China Moves to Boost Domestic Economy. Bad News for U.S.?

November 9, 2008

The linked article reports that China plans to pump almost $600 billion into its economy in a move to stimulate domestic growth at a time when exports are supposedly falling. 

China’s official Xinhua news agency said the world’s fourth-largest economy approved 4 trillion yuan ($586 billion) in new government spending between now and 2010, focused largely on infrastructure and social projects.

The move was hailed by the head of the International Monetary Fund, Dominique Strauss-Kahn, who said it would have a positive effect on the world economy.

Maybe it will have a positive effect on the world economy, but my guess is that this is very bad news for the U.S.  China has massive reserves that it could easily devote to helping its economy.  What could be wrong with that?  Those reserves are held in U.S. investments – stocks and bonds.  This means that China will soon be selling off over a half trillion dollars worth of these assets.  Selling bonds will drive interest rates higher in the U.S. and selling stocks will drive down the stock market.  This has long been a nightmare scenario for the U.S. – what happens when our foreign creditors who have financed our trade deficit begin withdrawing their assets from American investments.  This will certainly exacerbate the credit crisis in the U.S. 

Perhaps I’m wrong, but this makes me very nervous for our bond and equity markets.  I’m staying out of the market for now.

Beware of Warren Buffett’s Advice

October 18, 2008

Warren Buffett issued a letter on Friday morning advising investors to start buying American stocks.  Like many others, Buffett believes that this is just a cycle and everything will soon return to normal.  His motto is “be greedy when everyone else is fearful, and fearful when everyone else is greedy.”  He’s made tons of money with this philosophy which I’ve generally tried to follow myself, until recently.

Many people who offer financial advice seem to feel the same way.  They believe this is just another market cycle.  “We’ve seen this all before,” they say.  Maybe they’re right.  Is it correct to assume that the stock market will rebound because it always has before?  Personally, I see a lot of reason for caution.  I could buy into that philosophy if business conditions were normal.  But they’re not.  Consider the following backdrop for the current economic crisis, and then consider whether the market will simply behave as it always does:

  1. The world has never been more overpopulated and, indeed, more and more experts agree that, not only is the world overpopulated, but that the current population far exceeds the earth’s carrying capacity for supporting humans at a western-style standard of living.  And the world’s population grows by enough people to fill a new, medium-sized city every day. 
  2. In spite of the challenges of providing energy resources while cutting carbon emissions, and in spite of the growing burden of unemployment, America’s population continues growing by enough people to fill a new city the size of Chicago every year. 
  3. Our national debt per capita is at a record level, 50% higher than it was at the end of World War II, and soaring fast.  Never in our history has the per capita share of the national debt exceeded our median net worth.
  4. Our cumulative trade deficit since 1975, the year of our last trade surplus, now stands at $9.1 trillion and rises by $0.7 trillion per year.  Consequently, never has a greater percentage of American assets been under foreign ownership and control. 
  5. U.S. savings rates are at a record low level.
  6. Per capita consumer credit (or debt) is at a record high level. 
  7. In spite of reducing lending standards so low that “standards” no longer existed, providing a huge boost to the housing sector of the economy until the bubble burst last year, the U.S. was barely able to maintain a normal rate of GDP growth.  With the manufacturing sector of the economy already in ruins, now the housing sector is in complete collapse too.
  8. Never has the U.S. been closer to bankruptcy.

Perhaps the experts are right.  Maybe it is a good time to buy stocks.  But are you willing to bet your entire future that the market can behave normally considering the above headwinds that it faces?  Be very careful!