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Saturday, August 1, 2009

As the Chinese Money Monster begins to growl, Uncle Sam reaches for a bone!

Grande muraille de Chine à JinshanlingImage via Wikipedia

The Great Wall of China was built to keep out invading Mongols. It is not, however, keeping out billions of United States dollars. Those billions started flowing over the great wall, and into the great red business machine, shortly after George Dubya Bush was handed the first United States surplus economy in 30 years. It started when Bush 2 made his first massive tax cuts. It went on for the entire eight years of his presidency, accelerated by an unprecedented second set of tax cuts in a time of war on two fronts, something that no other President had ever done before It continues today, unabated and now, is actually accelerating.

Consequently, the worlds number one engine of growth, the good ole U.S.A. is in more debt than any country in history has ever been. (There may be an exception: Germany after WW1 when the allies demanded war reparations. During the 1920's and 30's, during the resulting hyper inflation, the average German would literally bring a wheel barrell full of German marks just to get groceries. The result was the rise of Hitler and world war 2)

Before last weeks massive sale of United States Debt in the form of Treasury Bills, China had accumulated foreign reserves of $2 Trillion. Of that, $1.6 Trillion was in U.S. Debt for which they made a return (direct payments from the U.S. Treasury) of over $40 Billion dollars last year. I repeat, that was before Tiny Tim went to China to sell another boat load of dollars in June, before last weeks summit (No not the beer summit, the "Chinese Money Monster summit") and it was before this weeks record breaking sale of U.S. Treasury Notes.

There is a saying that, if you borrow some money from the bank, it is your problem, but if you borrow a lot of money, it is the banks problem. In this case, the "bank" is the People's republic of China" which has been buying U.S. Government debt at an alarming rate. The borrower is the average American, their children, and their grandchildren, because it will take at least three generations to pay it back (expect a number of tax increases). The bank (read China) is getting nervous. They are demanding the U.S. provide insurance against a falling dollar to protect their investment. On top of that, there are rumblings that China has a debt problem of it's own as it's many local Governments are utilizing a loophole in their own banking system to siphon off equity from their own banks to pay for services (and graft which is rampant). Those banks will never see that money again.

This summer, as the rally picks up on North American Markets on the back of a sinking dollar, and another Trillion or so in Government largess, Newbie Chinese investors are diving into their own stock markets, driving up stock prices to dizzying heights, and that bubble can only end badly too.

Why would anyone think the Chinese might save the worlds economy? It will be hard pressed to save it's own. They do, however, have some padding. 1.6 Trillion in U.S. dollar denominated debt and the interest on that debt has to be paid from the U.S. Treasury. The Chinese fear they may end up with 50 cent dollars and they could be right. What a mess. The toxic Derivatives debacle perpetrated by the gluttons of Wall Street , is still the 10,000 pound gorilla in the room and no one wants to deal with it.

In this summer of 2009, the pigs at the trough are once again feasting on the unwary. In the mean time, we mere mortals have to decide what to do with our meager retirefunds. I can't tell you what to do, but I am in this summer rally and will remain so for now. September and October may be different. Certainly, 2010 is not looking anywhere near as good as the pundits in government or on CNBC would have you believe. Mr. Kneale of CNBC is calling this "The Great Recovery"! I sure wish he was right, but I fear a handle like "The Great Denial" would be more appropriate. A false economy led by taxpayer dollars, borrowed from friends who arn't friends, doesn't bode well for next year, or for that matter, the next 4-5 years. It may be that, hyper inflation will save America's bacon (heaven forbid)

Meanwhile, there are some great companies doing what they do best, no matter what the circumstances and you should be seeking them out during this rally. But don't take your eye off this bouncing ball. If it bounces too high, It may go right through the floor in 2010. Sorry I can't be more cheerful except to say, enjoy the ride this summer. This roller coaster may be the last good ride for a long time. Remember, when everyone else begins laughing hysterically, and pointing up, it may be time to jump to safety once again. But cheer up, 2015 isn't looking too bad.



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