad News for Banks

“At the end of June, $291 billion in [commercial] loans were outstanding, down only a few billion from the peak reached earlier this year. . . . Foresight Analytics estimates that 10.4 percent of commercial construction loans are troubled, but expects that to increase as the year goes on.

The definition of troubled loans used in the accompanying charts includes loans that are at least 30 days past due, as well as those on which the bank identified problems that led it to stop assuming that interest on the loans would be paid.”

Those folks who believe the “all clear” whistle has sounded may find themselves in unpleasant circumstances in a few short quarters . . .

A Surge in Homeless Children

While current national data are not available, the number of schoolchildren in homeless families appears to have risen by 75 percent to 100 percent in many districts over the last two years, according to Barbara Duffield, policy director of the National Association for the Education of Homeless Children and Youth, an advocacy group.

Gold Wars, Part III: Return of the Gold Standard (PLEASE DON'T READ IF YOU DON'T WANT TO SEE A BIBLICAL QUOTE)

Much like a “bomb squad” is sometimes not able to defuse a bomb before detonation, the damage caused by decades of the unbridled greed (and unprecedented stealing) of bankers may be so far advanced that a financial catastrophe can no longer be defused.

A return to a “gold standard” is now imminent. We can only hope that defeat of the bankers comes soon enough that history does not look back on this as a “pyrrhic victory”.

Soaring junk bond defaults

so junk defaults have hit 10% on their way to 13-18% in spite of massive refinancing subsidies for troubles issuers fostered by huge liquidity injections by the federal reserve bank into the relevant markets and agents.

if that doesn't underscore just how massive the corporate junk bond problem is, i don't know what could. a lot of these companies are going to default eventually regardless of liquidity provisioning because smaller bank balance sheets are going to force them off the fringe on credit quality concerns, and they'll become a chapter of the history books written on our society's great deleveraging.

30 Comments

Davos's picture
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Re: Daily Digest - September 8

Just to point out: I didn't switch into the "Deflation" camp. I'm still in agreement with Peter Schiff and Jim Puplava that inflation is the expansion of the money supply. I know it, with respect to the Ponzi credit that a lot of money is being destroyed and in some respect the money supply is decreasing but my eye is focused on the 2 trillion coming in the door and the 4 trillion going out the door and the anemic bond sales and QE to make up the difference.

I don't know what will happen if the equities tank. Will there be a perceived flight to safety (securities/bonds)? Will that be enough to finance the parasite?

Anyway, with respect to those in the deflation camp and with me not really knowing if I'm right or wrong here is what I see out there.

Take it easy.

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Re: Daily Digest - September 8

I think the chances of a deflationary tornado sucking everything into its grips is very possible... but only when the stimulus from countries around the world ceases. While the technical definition of inflation is the expansion of the money base, the symptoms of higher prices can very easily occur without an expansion if the consumerable prices are driven through scarcity in the underlying commodities. And sure is eggs is eggs as soon as (if..) the world bounces back to consumptive 'growth' the price of oil will shoot through the roof and prices will rise. It is feasible for this to occur even whilst the broad monyey supply is being torn to shreds in a deflationary death spiral. It is a crazy thing to say, but once we tip over into a world of scarcity, rather than plenty, the old rules simply won't apply. That's my take any how..

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Re: Daily Digest - September 8

I just completed the DD for the 10th, about 40% came from mainstream media sources. I wouldn't be surprised to see new dollars with red ink from the mafia of foreign countries with the verbage "Marked Man." 

IMHO that will lead to "high" prices for any and everything.

I think the world has had enough of US. Just from the Drudge:

UN wants new global currency to replace dollar... 
China alarmed by US money printing...
Switzerland topples America as most competitive economy...
Weakening...
Obama Asks Senate To Increase Debt Ceiling...

.Dollar hits low for year...

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Re: Daily Digest - September 8

That's scary,   how long before this juggling act falls apart I wonder?

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Re: Daily Digest - September 8
Comment that Los Angeles is "almost certainly near or at insolvency"
China's finance ministry will issue 6 billion yuan ($878 million) in yuan-denominated bonds in Hong Kong, its first such issue and a key step in the gradual internationalisation of the Chinese currency.
 
 
 
 
 
 
Young Workers: A Lost Decade; China Is Now A Net Seller Of U.S. Treasuries (DEMCAD)..use "more info" to see his links. This guy is from Michigan and now lives in Alaska. He posts almost daily on youtube about economic and social issues that are in the news.
 
 
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Re: Daily Digest - September 8
Mobile towers threatening honey bees in Kerala

"In one of his experiments he found that when a mobile phone was kept near a beehive it resulted in collapse of the colony in five to 10 days, with the worker bees failing to return home, leaving the hives with just queens, eggs and hive-bound immature bees."

http://www.ptinews.com/news/256707_Mobile-towers-threatening-honey-bees-in-Kerala

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Re: Daily Digest - September 8
gregroberts wrote:
Mobile towers threatening honey bees in Kerala

"In one of his experiments he found that when a mobile phone was kept near a beehive it resulted in collapse of the colony in five to 10 days, with the worker bees failing to return home, leaving the hives with just queens, eggs and hive-bound immature bees."

http://www.ptinews.com/news/256707_Mobile-towers-threatening-honey-bees-in-Kerala

I'd gladly give up my cell phone for food. I wonder how long the world would provide food without bees? Really good read, thank you for the link.

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Re: Daily Digest - September 8

Ah yes....

DavidC

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Re: Daily Digest - September 8

Peter Schiff, FTW !!!

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Re: Tectonic Schiff

The Schiff Video demonstrates Government mispeak in a nutshell 

Schiff defines Inflation academically

and his opponent uses "the Federal Reserve's definition"   

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Hugh Hendry Eclectica August Commentary

Some commentary from the Can Turtles Fly?: A Contrarian Investors Blog about Hugh Hendry's Eclectica August Newsletter.

Hugh Hendry August commentary... sticking with his deflation playbook

 

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Re: Daily Digest - September 8

Thanks Jag, I have a tremendous amount of respect for Hugh's work, can't wait to read that especailly in light of what is happening to the dollar. Take care

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Re: Daily Digest - September 8

Arizona really  needs money right now, so look at what they're selling.

Just for my own personal interest...I don't care about that old building, but how much

for one of those UFOs in the pic? I could use one of those. Oh, here's the link:

http://features.csmonitor.com/economyrebuild/2009/09/08/to-cut-deficit-arizona-may-sell-its-capitol/

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Re: Short Term Deflation and Long term inflation

Just to point out: I didn't switch into the "Deflation" camp. I'm still in agreement with Peter Schiff and Jim Puplava that inflation is the expansion of the money supply

Prices may fall in the short term, but the long full has to be inflation:

1. Deflation would bankrupt gov't spending as tax revenues plunge will outlays for benefits will rise. The gov't would either have to default, resulting in collapse of the dollar causing inflation for good priced in Dollars, since the value of the dollar is completely dependant on the credit value of the federal gov't. A real default would cause overnight hyper-inflation, as it has done with so many nations that defaulted on thier debt. Fortunately for many of them, the IMF provide loans to prevent a mad max style collapse. To US is too big for an IMF bailout.

2. Its extremely improbable that the federal gov't would permit a real default on its debts, or drastically cut spending. Even if the gov't did cut spending to  the bones, amount of interest payments would consume too much of the federal taxes to sustain itself for long. Its much more probable that the gov't will print money (as they started to this year) to maintain the status quo for as long as possible. Politicans like to spend money, especially money that they don't have.

3. The Federal gov't has promised enoumous entitlements to the baby boomers which are starting to retire. Because of the promises made (and believed) few boomers saved enough money for retirement. They fully counted on the entitlements promised, and politicans will do anything to provide the promised entitlements because the majority of voters are boomers. Few boomers will vote for politicans that cut entitlements or raise the minimum retirement age for boomers.

4. I believe there is a high probably of civil unrest in China in the next couple of years and this may shutdown exports from China. Consumer goods, parts, and unfinished goods produced in China may become in short supply if the period of civil unrests lasts for six months of more. Shortages of goods usually results in higher prices.

5. Pending global energy/water shortages. Much of the easy accessable energy and water has been tapped, yet population and demand for these resources continue to rise. The costs to replace consumed oil is rising as oil companies are forced to tap difficult and more expensive sources of oil as the easy and cheap sources of oil dry up. This will likely result in very large price swings for energy, as prices rise as demand exceeds supply, but collapse back as demand declines (because of high prices) and market supply increases (as the higher prices make it profitable to drill for expensive oil). However since Oil is a finite resource, direction of the price will be up.

6. Food shortages and higher food prices as water resources become more expensve. Already the US is in a 10 year drought in the southwest that is draining both above ground and under ground water resources. In some states, such as California are enacting laws to limit water supply for agraculture use. Its probably going to take a couple of years before these changes start to have a significant impact on food prices, but its envitable unless the drought ends soon. This drought isn't just in the US, as many other countries such as Austrialia have been in a long term drought too.

FWIW: The issue I have with Peter Schiff and some other folks is that they are looking for an exit strategy. In the case of Peter Schiff, its into China and other foriegn investments. I am not sure there is any safe exit.

  In the early 20th Century, American became the leading global manufacturer, which led the past for the US to become the financial capital of the world. However, in between becoming the leading global manufacturing capital and the financial capital, it had two depressions (one in the early 20s that was short lived because of a huge credit bubble that resulted in the Great Depression). In the early 20th Century, the US provided an enormous amount of credit to overseas markets to finance the sale of its goods (mostly for the first world war), After WW 1, Much of Europe was broke, financing the war. This lead to depression in the early 1920's because many creditors were unable to pay back there debts, or did so with devalued currency.  It appears that China is also falling into the same trap the US did by providing the US with enormous amount of credit to permit US consumers to buy Chinese manufactured goods.

 

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Re: Short Term Deflation and Long term inflation

Hello TechGuy: Quite a good piece, I agree! Take care

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Re: Short Term Deflation and Long term inflation

 

TechGuy wrote:

FWIW: The issue I have with Peter Schiff and some other folks is that they are looking for an exit strategy. In the case of Peter Schiff, its into China and other foriegn investments. I am not sure there is any safe exit.

 

I have listened to many hours of Peter Schiff, and I don't think he is looking for an exit strategy at all, he is an investor he is looking for opportunities that come up, and for the last couple of years many of the best investment opportunities have been outside the US. That's probably not going to change for a while.

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Re: Daily Digest - September 8
Davos wrote:

Just to point out: I didn't switch into the "Deflation" camp. I'm still in agreement with Peter Schiff and Jim Puplava that inflation is the expansion of the money supply.

 Inflation is a rise in the general level of prices of goods and services in an economy over a period of time, not rise in the money supply itself. If new, fresh money is created (issued)  to support production of varios goods and services, by giving credits directly to manufacturers or spending it on infrastructure (like debt-free money), there will be no inflation, guaranteed. Stop producing and all money would be worthless eventually, because there would be nothing to buy.

If banks or FED (or Treasury in ideal case) continue to stop lending money to those who really needs it, you can bet that economy will face deflation. All money today comes into the existence if form of debt not real, i.e. debt-free money and because of that, when banks stop lending it, collaps of economy is imminent. Old debt are paid off or goes default, money, i.e. medium of exchange is shrinking and there is no new credit/money to replace it. Economy suffers from illiquidity and that is exactlly what`s happening. It doesn`t mean anything if FED prints money, if that money goes to banks but than they refuse to lend it. That money is out of circulation, out of economy. It doesnt mean anything. It serves only to bailout banks and to keep their books compliant with present regulative. http://www.webofdebt.com/articles/big_brother_basel.php

P.S. Is Peter Schiff a relative of Jacob Schiff, the famous NY banker who financed communist revolution in Russia?

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What a great tool!

This article on Calculated Risk links to a Google tool that displays a myriad of economy-related searches over time.  Check it out!   (i.e., look at real estate; cars; mortgages and watch the search tally results on the charts - good stuff!)

http://www.calculatedriskblog.com/2009/09/google-domestic-trends.html

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Tracking Bonds

Interesting Analysis and Insight on primary dealers and their bond holdings:

http://www.zerohedge.com/article/guest-post-observations-unusual-bond-de...

Yves on unusual bond dealer behavior, submitted By Yves Lamoureux of Blackmont Capital

We keep hearing about a return to normalcy in financial affairs.
Spreads are back in line and risk appetite is healthy so we should all be feeling good.
I specialize in the behaviour of market participants. This week I am interested in pointing out the very unusual behavior of the 18 primary bond dealers in US Treasuries.

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Re: Daily Digest - September 8

Has this been posted by anyone already?

Here's a video of Max Keiser.

At just under 4 minutes into the video he talks of the next stage of the collapse
happening later this year, with bank bailouts of an additional $15 to $20 trillion.
At 6:45 into the video he says that the Chinese leadership has said that the dollar could be worthless in 12-24 months.
(At about 8:20 into the video)
"Those who own the most gold are going to be the only ones left standing in this economy"

 

 

 

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Re: Daily Digest - September 8

I was just listening to the FSN interview of Robert Pretcher again tonight, which Davos linked to above, and noted several apparent errors in his arguments.  First, I'm not clear on his definition of deflation and inflation.  Second, at one piont he said the run up in oil was just a bubble then at another point he said the decline in oil prices from that bubble was an indication of deflation - but you can't have it both ways!   Third, he said the Fed was exchanging treasuries for other (of dubious quality) financial assets, not printing money.  But the Fed's balance sheet has not only changed in composition but has expanded so the Fed must have issued additional money.  Fourth, he said all the money issued is temporary; banks will have to take back the assets the Fed bought - but I highly doubt the Fed can sell those junk assets into the market again for what the Fed paid for them.   Anybody else pickup on anything?   I'm still not convinced 100% either way on inflation/deflation but am looking at the arguments on each side.

Tom  

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Re: Daily Digest - September 8
Malden wrote:
Davos wrote:

Just to point out: I didn't switch into the "Deflation" camp. I'm still in agreement with Peter Schiff and Jim Puplava that inflation is the expansion of the money supply.

 Inflation is a rise in the general level of prices of goods and services in an economy over a period of time, not rise in the money supply itself. If new, fresh money is created (issued)  to support production of varios goods and services, by giving credits directly to manufacturers or spending it on infrastructure (like debt-free money), there will be no inflation, guaranteed. Stop producing and all money would be worthless eventually, because there would be nothing to buy.

If banks or FED (or Treasury in ideal case) continue to stop lending money to those who really needs it, you can bet that economy will face deflation. All money today comes into the existence if form of debt not real, i.e. debt-free money and because of that, when banks stop lending it, collaps of economy is imminent. Old debt are paid off or goes default, money, i.e. medium of exchange is shrinking and there is no new credit/money to replace it. Economy suffers from illiquidity and that is exactlly what`s happening. It doesn`t mean anything if FED prints money, if that money goes to banks but than they refuse to lend it. That money is out of circulation, out of economy. It doesnt mean anything. It serves only to bailout banks and to keep their books compliant with present regulative. http://www.webofdebt.com/articles/big_brother_basel.php

P.S. Is Peter Schiff a relative of Jacob Schiff, the famous NY banker who financed communist revolution in Russia?

Hello Malden:

Look, I respect your view on the definition of inflation.

I don't share it, or agree with it.

But, I'm not going to say it is wrong.

Rather then say "my" view, (Which isn't mine, it is just one that I share with Puplava and Schiff, they are the ones who pointed this out) is wrong maybe, just in case your view isn't correct, it would be better if you pointed out there is another view on inflation?

The one thing you might want to consider is this: Are you looking at everything? We take in 2 trillion and we spend 4 trillion. The difference (2 trillion) is no longer financed - much of it is printed. I'd estimate about 1 trillion a year now is going out the door, hot off the "press". China holds roughly 2 trillion total. The are NOT happy about this development. We have been called on the carpet,  Summers, Geithner, Clinton, Obama all say we will rein in the spending and now here comes an expensive health care plan.

The UN is calling for a new world reserve.

IMHO whether the banks lend or don't lend is what everyone is looking at, and they are missing what is going to sink the ship.

I'd also point out that the definition of inflation from years ago to today changed. Schiff saw this train wreck coming, his view of the definition was different then that of almost every economist (who by the way missed this.)

Take caer

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Re: Daily Digest - September 8

With all due respect to Peter Schiff, the one thing that is missing in the inflation argument is the velocity of money. Until that accelerates, inflation will be muted. Ultimately we will have a serious inflation problem. But before that occurs, the deflationary pressures created by debt destruction and low velocity of money need to play out. Just a thought or a different perspective.

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Re: Daily Digest - September 8

I would like to humbly suggest that everyone stop using the word "inflation."  There are too many definitions.  Just say what we mean instead.  Expansion of the money supply, increased prices of goods and services, depreciation of the currency,etc. seem to be perfectly acceptable terms that actually describe what we mean.

OK, go on with the discussion.

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Re: Daily Digest - September 8

THE US economy may witness double-digit inflation in a few years unless the central bank tightens up its monetary policy, Alan Greenspan warned.

“I am not talking 3-5 per cent inflation, I am talking double-digit inflation in the US.”

http://www.theaustralian.news.com.au/business/story/0,28124,26042538-501...

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Re: Daily Digest - September 8

SSTF Shocker - $6B August Deficit | zero hedge

The Social Security Trust Fund reported an August net deficit of $5.865 Billion. This is the largest monthly deficit in nineteen years. Base on recent years data it was not surprising the Fund ran a deficit in August. But the magnitude of the shortfall was a surprise to me. This deficit is now the seventh in the past twelve months. That pace has never been seen before.

...

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Re: Daily Digest - September 8

Calculated Risk: Bankruptcies: Movin' on Up!

From Bloomberg: Wealthy Families Succumb to Bankruptcy as Real Estate Crashes

Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.

More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Chicago bankruptcy attorney Joseph Baldi.

... Wealthier people filing for bankruptcy typically have large homes, two car payments and children in private schools, said Leslie Linfield, executive director of the Institute for Financial Literacy in Portland, Maine ...

“There are a lot of people with real estate, and they can’t afford it,” said Baldi ... “They can’t make the payments, and they can’t sell the house.”
emphasis added

Overall personal bankruptcies were up 36% in Q2 2009 compared to Q2 2008 - so high end bankruptcies are increasing twice as fast as the average.

This fits with the articles yesterday on Option ARMs and Interest Only loans that were used predominantly in mid-to-high end areas.

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Re: Short Term Deflation and Long term inflation

ernie wrore:

I have listened to many hours of Peter Schiff, and I don't think he is looking for an exit strategy at all, he is an investor he is looking for opportunities that come up, and for the last couple of years many of the best investment opportunities have been outside the US. That's probably not going to change for a while.

Peter is looking for an exit strategy out of US market into foriegn markets. The issue I see is that foriegn markets are linked to the US market by  trade, currency and credit. If the US markets rolls over, its going to affect the foriegn markets, either because of trade with the US, trade using US dollars for exchange, or the large amount of money owed by the US (both private and public sectors) to foriegn gov'ts and businesses.

When the US economy rolls over, its going to take time (years, if not decades) for many foriegn market to untangle themselves from this mess. In addition, many foriegn economies have elevated debt as the used excessive amounts of cheap credit to building infrastructure and factories. Consider that the Real estate bubble wasn't just a US problem, its a global problem. Another factor is how foriegn gov'ts and bussiness react to the change. A few bad policy decision in the time of crisis can have disasterous economic effects. We have no way to know what policy changes will be enacted during this period. My gut expectation, is that there will be a many bad decisions made by foriegn gov'ts,.  Its very easy to make a big mistake and very hard to get it all right and get it right in a timely fashion  to avert a crisis.

 In the past Asia has made several wrong decisions that resulted in the 20+ year Japan Bear market and the 1997-Asian economic meltdown. In my opinion investing in Asian stocks is going to be a mistake. Consider that the 1997-Asian economic meltdown was repaired quickly because of US consumers that bought Asian made goods (since the US was in the Internet bubble at the time). Without the US consumer, another Asian stock market\credit Panic will be much harder to recover from and will likely by substantially longer in duration. Asians are savers and are less likely to go on a spending spree to pick up consumption when the US consumer drops out.

 

 

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