You Heard it Here First…Again

August 9, 2007 – Once again, something we predicted months ago is happening and being reported by a major world newspaper. And yet, the foolishness in the U.S. Congress continues, illustrating that they “just don’t get it.” Thank God U.S. Congressman and women are not responsible for our nation’s fiscal policy though they really couldn’t possibly have done a worse job then the U.S. Federal Reserve has in the past couple of decades. In any event, on March 13th, I wrote in this entry the following:

“If U.S. Congress imposes prohibitive tariffs on Chinese imports, if China then follows that move by dumping dollars, this would be a double negative blow to the Chinese economy. So in imposing tariffs, such a move would in essence be a pre-emptive economic strike against the Chinese government that prevents them from offloading U.S. dollars.”

“However, such a short term victory would only cause a long term, much more significant defeat. Such actions would certainly alienate the Chinese government further, and any pleas by President Bush, U.S. Fed Chairman Ben Bernanke, and U.S. Secretary of Treasury Hank Paulson to the Chinese government asking them not to offload dollars in the future would almost certainly fall on deaf ears. I would guess that if tariffs do pass through Congress, that in the future, if the Chinese can dump massive amounts of dollars without such actions seriously hurting their own economy, then they will do so without concern for its effect on the U.S. economy.”

Today, five months later, the London Telegraph reported that the Chinese are threatening to do exactly what I predicted. But there’s even more to this incredible story.

Here is what the London Telegraph reported:

“Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion ( £658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.”

“Described as China’s “nuclear option” in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels. It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession.”

Incredulously, this article also reported that “the threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being ‘held hostage to economic decisions being made in Beijing, Shanghai, or Tokyo’.” This is incredulous because I have yet to hear any U.S. politician address the foolish actions of the U.S. Federal Reserve that has caused this great headache for the United States. How in the world does China and Japan get a hold of trillions of dollar denominated assets that they can now use to hold the U.S. “hostage” if the U.S. had not sold these trillions of dollars to foreign governments over decades of time to serve their purposes? Did China come to the U.S. and rob our banks? Of course not. The Feds foolish and irresponsible monetary policies have created this enormous headache and now U.S. politicians refuse to take any of the blame for a problem that has its origins within the homeland. The situation is comparable to you giving all your wealth to your next-door neighbor willingly as a gift, then scolding and berating him when he refuses to give up his new found lifestyle of wealth and return your money.

And it is precisely understanding situations like this that create the strategies we employ at maalamalama for all of our paid-up subscribers. Are we worried that the Dow dropped another almost 400 points yesterday? Not at all. My portfolio is positioned to eventually soar when all this trouble finally manifests itself, because if the past two weeks have made you nervous, you ain’t seen nothing yet. It is just the beginning and if if you haven’t been doing so over the past six months, you better ensure now that your stock portfolio is not just defensive, but positioned to gain from this whole mess, because even defensive portfolios will suffer when this trouble finally shakes out and surfaces.

[tags] China’s nuclear option, politics and stocks, maalamalama[/tags]

Leave a Reply