Money and Markets for September 19, 2006

Money and Markets

Tuesday, September 19, 2006

Tony Sagami Dear Subscriber,

Just when everyone thought the U.S. trade deficit couldn’t possibly get any worse, the Commerce Department has announced that the July deficit was the biggest in history.

And just when the markets were adjusting to that first shock, the government announced still another whopper yesterday — the second worst quarterly trade deficit in history.

These numbers are downright ugly. In fact, we’re on pace to hit a trade deficit of $776 billion for the year. That would be the fifth record-smashing year in a row!

A lot of people are attributing this torrent of red ink to sky-high energy prices. Sure, we buy a lot of foreign oil — for example, $28.5 billion in July. But oil isn’t the whole story ...

Trading U.S. Dollars
For Chinese Doodads

Get this: We spent almost as much on Chinese-made shoes, clothes, toys, stereos, and TVs as we did on OPEC oil! Imports from China rose to a record-high $24.6 billion in July.

What this means: China is making money hand over fist. And in just the first seven months of the year, China had a total trade surplus of $94.6 billion. Heck, in August alone, its surplus was $18.8 billion, a staggering 32.7% more than the same month last year.

By the end of the year, China will easily smash last year’s record intake of $100 billion in U.S. currency, raking in as much as $150 billion. That’s a huge wad of new dough pouring into China.

China's Trade Surplus Keeps Rising! And all of this money is sure piling up! China has almost $1 trillion in foreign reserves, most of which is parked in our currency. And it’s plowing this bulging war chest right back into its economy to insure future growth. It’s building and improving factories, highways, airports, dams, railroads, skyscrapers, shipping ports, power plants. Entire new cities are being created.

It can push our interest rates higher. [Editor’s note — read Mike Larson’s “Bond Market Bubble” for more on how this might happen.]

It puts downward pressure on the dollar.

And it sets the stage for a painful economic slowdown here at home.

I’m not the only one worrying about this, either. The International Monetary Fund just released its semi-annual Global Financial Stability report last week. It contained the following caution:

“There are risks to the global economic outlook that have tilted to the downside. Financial markets could experience greater turbulence that places stress on international financial markets, possibly with a wider impact on the global economy.”

Their point: The global economy is at risk. Of course, the IMF isn’t lumping China in with everyone else. They forecast that the Chinese economy will expand 10% this year ... PLUS another 10% in 2007!

Overall, it’s a tale of two economies: (1) a booming China, growing at double-digit rates, and (2) the United States, on the verge of an economic slowdown.

How to Play It

I don’t know about you, but I prefer a growing economy to a slowing one. That’s especially true when it comes to investing my hard-earned money.

To get outsized returns, you’ve got to go where the action is. The proof is in the pudding: The Shanghai Composite index has gone from 1,161 at the beginning of the year to 1,689 recently. That’s a 45% jump!

Meanwhile, just yesterday, the Shanghai B-share Index roared skyward by an astonishing 9.65%. That’s the equivalent of the Dow Jones Industrials soaring 1,084 points in a single day!

But what has the Dow actually done for you lately?

Hey, if your portfolio is getting 45% a year, keep doing whatever you’re doing. Otherwise, you might consider adding some Asian spice to your mix.

Industrial and Commercial Bank of China Just look at some of the scorching-hot IPOs about to hit the Hong Kong stock market:

Industrial and Commercial Bank of China — the country’s largest bank

Jingkelong — one of China’s largest supermarket chains

Jutal Offshore — a dominant oil services company

China BlueChemical — the country’s largest fertilizer company

SPG Land — an ultra-prime property owner

1. There are plenty of strong Asian companies benefiting from this boom that are listed on the U.S. stock exchanges.

2. It’s not too late for some of my favorite Asian mutual funds, such as Fidelity Pacific Basin (FPBFX), Excelsior Asia Pacific (USPAX), U.S. Global China Opportunity (USCOX), and T. Rowe Price New Asia (PRASX).

3. The China ETFs are soaring! For more, check out Martin’s latest report.

But no matter which vehicle you choose, remember: I think too much money in slow-growing North American markets — and not enough in fast-growing Asian markets — could be one of the costliest investment mistakes you can make right now.

Best wishes,

Tony

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