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Friday, June 18, 2010

Look east, young man...

In trying to read the economic Tarot cards, most are focused on the U.S. and Europe.

At first glance, this is quite understandable. The European economy is the largest in the world, followed closely by the U.S. But, that's not where the action is.

Indeed, the world economy increasingly turns on the axis of #3: China.

If you want to know where things are going, look east.

I say this for two reasons: 1) markets have been increasingly led by action in China, and 2) fundamental economic reality is being driven most by China.

When the economies and stock markets of the world turned positive in 2008 and 2009, it happened first in China.

All other markets are reacting to what happens in China, too. When China hints they may let the renmimbi appreciate, markets shout "how high?" When China hints its trying to subdue real estate speculation, markets shutter the world over.

The simple fact of the matter is markets are reacting increasingly to news from China.

You may think of markets as being speculatively fueled, but a look at underlying economic reality provides a basis for these flighty reactions.

China is the world's third largest economy, passing Japan within the last two years.

The Chinese economy is--by far--the fastest growing large economy.

China became the world's largest export economy, passing the former #1, Germany, just last year.

Demand from China is driving the markets for the most basic inputs to production. Watch the price of shipping, iron ore, copper, steel, oil, or almost anything else, and you'll most likely find news from China caused prices to jump or dive.

China has become the manufacturer to the world. You can't consume what hasn't been produced, so China is holding the economic cards, now. If you don't believe it, watch Chinese workers striking Honda or demanding hiring wages from purchasers like Apple and Hewlett Packard. This wasn't happening a year ago because China didn't hold the cards. They do right now.

Finally, China's economy is the only large economy whose government isn't in a fiscal straight jacket. The U.S., Europe and Japan are all hand-cuffed by borrowing and spending too much. China's government is almost certainly making uneconomic investments, but they have the ability to invest whereas the other large economies' governments are out of ammunition (or soon will be).

If you want to know where things are going economically, look east.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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