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  3-9-09

God Bless China

The irony is so rich you could cut it...

And simultaneously, we have a massive inflection point in the world.

It used to be that the countries of the world looked to America- the champion of free enterprise- to lead the world out of recession.

Now they look to a Communist led country: China.

This last week has seen a SIGNIFCANT landmark. China is moving world markets, including American. The Dow is moving according to what Chinese leaders say about their economy and stimulus programs.

The gap between Chinese and American military will also close as economies balance out between the two countries.

Most importantly, the Chinese have quickly learned that they can no longer afford to pin their hopes on producing products for Americans. Americans have stopped buying and China must learn to consume it's own products.

With that massive population of theirs, a 'virgin' population when it comes to luxuries we've taken for granted, enter the next superpower. So am I telling you this to depress you? NO! As I keep saying in this newsletter, you don't have to keep your hard-earned cash within American borders. There are funds you can invest in that ride the Chinese train all the way. This is not unpatriotic- we live in a free global economy and you're entitled to invest in a way that suits you best.

PLEASE, start thinking more laterally about your finances.

The effect of this, combined with the resultant loss in appetite for American debt (Chinese buying US government bonds) to keep American interest rates artificially low so they buy Chinese products, and you have a rapid shift in power emerging. In fact, if it happens too fast it would be catastrophic for America.

Right now, a situation of 'mutually assured destruction' exists between America and China. If the Chinese stop lending to America, American interest rates soar and Americans stop buying products which are of course, predominantly Chinese made.

So both countries need this arrangement. BUT, the big difference is that the American situation is a relatively permanent one, the Chinese is not. As soon as domestic demand picks up in China, the Chinese can happily dump US debt (and probably will).

So knowing this, if you were president, what would you do?

Of course, you'd be wise to prepare by 1) reducing the need for this debt with the Chinese and 2) by getting manufacturing American goods more efficient and cost-effective so they can compete with the Chinese.

Obama is doing the exact opposite: 1) he's building EVEN MORE DEBT and 2)   he's supporting inefficient industries instead of letting them die with government money (see number 1) and building EVEN MORE DEBT.

With General Motors continually asking for more of OUR money, can you now see why this is bad for America long term? GM and others are like that relative every family has. They mis-manage their affairs and well-meaning senior family members keep throwing money at them, but it's a financial black hole. They're not doing that relative any favors because that person will never have an incentive to solve his problems. It's treating the symptom, not the cause.

Obama's a smart guy. He undoubtedly knows this, but he serves the shuffling zombies on Main St. and what's he's doing is what they want: as always, free money and an instant fix to their 'problems'. You know, problems like not being able to keep up the payments on the Hummer and having to downgrade to a 4/3 instead of a 6/5 home.

By the way, they've stopped making Hummers "for now" as nobody is buying them. Maybe it will go the way of the Delorean car and the do-do.

This made me wonder: in 50 years time will there will be an exhibit at a museum dedicated to the long gone days of American excess? A Hummer will stand in the center display as something that epitomized the 'bling-bling' days at the turn of the century. I can see school kids looking at it scratching their heads. These kids just arrived by electric bus and wondered whatever we were all thinking around 2000 A.D., as oil has become a highly-prized and expensive substance to them, only begrudgingly used for lubrication and that World War III nearly started because of the race for the last of oil. Kids will laugh scornfully at the history books, much like we do now when reading about any uncivilized peoples.

Moving on...

Here's something that slips under the radar and could affect you: just about every weekend now, a bank goes bust. These are the smaller independent banks that the government won't bail out. If I had any money in "The Colonial Cracker Bank" or whatever else they're called, I would get my dollars the heck out of Dodge- FAST.

Across the pond to Europe. Here's an interesting article I picked up (not for the faint of heart):

"Conspiracy or...?

On the 11th February the Daily Telegraph's Brussels correspondent Bruno Waterfield wrote an article under the header: "European banks may need £16.3 trillion bail out, EC document warns." In the article, the reporter revealed that he has seen a secret document produced by the EU Commission which briefed the union's finance ministers on the true extent of the banking crisis. Less than 24 hours later, the article's header was changed to "European bank bail-out could push EU into crisis" and two paragraphs had mysteriously disappeared. Here they are:

"European Commission officials have estimated that "impaired assets" may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the 'trading book' total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.

In addition, so-called 'available for sale instruments' worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion."

Do yourself a favor - read those two paragraphs again. Newspaper editors do not change content light-heartedly. Did the Telegraph editor receive a call from Downing Street? Or Brussels? Did he have second thoughts about the avalanche that he could possibly instigate? I don't know and I probably never will. But one thing is certain. If the EU Commission's estimate of £16.3 trillion of impaired assets is correct, then the crisis is far worse than any of us could ever imagine. Not only would we have to get used to the prospects of a systemic meltdown of our banking system, but entire nations may go down as well."

A few issues ago, I said the Euro was overvalued and now you can see where I'm coming from. If you'd have gone short the Euro then, you'd be in the money. The Yen is the next to fall.

Currencies will go down like dominoes, and the US dollar will be seen as the best of a bad bunch as everyone flocks to it for 'safety'. When they realize that is an illusion (because the Fed prints so much of the stuff and it's backed by a lame promise), gold will be seen as "the currency of last resort" as one fund manager recently put it.

My views on oil, wheat, corn, silver and gold are unchanged (see past issues). I love them all for the longer and term.

The stock market is grinding downwards just as I predicted after it fell through the critical November low, and looking at the bigger picture I can see why: the government is dithering and having to go through the process of a democratic consensus. China needs no such consensus- they just announced a stimulus package. Stock markets like this kind of leadership and direction and Chinese stocks have responded accordingly.

This made me think though: as and when this administration finally does show some single-minded ACTION (not words), the US markets could take-off for this final surge before the bottom- the fabled bear market rally. And I believe this one could be a mother. So much so, it will fool everyone into thinking the worst is over. The bear is sick- he wants to destroy as many people as possible- he's not happy to just go down to 4000 now, he wants to suck more people back in first, tempting you with crazily low values.

I still believe this is coming and it will make gold drop (buying opportunity) and make stocks fly (last chance to sell!).

Until next time,

Mark Patricks

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