When Markets Collide

One of my favorite Motley Fool analysts is Bill Mann, yesterday he wrote an article on China that re-set a number of the investing thesis themes in the current global situation:

Things are so bad in China that its gross domestic product growth rate may fall from double digits to the dowdy level of 8%. Eight percent, by the way, is a level at which the United States is unlikely to ever grow again. It can't. Our economy is simply fully developed. Thus the sobriquet "developed economy." I know, not exactly catchy.

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All of the headlines show China sitting at a crossroads. But the reason I have faith in China is that it has historical proxies. Since 1970, with the exception of a few OPEC members, only four economies have made the transition from emerging to developed markets (meaning their per-capita incomes exceed $15,000 per year): Taiwan, Singapore, Hong Kong, and South Korea.

These four economies have two things in common. First, they have few natural resources; and second, they are dominated by Chinese values and the traditional Chinese work ethic. Mainland China is different only because it got a later start.

Also, China reportedly has currency reserves $1.6 trillion. That means that China has a better balance sheet than the US, plus 1.6 trillion beats minus 12 trillion if you are scoring at home.

Given that the Chinese stock market is down 70% in the last year, its an interesting time to look at Chinese stocks. A few weeks back Mohamed El-Erian made the bull case for buying the MCSI Emerging Markets index which gives you exposure to the BRICs plus a lot of other countries.

Speaking of El-Erian, his book "When Markets Collide" was just voted Best Business Book of the Year. If we could have voted for a book that we wished everyone had read in 2007 he would have won that too, he said 

“When I wrote the book, I thought I was writing about the future. When it was going to press, I thought it was about current affairs. Now I wish it was about history.”

This part below reminds me a lot of 1995 security architectures used to defend 2008 integrated applications

The present crisis had been triggered because the international financial system had undertaken activities that had “far outpaced the ability of the infrastructure to sustain them”, said El-Erian.

And it was not just the markets that could not cope with their own changes, but governments as well. Significant weaknesses had been exposed “from the firms, to the regulatory agencies, to governments, to multilateral oversight”.

“Turbocharge that with financial innovations, which history tells us we tend to overproduce and overconsume, and it’s inevitable that you will get a series of market accidents,” he said.

In a Robert Garigue sense, in computer security our infostructure (users, apps and data)  are outpacing our infrastructure-centric security models

Comments

[Forg Snud]

China has a huge surplus, yes. But the bad news is that it's mostly US Treasuries.

They'll probably be cashing those out to support their own "bail outs" and infrastructure/employment projects.

Treasuries are just a promise to pay. And considering Bernanke's printing spree, this promise is getting weaker and weaker. So on top of the likelihood of China cashing out in order to stimulate their economy, they might start bailing out on US Treasuries as they realize our debt is far beyond any hope of being serviced. In other words, it is becoming clear that we have no intent to pay down our obligations since we've allowed them to grow so outside of reality.

Finally, they have fewer toys to to trade for US Treasury bills since we're simply not buying their shit anymore. Thus begins a cycle that feeds on itself on a journey to the bottom.

How about that pump-and-dump operation from your boy Buffet? Actually, I'm sure he wants to believe in the optimistic outlook. But I also don't doubt that he hedges his bets with full knowledge of the worst case scenarios. Given that, talking the general public into buying "bargains" is a bit reckless and perhaps dishonest.