The debt crisis in Dubai is just the first of many that will occur in the Middle East and Eastern Europe in the coming years.  It was a wake up call, but not particularly serious by itself.  Many Eastern European countries, the Baltic nations, Hungary, Ukraine, Bulgaria, Slovenia, Kazakhstan, Romania, the UAE in the Middle East, Vietnam in Asia, are in poor economic shape.  Their economies are over-levered, and have low income levels. The property markets in the Middle East and Eastern Europe have a long way to fall, and many banks (primarily in Europe) will have to be bailed out as a result of their unwise loans to these regions.

We used the panic as a buying opportunity, adding to our oil and gold shares.

Investors do not get your hopes up… China will not revalue the Yuan soon.

Chinese Yuan per U.S. Dollar

ChineseYuan-3-1.jpg picture by gimmarketing
In our opinion, China will not revalue the Yuan further until inflation resurges in China to the five percent level.  We do not expect this to occur until the middle of 2010 at the earliest.
China’s politburo met last Friday and announced that it plans to “maintain the continuity and stability of economic policies, and continue to implement the proactive fiscal policy and loose monetary policy.”  In other words, grow and create jobs, keeping the Yuan low so they can export.  In effect, they are also saying ‘we are loaning the west a lot of money…who are you to tell us to revalue our currency?’


Many nations are getting tired of losing exports due to a very weak dollar…and Yuan.  For the last year the Yuan has not appreciated versus the dollar.  Government officials in these nations will want show their domestic exporters that they are working to reverse the situation.
Thus, we expect a weak dollar and strong commodities until year end 2009.  In early 2010 however, we expect a number of nations to engage in coordinated intervention to send the dollar higher and their currencies lower.

The nations who intervene may be able to create a rally in the U.S. Dollar, but it should not last more than a few months.  This is based on historical precedents of government intervention. 

Grain commodity prices will be stronger in the next few months as the demand for food world wide will grow.  After dipping during the past year, global food and grain demand has stabilized.  The global stores of grain are still at historically low levels.  This creates a scenario where global food production will have to grow at very rapid rates for a decade or more to reverse the impact of the low food grain carry forwards.  Additionally, the use of grains for ethanol [energy] production exacerbates the situation.   
We have been buying fertilizer shares and will be adding to these positions on price weakness.

India’s GDP grew by 7.9 percent in the third quarter of 2009.  As we have expected, India continues to move ahead with strong economic and industrial production growth.

There are some common myths we would like to dispel.  A few of them we have mentioned in the past, but their wide circulation argues for another reminder.
Myth 1.  China is dependent upon exports to the U.S.

Of total Chinese exports, 38 percent go to emerging markets, 21 percent to the European Union, 18 percent to the U.S. and 8 percent to Japan.  Additionally, exports have fallen to about 14 percent of China’s GDP if you include only the value added in China.  Total exports including those partially manufactured goods brought into China from other countries (and which have value added in China before export), make up about 30 percent of China’s GDP.  
The fact is that exports to U.S. make up somewhere between 2.5 percent and 5 percent of China’s total GDP.
Infrastructure and consumer sectors have replaced exports as the main drivers of China’s GDP growth.
Myth 2.  Very little is manufactured in the U.S. anymore.

Merrill Lynch provides us with the following facts “…the U.S. is still the largest manufacturer by a long shot, making up 20 percent of the world’s total manufacturing output.  Furthermore, when focusing on the value added (as defined by the World Bank), the U.S. contributes more than double the production of the next largest producer, China.”
Myth 3: The U.S. does not export much except software and weapons.

Fact: The U.S. is the world’s third largest exporter (Germany is number one, and China is number two).  The U.S. exports value added industrial chemicals and supplies, capital goods like production machinery, computer and telecommunications equipment, motor vehicles and parts, and aircraft and aircraft parts.  The U.S. also is the world’s leading exporter of food, feed, and beverages.  Additionally, many billions of dollars in consumer goods, medicines, and media and entertainment products are exported by the U.S. each year.

Until year end we expect commodities, including food and gold to rise, and the U.S. dollar to remain under pressure.  Oil prices should rise as cold weather asserts itself in the Northern hemisphere.  China’s currency policies are not likely to change in the near term. Developed economies will continue to slowly improve.  Faster growing economies, especially in Asia and Latin America will continue to attract investors.
We hope everyone has a wonderful holiday season.  Please call us if we can be of service.
Thanks for listening.

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