By Andrew PK Yap
Singapore 27 Sept 2009 7pm
In March, in this website, (Today Marks the End of the US Stock Market Rout Tuesday, March 10th, 2009 at 16:38 ) I said that the down moves in the stock markets have ended. This is six months later and the markets have moved up from March to year highs. Where do we go from here?
Now that the markets have move up six months, taking the risks / reward into consideration, it would be prudent to take out at least 50% of your stock investments. I am taking out more and positioning myself for a sharp stock market correction.
The stimulus and other economic packages have so far stopped the world economy from falling down a bottomless pit. The stock market moves up reflects this.
The problem is, the data shows only that the world economy is not going into depression but it shows also that neither is there any economic growth to speak of.
The stock markets on the other hand moved up as if we are back in the good old days. It is unlikely that the world will go back to the good old days.
In the brave new world, it will not be the USA borrowing money from China and Japan to buy stuff from them.
The USA has little to lose borrowing from China and Japan (and all others that lend to them) for the simple reason that they borrow not in Renminbi or Yen but in US dollars. If you stop to think about it, the situation is highly ridiculous. All the US needs to do when push comes to shove, is to print US dollars to repay them.
Yet for the sake of their own domestic economies, they have no choice but to do that, lend the US money in US dollars.
If they were smart, they would have reformed their economies while selling to the US with their own money (that they lend the US) but this crisis has shown that they were not that smart. They did not reform their economies not to be so dependent on the US at all.
The last few decades were the lost decades for China and Japan; lost in their failure to reform their economies. Japan tried for sure but was not successful.
Both China and Japan tried but on hindsight, they did not try hard enough. This crisis has shown that their efforts were failures.
They are now stuck between a rock and a hard place, between the devil and the deep blue sea.
When the US prints money to repay her debts, one would expect the US dollar to drop if not plunge and it has been doing just that. That it has not plunged like the Thai Baht during the Asian financial crisis is because it is still the world’s reserve currency and China and to a lesser extent Japan is propping up the US dollar.
They are still propping up the US dollars simply because their attempts in the last decades to reform their economies to wean their dependence on the US were a failure.
If they do not lend the US money (the ridiculous lending the US in US dollars), the US will not have the money to buy their produce; if they dump the US dollars they are holding, the US dollars will fall to a point that China, and Japan cannot sell to the US because their goods will be too expensive. Not only are they still holding and not dumping, they are still lending more!
This then is the devil and the deep blue sea they face.
Japan is not as desperate as China (because it is a democracy) to prop up the US dollars. Even as the US dollars fall against the Japanese Yen (the Japanese are trying their level best to ensure a smooth adjustment) the painful adjustments are taking place in their country. By the way, Russia, which was never dependant on the US for their economic growth, is dumping the US dollar.
China cannot afford to have a faltering economy. Despots run it. The despots will cling on to power at all costs and there are many risks to their hold on power if the US dollar falls too far against the Renminbi.
Last week President Obama threw a spanner in China’s work. The Chinese figured that they would be able to buy themselves more time by not letting their Renminbi appreciate so fast against the US dollars like the Japanese Yen and the European Euros.
In a move that shocked everyone for its sheer, apparently, fruitlessness President Obama raised tariffs by 25% to 35% on Chinese tier three tires. All the analysis I have read on this issue is consistent in that it, the tariffs, will not, have the expressed effect.
The expressed reasons for the tariffs are to if not restore jobs lost in tire manufacturing, stem further losses. All the independent analysis shows that it will not do that. Some people suggest that president Obama caved in to demands by the Steel Unions that brought up the complaint.
I look at it as, if China wants to manipulate their currency to ensure that what they produce remains cheap, the US is no longer willing to buy even if China lends the US money (again, ridiculously, in US dollars) to buy.
What all this adds up is that the world is looking at painful economic adjustments that will last at least a decade. In the meantime, the stock markets behave as if it will take a year or two to adjust.
As I said, I am more than 50% out of the stock market.
