Tuesday, March 22, 2016

The Biggest Global Risk Right Now

The Biggest Global Risk Right Now

Martin D. Weiss, Ph.D. | Monday, March 21, 2016 at 7:30 am
What single earth-shattering event is the most likely to kill world trade … crush the global economy … and crash financial markets?
Another oil price shock?
A breakup of the eurozone?
A major terrorist attack?
According to Intelligence Unit of the London-based Economist, the answer is none of the above.
Instead, it’s precisely the scenario I depicted here last week — a hard landing in China.
My thesis: High-growth countries almost always behave like high-flying stocks. When things turn sour, they don’t just slow down. They crash. And China is the prime example.
My data: A raft of case studies, present and past, of nations that experienced cataclysmic contractions immediately after periods of rapid GDP growth: Russia, Estonia, Latvia, Ukraine … Peru and Chile … the UAE and Iran … Bahamas … the United States in the 1930s … and many more.
The reason: By definition, accelerated growth is sponsored by overzealous governments … stimulated by excessive debt … and downright dangerous.
It concentrates wealth, corrupts political power and corrodes any semblance of social balance.
It inevitably comes with great speculative bubbles. And it can only end one way: With great panic busts.
But rather than bury you in more history and data, let me share some of the things that I’ve experienced personally … that have taught me valuable lessons … and that have convinced me, without a doubt, a soft landing in China is impossible.
Cuba, Late 1940s
My family spent a lot of time vacationing on the Isle of Pines, about 175 miles southwest of Havana.

While we were leaving Cuba for the last time on this Pan Am flight, GDP was plunging rapidly.
A few years later, Fidel Castro led a failed attack against the government of Fulgencio Batista and was thrown into the Presidio Modelo prison a few miles from where we stayed. His younger brother Raul, Cuba’s current president, was his cell mate.
Years later, just a couple of months after the Cuban Revolution, my father and uncle revisited the island one last time. Castro had just renamed it Isla de la Juventud (Isle of Youth). And ironically, he was using the same Presidio Modelo prison to torture his own enemies.
In the interim, Cuba’s economy was rapidly shifting from super boom to super bust. And to this day, over a half century later, it has yet to recover.
Central Brazil, Early 1950s
By this time, we had realized Cuba was not exactly a good winter home anymore. So instead, we decided to set up our second home 3,500 miles to the southeast — on a ranch in central Brazil.
I remember one day especially well. We hopped into our Rural Willys Jeep and drove a half day to visit a unique plateau to the north.
In the early 1950s, when we took these photos in central Brazil, the roads were often impassable (top), and the future site of the new capital was a deserted plateau (bottom). Its construction spurred rapid growth, but also hyperinflation and a series of boom-bust cycles.
But I was disappointed. There was nothing there … except perhaps for a hastily erected sign in the ground. Translated literally and including a spelling error, it read: “FUTURE ‘CITE’ OF BRASÍLIA”.
Years later, it would be the largest construction site in the world — for the new spectacular, super-modern capital of the world’s fourth-largest nation.
But the birth of Brasília also set off a chain reaction of events that periodically destroyed Brazil’s economy:
Huge deficit spending to build the new capital …
Unbridled money printing to finance it and wild hyperinflation …
Eight new currencies and mass devaluations …
A traumatic military coup in 1964 and 20 years of state oppression and murder with impunity …
Then a short golden era of strong growth with stability …
And now the worst depression in nearly a century.
I saw this personally. My own childhood friends were among the victims; their families’ lives, destroyed.
China Today: Flashbacks
Today, what I see and hear every day in China brings back eerie flashbacks of my childhood experiences.
I see the similarities particularly clearly because I also know China personally:
Not long ago, to improve my fluency in the language, I stayed with my favorite host family in Qinhuangdao, the summer home of China’s government. I’ve traveled to Shanghai several times to speak at economic forums. Before that, Elisabeth and I crisscrossed the country visiting centers of Chinese and Western medicine. China was my area of specialty as an undergrad at NYU; Chinese, my first Asian language as a teenager.
And I can tell you flatly: The social, political, and economic upheaval coming to China will make the convulsions of Cuba, Brazil and other major nations look mild by comparison.
Again, though, rather than a bunch of stats, let me share with you some anecdotal experiences that can give you even better insights:
Toxic Smog
When my online Chinese teacher first invited me to Qinhuangdao, I questioned her about the seemingly high pollution index. “Don’t worry!” she insisted. “We’re four hours away from Beijing.”
True, the pollution in Beijing is worse. And yes, on some days, I could actually see the sky — sort of. But on most days, I could barely breathe.

On a recent trip to China, even in a city that was far from the industrial smog of Beijing, I still found it hard to breathe.
Throughout urban China, toxic smog makes cancer the leading cause of death. Hundreds of millions of people choke in a fog of particulate matter, ozone, sulfur dioxide, mercury and lead, caused mainly by factories and coal burning. The water supply is often contaminated. The food supply, same thing.
Result: A shockingly vocal public outcry … and, after years of denial, a surprisingly sincere government response. But it’s 99% lip service and only 1% action.
Looking ahead, if high officials in Beijing continue to do little or nothing about pollution, that alone could foment the mass revolts they fear so intensely. And if they finally do something substantial, that alone could chop several percentage points off of GDP growth.
Government-Sponsored Crime
Despite a healthy lifestyle, one of my hosts was recently diagnosed with cancer, probably due to four decades of breathing the chemicals I just told you about. So she asked a dear family friend to come stay with her while she underwent chemotherapy.
Travel plans were made, farewell parties held … until one day recently, the friend called, exclaiming in desperation: “I just got notice that the government’s going to tear down my house for a new project. I’ve got to move out. I’m so sorry. I can’t come.”
Rare event? Not by a long shot! It’s just one of millions of forced evictions.

Despite the threat of punishment, forced evacuations like these in China often evoke emotional outbursts and protests.
In fact, when I first went to China many years ago, forced evictions were rarer and mostly in rural areas. That’s where government authorities occasionally worked in collusion with private developers to seize land from villagers with little or no compensation.
Now, however, according to the Financial Times, 40% of local government revenues come from these kinds of land sales. And the Council on Foreign Relations estimates that up to 65% of 180,000 “mass incidents” (rebellions and protests) recorded annually in China stem from grievances over forced evictions.
What’s worse, as Beijing sought all possible means of stimulating growth after the 2008 debt crisis, the Communist Party has pushed even harder for “land re-development” at any cost — roads, factories and residential complexes. So just in the last couple of years, forced evictions have accelerated dramatically and spread to urban areas, such as the big city where my host’s friend is now losing her home.
Yes, China’s President Xi Jinping has made his anti-corruption campaigns the signature feature of his public facade. But not surprisingly, forced evictions are not his focus. Instead, the campaign is mostly about snagging a select list of highly visible senior officials accused of other kinds of graft.
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External Sponsorship
Beijing Censors in Shanghai
Throughout most of China’s rapid growth years, strict party control of political commentary was the norm. But financial journalists typically got a free pass: As long as they stuck to stock market analysis or econ-speak, they could say and write pretty much whatever they wanted, especially in the financial capital, Shanghai.
As long as the economy and the stock market were strong, that dual system — censorship of the political press and freedom of the financial press — endured. Today, however, with the Shanghai Exchange in the dumps and the economy slowing rapidly, it’s over.
Chinese and foreign journalists who stay bullish can “keep up the good work.” Those who have turned bearish, no matter how right they may be, risk jail sentences or worse.
Government censors from Beijing have moved in.
On the surface, this may sound like a side-show to the big economic news coming out of China today — sinking industrial production, crashing exports, and more.
But it’s not. Investors always prefer the devil they know. They abhor company cover-ups and falsified government data. They run from news vacuums faster than they run from the bad news itself.
And that’s precisely what investors in China are doing right now. As The New York Times reports …
“Over the last year, companies and individuals have moved nearly $1 trillion from China. … The swell of outflows is a destabilizing force in China’s slowing economy, threatening to undermine confidence and hurt a banking system that is struggling to deal with a decade-long lending binge.
“The capital flight is already putting significant pressure on the country’s currency, the renminbi [aka the yuan]. The government is trying to prevent a free fall in the currency by stepping into the markets and tapping its huge cash hoard to shore up the renminbi. But a deep erosion of those reserves may set off further outflows and create turbulence in the markets.
“Some methods are perfectly legal, like investing in real estate elsewhere, buying businesses overseas and paying off debts owed in dollars. Others … are more dubious, and in certain cases, outright illegal. Chinese customs officials caught a woman last year trying to leave the mainland with $250,000 strapped to her chest and thighs and hidden inside her shoes.
“If the government cannot keep citizens from rushing to the financial exits, China’s outlook could darken.”
To me, the outcome is obvious: What may initially look like “just a slowdown” will inevitably turn into a massive crash that breaks the back of an already-fragile global economy.
Don’t let China hit you by surprise. Start preparing right now by raising cash and building a strong hedge portfolio.
Good luck and God bless!
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Martin D. Weiss, Ph.D.Dr. Weiss founded Weiss Research in 1971 and has dedicated the past 40 years to helping millions of average investors find truly safe havens and investments. He is president of Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. And he is the chairman of the Sound Dollar Committee, originally founded by his father in 1959 to help President Dwight D. Eisenhower balance the federal budget. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recesssion and Depression.
The investment strategy and opinions expressed in this article are those of the author and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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