Looming Collapse of Russia, China and more

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Looming Collapse of Russia, China and more

Looming Collapse of Russia, China and more …

by Martin D. Weiss, Ph.D.   01-05-09

Martin D. Weiss, Ph.D.

I hope you’ve had a great start to your New Year!

At the same time,
however, I trust you are not counting on the latest holiday rally in
the stock market — or the most recent incarnation of the Obama rescue
package — to transform 2009 into a positive year for the economy.

The reasons: In
addition to the massive wealth destruction I told you about two weeks
ago and the continuing debt collapse I’ve been warning you about for
many months now, the overseas engines of global growth are also
collapsing.

This does not
negate my long-term view that certain overseas economies offer great
future opportunities. But it does represent a major short-term threat
to U.S. investors, U.S. companies and the U.S. economy as a whole.

The undeniable
reality: The debt crisis that first appeared in the U.S. subprime
mortgage market … then precipitated a Wall Street meltdown … and has
now driven the American economy into its sharpest decline since the
Great Depression … has now spread to the entire world.

It is driving the
economies of Western Europe and Japan into an unprecedented tailspin.
It threatens the economic — and potentially political — stability of
Russia, China and several emerging market nations. And it’s setting the
stage for a global depression of epic dimensions.

Here are some of the most vulnerable major economies …

Russia Smashed by Oil Price Collapse

Never in modern
history has the success or failure of a major emerging economy been so
dependent on one single commodity! And never before has that commodity
fallen so far and so fast as Russian crude oil!

Russia does have
other resource and revenue sources. But in just the past six months,
Urals crude, Russia’s primary export blend, has plunged from a high of
nearly $141 per barrel to a low of a meager $32.34 — a 77% crash that’s
pounded Russian stocks like a sledgehammer and sliced through the
Russian economy like a serrated sickle.

The big dilemma: To balance its federal budget, Russia must get a minimum
of $70 per barrel for its crude oil. But at $32 and change, it’s
getting less than HALF that amount. The entire country is losing money
hand over fist.

No wonder Russia’s stock market has plunged 72%, forcing 25 separate stock exchange shutdowns!

Transneft, the
Russian oil transporter, is down from $2,025 in January 2008 to a
recent low of $270. Gazprom, the natural gas monopoly, has lost more
than two-thirds of its market capitalization since May. Meanwhile,
Lukoil fell from a May peak of $113 to a recent low of $32.

Russia’s
oil-driven real estate bubble is also collapsing. That’s why Russian
construction and real estate giant Sistema-Hals lost more than 94% of
its value last year alone … why PIK Group, another major construction
giant, collapsed by 96% … and why the entire RCP Shares Index of
Russian developers has sunk 92% since its record high in June 2007.

Ford, Renault and
Volkswagen are halting production at Russian assembly lines.
Unemployment is likely to surge to 10% and beyond. Massive amounts of
foreign capital are fleeing the country.

In a desperate
attempt to stem the tide, the Russian government has devalued the ruble
11 times since November, and thrown a quarter of its foreign currency
reserves at the raging debt crisis. But it’s still not enough. Russia’s
primary source of revenues — energy exports — is in shambles; and
unless crude oil prices could somehow DOUBLE in a big hurry, Russia’s
economic and financial decline cannot end.

Standard &
Poor’s has cut Russia’s long-term debt rating for the first time in
nine years, citing dangerous outflows and a “rapid depletion” of
currency reserves. And more downgrades are in the offing. Even a major
debt default is not unthinkable.

The biggest danger: Political upheaval and social unrest.

Even before this
crisis, Russia’s middle class earned less than $500 per month. Now,
with the devastating plunge in oil revenues already in place, those
numbers are falling to even lower levels. For a nation with a cost of
living that rivals that of the U.S., Western Europe and Japan, the last
thing the Russian people needed was a depression. Yet that’s exactly
what they’re getting.

I visited Russia
last year before the collapse in oil prices. I spoke to a variety of
professionals and people on the street. And I stayed with friends who
work in government jobs.

From everything I
had read, I had anticipated signs of greater prosperity. Instead, I was
surprised to see how little average citizens had benefited from the
recent years of rapid economic growth.

Yes, they have
more access to a wider variety of goods that were scarce during the
Soviet era. But most professionals — such as teachers, doctors, nurses
and government employees — are still living on the edge of poverty.

Equally
surprising is the popular disgust and disdain for the government.
Public opinion surveys and press reports may indicate broad support for
the Kremlin’s foreign policy, and they seem to be accurate. But support
for domestic policies is another matter entirely.

My view: Any
major disappointment with respect to pocketbook issues could lead to
major political changes, the outcome of which is largely unpredictable.

China Far More Vulnerable Than Expected

China’s
extraordinary expansion of the past decade fueled booms in global
trade, commodities and emerging markets. It was a major growth engine
that turbo-charged Australia, Brazil, Southeast Asia and even Japan.

Now, however,
that engine is grinding to a screeching halt. Indeed, when historians
look back to major pivot points of this global economic crisis, they
will undoubtedly point to the abrupt end of China’s boom.

Many of us
assumed that because China’s economy was growing so quickly — at a
breakneck pace of 10% or more per year — it could easily afford to slow
down by a few percentage points and still be in far better shape than
most other economies.

But now I
seriously question that theory. Indeed, more often than not, companies,
industries and entire nations that enjoy the biggest booms are also
vulnerable to some of the biggest busts. Instead of a mere slowdown, as
many still seem to expect, China’s economy could suffer a wholesale
collapse.

Exports, which
still represent two-fifths of the Chinese economy, are already sinking
fast. And the domestic economy, much of which depends directly or
indirectly on the revenues flowing from exports, is also beginning to
sink.

Warning signs are
everywhere: Stocks, down 60% just in the last 12 months; imports, down
17.9% in November alone; foreign investments to China, off 36.5% last
year.

In response, the
government has slashed interest rates and pledged a $582 billion
stimulus package. But that’s mere pocket change compared to China’s
trillions in vulnerable exports. Moreover, it has done little to help
millions of small- and medium-sized businesses which are already
shutting down and laying off millions.

A big problem:
45% of the Chinese government bailout is earmarked for the cement and
housing industry. Meanwhile, cash-flow problems are sweeping through
the entire economy, downing airlines, manufacturers and property
companies.

Airlines like
China Southern and China Eastern, for example, have been losing money
hand over fist. China’s auto sales are plunging. Its shipbuilding
industry is in a tailspin. And its real estate market is collapsing.

Next, expect
surging unemployment … mass reverse migrations from urban centers to
the countryside … spreading popular unrest … and a major challenge to
authority. Chinese leaders have already admitted that an economic
downturn would test their ability to govern. Now, that downturn is here
— and the ultimate test, on the near horizon.

Meanwhile …

India,
also heavily dependent on foreign demand for its goods, is suffering
its worst export slump in recent memory. Overseas shipments plunged
12.1% in October and another 9.9% in November, forcing
companies like Tata Motors, India’s biggest truck maker, and Hyundai
Motor to cut output, fire workers and shut down factories.

Brazil,
which was growing at a record pace until the third quarter, has
suddenly frozen in its tracks. Much of the foreign money it counted on
has vanished, leaving acute capital shortages in its wake. Auto sales
have gone dead, leaving biggest-ever inventories of unsold cars.
Credit, abundantly available just a few months ago, is now gone.

Japan
has been slammed by its worst recession since World War II … with stock
prices plunging to new 18-year lows … industrial output suffering the
largest monthly drop since records were kept … Toyota reporting its
first loss in 70 years … layoff victims filling tent parks … and worse.

Everywhere from
Argentina and Mexico to Australia, New Zealand and even the once-rich
Middle East, the worldwide debt crisis, the bust in commodities and the
sharp slowdown in global trade are transforming massive booms into
instant recessions.

It’s happening
fast and it’s accelerating. Government rescue programs aren’t nearly
enough to turn the tide. And it’s another key reason you must approach
2009 with great caution.

Stick with
safety. Don’t veer from the course I have laid out for avoiding the
dangers. Wait for the truly big price declines ahead before reinvesting!

Good luck and God bless!

Martin

http://www.moneyandmarkets.com/looming-collapse-of-russia-china-and-more...

 

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