U.S. recession knows no borders by
Tony SagamiPresident Obama and the Democrat-controlled Congress are on a multi-trillion dollar spending spree to keep our economy from slowing even further.
Whether all that spending will revive our economy is yet to be seen. However, one thing is very clear —
Our recession is spreading across the Pacific Ocean to the booming Asian economies.
The United States has become a nation of consumers. And countries that make all the doodads, toys, clothes, and other consumer goods we can't seem to go without are seeing their economies slow to a snail's pace as we buy less and less.
As U.S. consumers buy less and less, many Asian countries are seeing their exports slow to a snail's pace.
The Chinese National Bureau of Statistics released their GDP data for 2008. And it turns out that the Chinese economy expanded by 6.8% in the last quarter of 2008 — the weakest quarterly year-over-year growth rate in seven years!
And for the year as a whole, the Chinese economy grew only 9%, way down from the 13% growth rate in 2007.
The reason for the slowdown is simple: Exports are way down ...
China's exports tumbled 2.8% in December, the most in nearly a decade. To put that in perspective, China enjoyed a 21.7% increase in exports during the fourth quarter of 2007. And for all of 2008, exports were up by just 17.2%, a huge drop from 25.7% in 2007.
I also pay a lot of attention to electrical output. That's because this statistic is an extremely accurate indicator of overall economic growth (or lack thereof). And in the fourth quarter China's electrical output was 6% below the same period in 2007.
Now, you may be telling yourself that a 6.8% economic growth rate is nothing to sneeze at. You're right — we'd do cartwheels for that type of economic growth in the U.S. — but the circumstances in China are very different.
You see, a population of 1.3 billion means that tens of millions of new workers are entering the workforce every year, especially as migrants from the poor interior cities move to the coastal cities looking for factory and construction jobs.
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Click here for more information ...So while 6.8% growth would be great in the U.S., a growth rate of 6.8% is almost like a recession to China.
On top of that, China is also facing pressure from President Obama to allow the yuan to rise in value. Timothy Geithner, Obama's pick for Treasury Secretary, said that "China is manipulating its currency."
Nevertheless, the last thing China can afford is to allow its currency to rise and make its exports more expensive. So I foresee that the currency-valuation issue will probably turn into some sort of political battle down the road, threatening to make things worse for both the U.S. and China.
No doubt, China's slowdown is going to affect more than just its own economy. And the steepness of this slowdown is likely to have a significant impact on much of the rest of Asia, which relies heavily on demand from China.
In fact, it is already causing ...
Slumps in Three Major Markets:
Slump #1 — Japan ...
The Japanese Finance Ministry reported that Japanese exports plunged by a faint-inducing 35% in December from the year before. For an export-dependent country like Japan, that is a kiss of corporate profit death.
Sony, for example, reported its first annual loss in 14 years last week. It also announced 8,000 layoffs and the closure of 10% of its manufacturing plants around the world.
Slump #2 — South Korea ...
Samsung reported its first ever quarterly loss. And it warned that it expected the cell phone market to drop by another 5% or 10% in 2009.
South Korea's economy contracted a painful 5.6% last quarter — twice as bad as had been expected. The problem? China is South Korea's biggest export market. And exports to China are nose diving.
Case in point: Korean electronics giant Samsung reported its first ever quarterly loss. The $674 million loss was a whopping two times larger than the Wall Street crowd was expecting.
The big problem, by the way, was cell phone sales. Furthermore, Samsung warned that it expected the cell phone market to drop by another 5% or 10% in 2009. So if you're a Motorola or Nokia shareholder, you might want to re-think the wisdom of holding on to a company in a shrinking industry.
Slump #3 — Australia ...
Australian Prime Minister Kevin Rudd warned last week that the slowdown in China will chop $3.3 billion of business from the Australian economy.
He went on to say, "And that means a massive five billion dollar fall immediately in Australian exports, just because of China alone, and with a consequential impact on Australian jobs."
In fact, Australian mining giant BHP Billiton is closing a nickel mine and cutting 6,000 jobs around the globe because of weaker demand from China, the world's No. 1 consumer of metals.
I could go on:
Singapore, Taiwan, India, Malaysia, Indonesia, and China's other Asian neighbors are all feeling the same economic pinch.
What's important is that things are going to get worse before they get better. I'm not just talking about the U.S., either.
What You Should Be Doing Now ...
I think U.S. dollar-denominated assets will get clobbered the most. So use any rallies to sell stocks and reduce your exposure to equities.
As the U.S. recession sends a financial tsunami from sea to shining sea, there are five moves you might consider to protect your wealth and profit from the chaos ahead ...
Use any rallies to sell stocks and reduce your exposure to equities. Raise cash!
I think U.S. dollar-denominated assets will get clobbered the most. I expect U.S. stocks and U.S. bonds to be among the worst performing assets in the world. I would avoid them like the plague!
Our politicians are spending money like there's no tomorrow. And that means a whole lot of inflation is in our future. So make sure your portfolio includes some inflation hedges, such as gold and timber.
If you're very aggressive and have some speculative money you can afford to put at risk, take a look at either long-term put options (also known as LEAPs). Or consider inverse exchange traded funds, such as the ProFunds Ultrashort FTSE/Xinhau China 25 (NYSE:FXP). This ETF is designed to move twice the inverse of the daily performance of the FTSE/Xinhua China 25 index. In other words, for every 10% the index drops, the ETF is meant to go up 20%. Of course, the opposite can happen: If the index rises 10%, the ETF could drop 20%.
Get ready to become a big, big buyer. The economic picture will get uglier. But the best time to buy is when nobody wants to! And don't forget that stock markets historically bottom 6-12 months before the economy does.
My
Asia Stock Alert subscribers have already implemented the above strategy and are calmly waiting for the buying opportunity of a lifetime. I hope you will be ready to do the same.
Best wishes,
Tony
About Money and Markets
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http://www.moneyandmarkets.comMoney and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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