China-U.S. Economic “Cold War” Heating Up

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Tuesday, May 20, 2014

YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET

China-U.S. Economic “Cold War” Heating Up

by Mike Larson

Is China our friend? Our enemy? Our biggest "fr-enemy?" Or something else entirely? MARKET ROUNDUP Here's a quick recap of the important news of the day ...  The market couldn't shake off some lousy reports from the retail sector today, helping drag the Dow down by 137 points. Banks couldn't build on yesterday's strength either, nor could small capitalization stocks. The Dow Jones Utility Index has also now shed 5 percent from its April 30 high.  Home Depot (HD, Weiss Rating: A-) was one of the standout gainers and among the day's most active stocks. It reported disappointing results for its fiscal first quarter. But the company also said the housing market was still doing fine, and added that sales were getting more "robust" in recent weeks now that the rotten weather has faded into history. That helped turn early losses into an 1.9% gain for the day.  On the flip side, shares of TJX Co. (TJX, Weiss Rating: A-) dropped 7.6 percent after missing first-quarter earnings forecasts by three cents a share. The company runs the T.J. Maxx and Marshalls discount retail chains. That's the question investors are wrestling with in light of the recent ratcheting up of tensions between the U.S. and Asia's growing economic and military colossus. Just consider the news from the past 24 hours ... The U.S. accused five members of China's armed forces of spying on U.S. companies for the economic benefit of domestic firms. U.S. Steel (X, Weiss Rating: D+), Alcoa (AA, Weiss Rating: C), Westinghouse Electric and others were reportedly among the victims. It's extremely unlikely any of the Chinese officials will ever see a U.S. courtroom since the two countries have no extradition treaty. And it's also unlikely China's mysterious "Unit 61398," housed in a plain-vanilla building in Shanghai, will stop trying to hack into U.S. systems. But the fact our government felt comfortable going forward with unprecedented public indictments of foreign officials speaks volumes about how frustrated the U.S. is with China's cyber theft. China responded by labeling the charges "purely fictitious" and "extremely absurd." That could lead to tit-for-tat charges against U.S. officials, even less cooperation on economic issues or other retaliatory steps. China just banned Microsoft's (MSFT, Weiss Rating: A) Windows 8 operating system from government computers recently, and it doesn't help that we're wildly over-indebted to the Chinese government. China was holding almost $1.3 trillion of U.S. Treasuries at last count. Meanwhile, China is flexing its muscles in a dispute with neighboring Vietnam over energy resources in the South China Sea. China is exploring for oil using an offshore rig in disputed waters. That's prompting ships to ram and fire water cannons at each other, and Chinese aircraft to buzz surface vessels. “Is China an ally or an adversary? And what does that mean for your investing strategy?” Vietnamese citizens have also rioted against Chinese and Taiwanese companies, forcing China to evacuate thousands of its citizens from the country. That could lead to enhanced ties between the U.S. and Vietnam, something that would undoubtedly vex China even more! If it brings back memories of the standoffs we saw with the old Soviet Union in the 1960s, 1970s, and early 1980s, that's no surprise. In some ways, it's the same process playing out again — this time as a largely economic Cold War. It's also a key investing risk that my colleague Larry Edelson has done such a good job highlighting in his work on the Cycles of War. Martin covered that a few days ago. The standoffs we're seeing now, brings back memories of what we saw with the old Soviet Union in the 1960s, 1970s, and early 1980s. So will these latest tensions turn into something much worse? Is China an ally or an adversary? And what does that mean for your investing strategy? Are you likely to keep more of your money at work nearer to home, or do you want to invest more aggressively in China or Southeast Asia? I'm interested in your take on the blog. My view is that China is grappling with plenty of economic challenges, from slowing growth to a potential massive real estate bust. That would tend to argue against them getting too aggressive with trade sanctions or other anti-American moves. But China also holds a real trump card in the form of hundreds of billions of dollars worth of our government bonds. If we push them too far, we could start seeing reams of sell orders come in over the transom from Asia. That would push up everything from the mortgage rates we pay to buy homes to the gargantuan interest bill on our $17.4-trillion-and-counting debt load! So it's important to pay attention to China in the days and weeks ahead to see what move it makes next! Meanwhile, many of you were up in arms about the ramifications and motivation of companies like Walgreen Co.(WAG, Weiss Rating: A-) and Pfizer (PFE, Weiss Rating: A) shipping their corporate headquarters overseas to save a few bucks. OUR READERS SPEAK Reader John W. said he understands why great American icons are considering decamping for foreign shores ... "Why wouldn't companies that are being taxed to death want to relocate overseas? And why wouldn't the rest of us that have been working all our lives and paying ever-increasing taxes want to do the same? We've been paying into Social Security all these years only to learn that the fund is insolvent. Where is our motivation to approve of what has become of America? The Constitution is being ignored and replaced with executive orders — sounds very much like a dictatorship." Reader Ron M. was on the same page, saying, "It is now almost impossible to rein in the monster that has been created." He added: "This is what we get when we elect a majority of lawyers and academics to political power. Most of our leaders never ran a company or for that fact worked in an environment where they had to make a product to sell and compete with others. The federal government has turned into a gigantic thief." But Reader Bookmagic thinks those kinds of moves are "close to treason." The rest of the comments: "We all know that thru their lawyers and loopholes they don't pay anywhere near the 37 percent. That's a copout. They took advantage of our roads, our taxpayer-paid educations, our army that has kept them safe, our Constitution that has kept this a lawful place, and don't feel they need to offer our country anything. Or their workers for that matter. Disgusting." No matter which side you come down on this debate, there's no denying the ongoing trends toward offshoring and tax inversions will impact your wallet. They may help you as an investor by boosting the earnings per share your companies make ... but hurt you as an American by shifting more of the tax burden to you, or even resulting in you losing your job! So will Washington get more aggressive to go after tax dollars? Or should it let corporations do what they want to do? Hop over to the blog to weigh in! OTHER DEVELOPMENTS OF THE DAY  The euro has continued to weaken as I expected, in part because of threats of extraordinary policy measures out of the European Central Bank (ECB). The latest from Der Spiegel in Germany? That the ECB will introduce "negative" deposit rates. That would mean banks will have to pay the ECB to park money with it rather than do something actually productive, like lend it out.  "Yield chasing" is in vogue ... again. In plain English, big money investors are plowing into junk-level bonds with tons of credit, currency or inflation risk just to earn more yield because they can't get it in Treasuries. Why can't they get it? Because the Federal Reserve is keeping rates too low for too long. Why would they do that, when the last time they did, it sparked the biggest housing bubble in history (and the time before that, the biggest dot-com bubble in history)? Because unlike the average two-year-old, who learns not to touch a hot stove after getting burnt, the Fed never gets it!  So USA Today has an article whose headline reads "Nine Ways Air Travel is Better Than Ever." Here is my personal list of those ways: Okay, I'm done now. Reminder: If you have any thoughts to share on these market events, all you have to do is hop on over to the blog and leave your comments. Until next time, Mike Larson

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.