Isn’t that a scary thought?

Just a couple of days after Obama touched down in Washington, China makes a very American decree. It’s telling its banks it had better shore up their capital situations or face strong sanctions from the government.

They say imitation is the sincerest form of flattery. America did it first, now the communists are following.

In case you missed the news over the past year or so, China’s economy is flat-out soaring ahead. While no figure that disseminates from Beijing is ever trusted, most analysts believe the country’s GDP is growing by a rate of 7% or so. Some even say it has eclipsed the 10% mark.

Just like here in the States, very little of that growth is organic. China’s government is just as fond of manipulating natural market forces as our friends inside the beltway.

And, of course, anytime the government gets involved, some unnatural and unexpected economic reverberations will be felt.

Just as their American brethren did over the past decade, China’s banks are taking advantage of a fixed currency and an optimal lending environment by sending all the money they can dig from the couch cushions into the streets of China.

As the economy grows, the leverage on their books multiplies. Like we learned just 13 months ago, the situation will eventually collapse under its own weight.

That’s why Beijing has stepped in and told the banks that they had better save some money for their backup coffers… or else.

This is bad, bad news for a country surviving on borrowed money (no, not us… this time). China’s economy has been artificially inflated by the government’s cash infusions. But now the leadership is starting to pull back, realizing enough is enough.

Continuing with Friday’s lead, this proves natural market forces are still alive and well. Better yet, it proves China is in for some bumpy traveling.

If you would have asked me early last week about China’s economic health, I would have told you I like what I see. But then something odd happened.

Obama visited. And it’s been downhill ever since.

*** I love it when the markets make a mistake. After some positive economic data from the consumer front this morning, the equities market put in quite a showing today. In fact, even the ultra-bearish natural gas sector followed the crowd of bulls today.

It has created another fantastic buying opportunity. Natural gas prices climbed by less than one percent, but much of the sector is up by two or even three times that figure. Investors mistakenly got caught up in the rally.

Over the next few days they are going to pay for it.

Late last week, we locked in gains of 400% thanks to the natural gas market’s recent selloff. Thanks to today’s action, investors that make their move now have yet another shot at triple-digit gains.

To find out how, read my updated report.

This is going to be a fun week for the energy markets.

*** Let’s face it, the dollar is in trouble. But so is the sun at the center of our solar system. The big question is which will implode first. Now that the dollar has slowed its decline, the race may be tighter than you think.

The dollar will eventually be tossed aside, but will it happen in the next million years?

Here’s a bit of what I told Contrarian Profit readers this afternoon:

“Is the drop in the dollar worth watching? Just like the sun will eventually shine its last ray of light, the mighty dollar will someday buy its last barrel of oil or its final container of Chinese imports.

“We all know it is going to happen, so why bother discussing it. Right?

“There is no doubt the world’s currency of choice has more pressure stacked against it than ever before. But even with $12 trillion in debt and nearly a trillion of annual interest payments due within the next decade, the greenback is still stronger than it was just sixteen months ago.

“While so many of us are betting against the dollar and calling for its demise, plenty more investors are using it as a security net, buying American treasuries to protect themselves in case the bottom really falls out.

“With the sun someday going to fade, I could sit in my basement and wait for the big day to come, or I could live my life without worry.

“It’s the same thing with the dollar. We could bet against the greenback and profit as it drops, or we could forget about the minimal return potential and keep our eyes looking forward, where the real money is at.

“Here’s the scoop. The dollar is likely to fade, at most, six percent below today’s value against the Euro. That’s major erosion for such a massively distributed currency, but six percent over a few years doesn’t stack up to a hill of beans in the grand scheme of things.

“I can list a couple of dozen stocks that are up by twice that figure today alone.

“No doubt, you should pay attention to the dollar, as a six-percent decay in the value of the world’s most important currency will change all sorts of valuations. But don’t invest in the cause, invest in the effect.” Keep reading here.

The dollar is going to fall, but you and I may not live long enough to get rich off the move. The smart money is looking somewhere else. I say we follow.

A Chinese newspaper reported that Chinese officials are calling for Beijing to sell U.S. Treasuries… Whoa! This is completely different than people outside of China giving them their 2-cents worth of opinions on how they should run their economy (read, Schumer, Graham, Bernanke, Paulson, and now Geithner a.k.a “the cheater”)… Let’s go to the story…

“BEIJING (Nikkei)–Calls are growing in China for the government to reduce its holdings of U.S. Treasury securities, as some observers expect their prices to decline amid heavy issuance to fund U.S. economic stimulus plans.

Such sentiment — in part motivated by indignation over recent American assertions that China is partially responsible for the global financial crisis — threatens to cast a cloud over relations between Beijing and the new U.S.
administration.

“China should sell some of its U.S. government bonds and increase its euro and yen assets,” Yu Yongding, a former member of the People’s Bank of China’s policy board, wrote in a Chinese newspaper earlier this month. Yu warned that the supply of Treasuries may far exceed demand in the future.

Such remarks by Yu, who currently serves as director-general of the Chinese Academy of Social Sciences’ Institute of World Economics and Politics, has sparked discussion within the government on how to manage its foreign reserves, according to a source familiar with the matter.”

I told the boys and girls on the desk about the story, and Ty noted that the markets weren’t really picking up on it… But by noon, you could tell something was going on, as the euro traded to 1.30 (+2 figures), Gold was up $40, and the Long Bond in Treasuries was down 2 whole points!

Now, I’m not saying that “this is finally the last shoe to drop” You see, just because a Chinese official calls for Beijing to sell their Treasuries, doesn’t mean Beijing does. However, look at the damage done to the dollar, and Treasuries when we have a single individual within China calling for this!

So… Judging from the currency reaction overnight… There’s been no follow up to the NIKKEI story… But what a performance from Gold! WOW! The shiny metal traded over $900 for a short time on Friday… I do see the Gold futures on the internet, and they are showing Gold will be over $900 today…

Pound sterling has bounced off its lows from last week, after Barclays announced they did NOT need Capital from the Government… This is the first “good” news from the U.K. in weeks, but I suspect it won’t last too long, as this is just one Bank… There are plenty others in the U.K. that won’t be able to make a statement like that!

And speaking of Banks… I see where BNP Paribas posted a huge loss in the 4th QTR on their investment banking woes… So, it’s not just U.S. , and U.K. Investment Banks with losses… The key here is “investment” banks… The ones that got deep into the subprime bonds, credit default swaps, and didn’t manage the “risks” correctly… Any way, this news from BNP Paribas is probably weighing heavily on the euro this morning, and one of the reasons the single unit has given up it’s gains from Friday…

So… As I said above, the Trading Theme for the dollar is in place, which means… The euro gets sold along with the other alternative euro currencies like Norway, Sweden, Denmark, and Switzerland… But the High yielders, like Aussie, kiwi, Brazil, and South Africa, really take shots to the chin… On the other side of the coin, the Japanese yen rallies like there’s no tomorrow…

The U.S. data cupboard is chock-full-o-data this week, and the Fed’s FOMC meets tomorrow, but won’t announce their rate decision until Wednesday. I’ve always wondered just what these Fed Heads do during these two-day meetings… I’ve always contended that they most likely played board games… Or Battleship! I can hear Kohn, telling, Bernanke, “Ben, by Joe, you’ve sunk my battleship!” (if you do it in an English accent it’s funny)…

We begin the week with Existing Home Sales and Leading Indicators… I keep saying over and over again that if the markets had 1. read the Pfennig… Or more likely 2. paid attention to the Leading Indicators they would have not been blind sided by this recession! Leading Indicators have told us for months now that things were not going to be all seashells and balloons for the economy… And voila! Well… I think Leading Indicators will continue to tell us there are more problems ahead, as they are forecast to be negative -.3%… And Existing Home Sales? The rot on that vine has been exposed for over a year 1/2 now…

Tomorrow we get the Case-Shiller Home Price Index, and Consumer Confidence… Wednesday, we’ll get the Fed’s rate decision, which I told you last week, to forget about any more rate cuts, they are so close to zero, they are at zero… Thursday brings us the Weekly Initial Jobless Claims, which last week, got very close to 600K, Durable Goods Orders, and New Home Sales… And then finally on Friday, we get 4th QTR GDP… Which I told you, and a Huge crowd at the Wealth Masters Conference in November, that 4th QTR GDP would be a negative -5.0%…

Well, it looks as though it probably will be an even greater negative than I forecast back then…

OK… Let me give you a bit of a lesson on what’s happening with the economy and this recession… You see… Every other time in the modern era that the U.S. economy has contracted more than 5% in a quarter, falling inventories have been a major reason, if not the single biggest factor. Unfortunately, the really bad recessions, like this one is going to turn out to be, get worse by the Companies getting rid of all their inventory, you know, stuff that isn’t selling! Then… Once the inventories are sold off, the economy can grow quickly again, but at the cost of inflation, as the Companies sold off their stuff, and now there’s demand for it again.

But so far in this recession, falling inventories haven’t been the problem. Of course you have to forget about housing here… NO, this recession is a direct result of the Credit Crisis that was first exposed in August of 2007… Which, I’m afraid, doesn’t bode well for a turn around in the recession, that a lot of economists are calling for in the 1st QTR of this year… The recession is deep rooted, and will be protracted until someone figures out how to get this credit crisis unlocked!

I’m still holding out hope that by summer, we see an unlocked Credit market… Then it would take a couple of months before the economy could get some “legs”… Then… We could see this spiral of demand again, and inflation rising, like in previous recoveries from recessions… And this is why I believe that in the 2nd half of 2009, we’ll see a return to the fundamentals, and all this awful debt creation that was done to “stop” the correction, will be on display again, and a dollar sell off, along with U.S. Treasuries should be in store…

But, if the Chinese jump the gun, and begin selling ahead of that time, then the dollar sell off could obviously move forward on the calendar!

I think what the markets are looking for these days, and especially after the NIKKEI story on Friday, is some sort of hedge against Treasuries… All that safe haven buying, that I’ve been talking about for months now, has created what I call the last balloon / bubble in this cycle…

And then finally before we head to the Big Finish… There’s this… A story that Ty found the other day, and sent to me… When I went to read it, I saw that the writer is a young man, that used to swim against and play water polo against my oldest son, Andrew! The lad’s name is Jamie Saettele, and he’s now the Senior Currency Stategist for DailyFX.com…

Jamie is a stategist, so he works with charts… And he believes that the euro is forming a base for a Large Rally… He points out that each time the euro rallies, and then drops, the drop is less than the previous drop… You may recall that I pointed this type of information on Gold a couple of weeks ago, and said that it looked like it would rebound to $900, and voila! Here it is… So… Let’s see if the charts work for the euro, the same way, eh?

Currencies today 1/26/09: A$ .6570, kiwi .5290, C$ .8190, euro 1.2970, sterling 1.3870, Swiss .8625, rand 10.1820, krone 6.8750, SEK 8.1750, forint 222, zloty 3.3815, koruna 21.5920, yen
89.30, sing 1.4980, HKD 7.7580, INR 48.90, China 6.8465, pesos 13.93, BRL 2.3140, dollar index 85.69, Oil $45.90, Silver $12, and Gold… $898.30

Source: Chock-Full-O-Data Week!

Finally, Americans are getting some relief. They no longer have to carry the whole world economy on their shoulders…

But we’ll come back to this….

First, a look at Wall Street.

The Dow tumbled more than 200 points yesterday. Oil rose $5. The euro rose against the dollar – to $.155. Gold shot up $11. And the yield on the 10-year note fell to 4.07%.

No biggie.

So, let’s go to today’s two top stories:

The first from Bloomberg: “China exports unexpectedly grow 28%.”

And this from the Wall Street Journal:

“Global inflation’s bite worsens.”

What is going on? The world economy is supposed to be slowing down. Inflation rates should be going down, not up. China’s exports too – they should be falling, not increasing.

D-E-C-O-U-P-L-I-N-G say the pundits.

The widespread view is that the emerging markets are separating – at least partially – from the developed markets. America cools…but China’s tiger economy burns bright. And not just China. India…Russia…Brazil…and dozens of other emerging economies are on the prowl. India’s exports are increasing even faster than China’s – up 32% at last count.

Is it possible?

Well, yes…and no. Some emerging markets produce stuff for the developed countries. Some produce stuff for themselves and other emerging markets.

Here, we defer to colleague Manraaj Singh, who follows the emerging markets for a living:

“…[With] all the talk of a global economic slowdown, China is still booming. Its economy grew by a white-hot 10.6% in the first quarter of this year. And that’s despite all the efforts of the Beijing government to slow things down…

“So, the commodity-rich Asian countries that supply China’s industrial machine, like Malaysia, Indonesia and Thailand, are surviving the global economic downturn well enough. In fact, they’re seeing exports boom…

“But not every Asian country is benefiting. The Asian countries that rely on electronics shipments for the bulk of their exports, like Singapore and the Philippines, are being hit by the US slowdown.

“Just look at the figures. This week, Malaysia announced a 21% jump in exports in April from a year earlier. What are they selling to the rest of the world? Let’s see…palm oil exports are up by 71%, crude oil exports by 53% and exports of natural gas by 26%. Electronic-component exports were up by just 12.5%. The electronics industry used to be the crown jewel of Malaysia’s export industry. And most of those components used to go to the U.S. We’re seeing a massive shift in the centre of economic gravity here.

“Same thing in Thailand. The country’s exports jumped 28% from a year earlier. And a good part of that comes down to the soaring prices of rice and other agricultural products.

“Indonesia’s monthly exports have just hit a new record of $11.9 billion in March, as well. No prizes for guessing what they’ve been selling…crude palm oil (Indonesia is the world’s biggest producer), natural gas, timber, coal…

“Coal is the new gold. And Indonesia has some of the most exciting coal companies on the planet.”

If these economies can continue growing at this pace, perhaps they will spare the United States a serious correction. American consumers will finally be able to relax. The whole world economy will no longer rest on their backs. Someone else can do the hard work of consuming.

While exports from India and China are increasing, the U.S. trade balance is actually improving. From a negative $150 billion in 1995, America’s trade deficit grew to more than $700 billion in 2006. The latest figures show it finally contracting – towards $600 billion.

But you can look at these numbers in a variety of ways.

As mentioned above, it means Americans no longer have to do all the work of consuming. Now, others will have to take a turn.

Another way to look at it, though, is that Americans will get less of the world’s output. This is a trend you can bet on, dear reader. Americans have earned a disproportionate share of the world’s income…and spent even more…for a very long time. Now, the average American earns less…and is beginning to spend less. His standard of living – compared to the rest of the world – is going down. Like it or not, he’s going to have to live with less energy…probably with a smaller car…probably with a downsized house…and probably with less money to spend.

Still another way to look at it is this: the world’s money machine is slowing down. When Americans cut back, they export fewer dollars abroad. You’ll remember how the global financial system works, dear reader. The U.S. emits dollars. Other central banks have to buy up the dollars, by emitting their own currencies. The effect is a global tide of paper money – none of it backed by anything other than faith – which has caused bubbles in dotcoms, housing, finance, and most recently, in commodities. It has also left huge piles of dollars in the exporting countries. By some estimates, this money, invested through Sovereign Wealth funds, has held up the U.S. stock market for the last six months.

As the impact of the global credit crunch rumbles on, we’re seeing a very interesting divergence in the performance of the Asian economies. The countries that are still bound to the American eagle are heading for the doldrums. But the ones that have chained themselves to the Chinese dragon are roaring ahead.

You see, despite all the babble about a global economic slowdown, China is still booming. Its economy grew by a white-hot 10.6% in the first quarter of this year. And that’s despite all the efforts of the Beijing government to slow things down…

So, the commodity-rich Asian countries that supply China’s industrial machine, like Malaysia, Indonesia and Thailand, are surviving the global economic downturn well enough. In fact, they’re seeing exports boom…

But not every Asian country is benefiting. The Asian countries that rely on electronics shipments for the bulk of their exports, like Singapore and the Philippines, are being hit by the US slowdown.
The numbers say it all

Just look at the figures. This week, Malaysia announced a 21% jump in exports in April from a year earlier. What are they selling to the rest of the world? Let’s see…palm oil exports are up by 71%, crude oil exports by 53% and exports of natural gas by 26%. Electronic-component exports were up by just 12.5%. The electronics industry used to be the crown jewel of Malaysia’s export industry. And most of those components used to go to the U.S. We’re seeing a massive shift in the centre of economic gravity here.

Same thing in Thailand. The country’s exports jumped 28% from a year earlier. And a good part of that comes down to the soaring prices of rice and other agricultural products.

Indonesia’s monthly exports have just hit a new record of $11.9 billion in March, as well. No prizes for guessing what they’ve been selling…crude palm oil (Indonesia is the world’s biggest producer), natural gas, timber, coal…

Indonesia’s coal story is something that I’ve written about recently. Coal is the new gold. And Indonesia has some of the most exciting coal companies on the planet. We’re watching that situation very carefully…looking for a chance to get in…

And then India has reported a 32% rise in exports… The gist of this story is that if you’ve got what China needs right now, you’re in the money.

And The Dragon isn’t just dragging along a bunch of small Third World economies either. Even developed economies like Japan are getting a boost from China’s rise. The Japanese have sold so much industrial machinery and parts to China that their economy grew by 3.3% in the first three months of this year from the year before.

But here is the bit that really excites me: what China is doing for Asia, it’s now doing for Africa as well. It’s locking the Dark Continent into its economic orbit. And Profit Hunter readers have bought into this boom right on the ground floor.

From basket-case to oil exporter…

It has already invested $30 billion in Africa’s oil and gas industry. And most of that has gone to places that most Western investors would never have touched: Sudan, Chad, Equatorial Guinea, Angola, Nigeria….

Now it plans on investing $5 billion in the West African country of Niger. This is one of the poorest countries on earth. It ranks in the bottom five on the United Nations’ human development index. And the country is battling an insurgency by the magnificently blue-cloaked, be-turbaned, camel-riding Tuareg nomads in the north of the country. But the Chinese don’t seem remotely concerned. They plan to pump the country’s first barrel of oil next year. And to get it out of the country, they are going build a 2000-kilometre oil pipeline and a refinery with a capacity of 20,000 barrels a day.

Here’s another country about to become an economic annexe of the Middle Kingdom…

The new king of the African oil patch

While we’re on the African oil industry, here’s a bit of very interesting news. Angola has now dethroned Nigeria as Africa’s biggest oil producer. Nigeria has held the top spot for decades. But militant attacks in the oil rich Niger Delta and worker strikes have undermined the country’s oil industry. In April, Angola produced 1.87 million barrels of oil per day. Nigeria produced 1.81 million barrels.

We aren’t in Nigeria. But our brilliant African play puts us in the thick of Angola’s booming economy. It owns airlines in the region and is setting-up a massive logistics centre in the country’s capital, Luanda.

Source: China Invests Billions In Africa And We’re Set To Book a Massive Profit

— Here’s a cheery way to start your week: More than two-thirds of American Gen Xers — those aged 27-42 — don’t think they will ever be able to stop working. And don’t think they’ll ever see a dime from Social Security or Medicare.

“The Gen X group is the most anxious about their finances,” Chris Moloney of Scottrade told Reuters last week.

Of the 1,000 people they talked to who were 18 and older, nearly 40% percent said they had saved less than $25,000 for retirement. Conventional wisdom suggests if you want to live for 20 years on about $50,000 per year — whatever that will be worth at that the time — you’ll need to have $1 million stashed away.

“Gen X is in the middle of a ‘retirement perfect storm’ of very high expectations, low retirement savings and massive concern about the future of Social Security,” Moloney says.

Thirty seven percent said they would like to have between $1-5 million saved for retirement — even if their ability to save this money leaves such sums in the realm of wishful thinking.

Not that we want to reignite the debate among readers about which generation is “to blame” for the state of things, but we also note that 64% of baby boomers say they’re ready to retire — and aren’t worried.

Take that.

Worth the paper it’s printed on…

— Retail sales were up in March…but mostly because gasoline keeps costing more.

The Commerce Department says retail sales rose 0.2% in March, a tad more than the flat reading analysts were expecting. But throw gasoline out of the equation, and they were ruler flat, indeed.

If the figures took inflation into account, which they don’t, the outlook for retailers would be even more discouraging. Still, a 0.2% increase in March looks better than, say, the revised 0.4% decline in February…

— U.S. stock markets began the week moving sideways, taking a breather after GE’s earnings disappointment Friday and before Citi and Merrill reveal whatever they’re going to reveal later this week.

But Goldman Sachs isn’t waiting to make its call: Earnings season has had an “awful” start and stocks will head downward this spring.

“Early signs are awful,” says a Goldman report out today. “We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor’s 500 Index lower in coming weeks,” perhaps as low as 1,160, before a rebound by year’s end to around 1,380 — which would put the S&P down 6% for the year.

That’s a remarkably gloomy call for David Kostin, Goldman’s new chief forecaster — at least compared to his predecessor, the ever-optimistic Abby Joseph Cohen.

— Wachovia needs cash, and quickly. Ho-hum. The bank plans to float $7 billion in new shares and slash its dividend by 41%. It’s the second time Wachovia’s had to scramble for capital just this year.

Wachovia jumped into the adjustable-rate mortgage pool with both feet at the most frothy stage of the bubble in 2006 by purchasing Golden West — whose business was focused on one of the most airheaded states, California.

— But that’s just the beginning of the financials’ pain this week, as many of the top firms reveal first-quarter earnings… and probably more write-downs, too. Citigroup will likely write down $10 billion in debt this week…which would add up to a first-quarter loss of $3 billion. Merrill Lynch will likely write down another $5 billion, for a loss of $2.7 billion.

That’s still a drop in the bucket given that write-downs industrywide total $250 billion to date…and that everyone from George Soros to the International Monetary Fund is forecasting $1 trillion, give or take, by the time all is said and done.

— Citi’s announcement last week that it will unload about $12 billion in debt onto private equity at 90 cents on the dollar highlights another problem — one that’s “entirely separate from subprime mortgage lending,” writes Strategic Short Report’s Dan Amoss. “It’s another symptom of the credit bubble disease.”

The $12 billion is money Citi hoped to raise in the credit markets to finance leveraged buyouts. But when the credit markets seized up last summer, Citi had to take the deals onto its own books.

“Investment banks are stuck with an estimated $250 billion worth of this buyout debt on their balance sheets,” says Dan, “or in off-balance sheet entities for which they’ve made guarantees. Until they get rid of it, credit will remain fairly tight.

“Financial stock bulls point to this $12 billion sale as evidence that the leveraged loan sector of the credit markets is thawing. But I remain a financial stock bear, because this sale is only a tiny part of the market and only one of the many other credit-related problems plaguing investment banks.” For ways to play Dan’s skepticism, see the Strategic Short Report.

— Asian stock markets tanked overnight, fearing the worst from U.S. financials this week. Shanghai was down 5.6%, Hong Kong 3.5%, the Nikkei 3%.