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Plan A Is In Effect

Stock Market Trend: Decisively Broken.

Plan A is in effect for retail investors – remain in cash until the trend reestablishes itself.  The big question now is whether we have “merely” a major correction OR the beginning of a downward bearish trend.

The answer to this question lies in the economic tea leaves.  Will the U.S. recovery start to falter, as some regional data is suggesting?  Will the European economic slowdown and crisis spread to the rest of the world?  Is the 20% drop in the Chinese stock market in the last five weeks a harbinger of a bubble economy bursting or “merely” a Chinese style correction?  Is the drop in long term yields the beginning of a flattening of the yield curve and a signal of trouble ahead?

Since no one really knows the answers to these questions, there is much uncertainty, which is reflected in higher volatility in the financial markets.  Ergo, being in the market now is a roulette-wheel gamble rather than a poker-style speculation.

Remember: The institutional investment managers who go on the tube will tell you that “this is a great buying opportunity.”  They do so because they are stuck on the long side and forced to be in the market by their rules.  Don’t be their patsy.  As they tell you to “buy, buy, buy,” they use your purchases to sell, sell, sell.

The U.S.-China Economic Monologue

The longest running comedy off-Broadway – the U.S.-China Strategic and Economic Dialogue – lifts its curtain once again this week in Red China.  Going back to the days of the Bush Administration, this show features U.S. Treasury Secretaries kowtowing to Chinese officials.   It’s a well worn plot: These earnest men always return with empty hands and empty promises on topics ranging from Chinese currency manipulation to Chinese protectionism of their markets.

This week, the Obama Administration is upping the dialogue ante by sending over 200 officials to talk about a wide range of topics.  At the top of the economic list once again there are the topics of currency manipulation and Chinese protectionism.  One particular form of protectionism on the docket will be China’s “indigenous innovation” policy, which favors domestic firms and forces foreign companies to surrender their technology as a condition of market entrant.

While Hank Paulson did his best impersonation of Neville Chamberlain when he was at Treasury for W., expect Tim Geithner this week to star in the role of American Eunuch. 

Mark my words: There will be no meaningful deal on currency reform.  The yuan is 40% under-valued and the best we’ll get is a few percentage points – and likely nothing at all.

Mark my words: There will also be no meaningful lifting of China’s Great Wall of Protectionism.  Not with the Chinese economy in crisis and downshifting.

The euro crisis has changed everything.  With Europe as China’s biggest export market, China is already getting hammered by the falling euro.  For it to revalue to the dollar – and therefore have the yuan rise even higher relative to the euro – is now a non-starter.

What this means is that with the U.S. dollar rising and taking the yuan with it, it will primarily be the U.S. once again getting screwed by the Chinese.  America urgently needs for the dollar-yuan hard peg to be broken so that we can rebalance our trade and revitalize our manufacturing base.  But the Chinese just aren’t going to do it.  Economically, the peg serves their purpose while strategically it further weakens us.   To put this another way, they have us right where they want us and President Obama, Larry Summers, and Timothy Geithner just don’t see it.

The best thing to do right now is to put an end to this “dialogue” – it’s just a monologue in which we talk and they don’t listen.  Instead, the U.S. Congress needs to start unilateral action that will prompt Beijing to engage in real bilateral reform. 

The lesson of this tawdry repeated summit is that “talk is NOT cheap.”  It’s killing our economy because all we get from Beijing is talk.