It’s an important question for any investor if they plan on making any long-term investment decisions during this global downturn.

Financial newsletter writer John Mauldin gives us a big clue of what’s to come in an article he wrote earlier today…

One of the best gauges of an economy is tax collections. No one pays taxes unless they have to, so collections are a real-world, real-time analysis of the US economy. And the best source I know of for tracking taxes is The Liscio Report, by Philippa Dunne & Doug Henwood.

Tax collections are down. Philippa and Doug give us the actual numbers, which are not pretty. Bottom line? “What does this all mean? It suggests that the consumer retrenchment in this recession will be deep and long, and will probably continue into any recovery. The American consumer is no longer the world consumer of last resort, and that’s an enormous change for both this country and the rest of the world to get used to.”

(You can learn more about the Liscio Report at www.theliscioreport.com.)

If American consumers are spending less, this means the world’s savers (Asians) would have to become spenders (like Japan did during its “Lost Decade”) for the global economy to rapidly rebound.

But Chinese exports were down 17.5% in January. And imports were down 43.1%.

And down from the double-digit GDP growth rates earlier this decade, Chinese GDP grew only 6.8% last quarter (which means recession in China).

China has already shed 20 million jobs (with estimates from the Telegraph.co.uk of50 million more on the way). And Beijing is implementing its $586 billion to stimulate its own economy.

So if China isn’t selling an increasing amount of goods and its consumers are buying less, then how could China keep the world economy from shrinking?

It won’t.

The reality is that China (and Asia in general) is far too export reliant, and the U.S. is far too import reliant. And as long as this imbalance exists, it’s going to be difficult for the global economy to recover.

That means making mid-term market bets on shaky emerging-markets might be a real nice (and easy) way to lose money.

Instead, what you want is steady-eddy income from stable, cash-rich American companies that have virtual monopolies… companies like Microsoft (NASDAQ:MSFT).

Microsoft is a solid company because…

• It holds $20 billion in cash and only $2 billion in debt. Refinancing isn’t an issue. And it has plenty of cash to make it through a downturn and pay shareholders dividends.

• The Windows Vista operating system replacement, Windows 7, is due out by January of 2010. I’ve personally tested the beta, and it’s leaps and bounds better then Vista. There’s been a lot of positive hype around this release, too. So Microsoft should do very well once it hits the market.

Microsoft is a virtual monopoly! Its operating system was the choice of 89.6% of Web users in 2008. Any new upgrade means hundreds of millions buyers will buy

It’s not going to be tough work getting through the next few years of an underwhelming economy. But by holding a strong company like Microsoft, you’re assured that your money is in a safe place and will grow in the years ahead.

Stay free,
Charles

The reason: Soaring unemployment and the threat of social unrest.

A recent government survey showed that slightly more than 15% of China’s 130 million migrant workers – about 20 million people – had lost their jobs and returned to the countryside by the start of the Chinese Spring Festival on Jan. 25.

That figure is double the previous estimate by the Ministry of Human Resources and Social Security, which said in December that up to 10 million migrants lost their jobs in 2008 due to the financial crisis. But analysts say the actual number of unemployed migrant workers is probably closer to 26 million.

Another 5 million to 6 million new migrants enter the workforce each year, Chen Xiwen Director of the Office of Central Rural Work Leading Group, a central government advisory body, told BusinessWeek.

“So, if we put those figures together, we have roughly 25 to 26 million rural migrant workers who are now coming under pressures for employment,” said Chen.

Other government figures suggest that as many as many as 7 million workers a year have migrated from the countryside to fill factory and service jobs. And that could just be the beginning, as weak global demand for Chinese exports is having a profound effect on the nation’s once raging economic growth.

China posted its most severe foreign-trade decline in at least a decade in December. Exports, which have contributed around 20% of China’s economic growth since 2005, fell 2.8% from a year earlier, extending the 2.2% decline in November.
With global demand stagnant, China’s gross domestic product (GDP) growth cooled to 6.8% in the fourth quarter, the weakest pace in seven years. That’s a steep decline for a country that has a strong track record of double-digit growth.

According to rough official calculations one percentage point of Chinese GDP growth creates around 1 million jobs, The Financial Times reported.  If China’s growth drops below 6%, hundreds of thousands, if not millions, of more job losses can be expected.

A recent study by China’s Tsinghua University said that up to 50 million migrant workers will lose their urban jobs in 2009 if the downturn continues.

Premier Wen Jiabao: China WiIl take ‘Preemptive’ Action

Unemployment is more than a drag on the economy in China; it’s a threat to social stability.

That’s why the government in Beijing is wasting no time, or expense, when it comes to ensuring China’s economic prosperity continues.

“It’s fair to say the Party Central Committee is taking the issue of employment of migrant workers very seriously,” said Chen Xiwen. “Ensuring job creation and job protection is to promote social stability.”

China is already at work implementing the $586 billion (4 trillion yuan) stimulus package it unveiled in November. The cost of that plan amounts to a staggering 20% of China’s GDP.

But Chinese Premier Wen Jiabao said yesterday (Monday) in an interview with The Financial Times that the government might expand the plan even further to boost growth and trigger consumer spending.

“In meeting the financial crisis, it is imperative that governments must adopt a big enough package plan to stimulate the economic development,” Wen told the FT.  “Such a plan must be comprehensive and complete. It must target both the root causes and symptoms of the issues, and also take into account both immediate difficulties and long term development.”

In the interview Wen outlined the several measures his country has already taken to stem the tide of the financial crisis, including:

• The $586 billion investment program intended to stimulate domestic demand.
• Another $88 billion (600 billion yuan) dedicated to scientific and technical innovation and upgrades.
• And $124 billion (850 billion yuan) to improve the nation’s health care system.

In addition, Wen indicated that the government remains vigilant and willing to take preemptive action to stimulate growth.

“The financial crisis has not yet hit the bottom, and we will continue to follow very closely the development of the situation,” he said. We may take further new timely and decisive measures…All these measures have to be taken preemptively before an economic recession, so as to maximise the desirable effect, otherwise our efforts will be wasted.”

The government has already made rural economic stability a priority. About $54 billion (370 billion yuan), or 11%, of the $586 billion spending package has been allocated towards rural infrastructure projects to create jobs.

In a 28-point policy outline Beijing said it would also “skew” more budget and bond revenues to villages, increase agricultural subsidies, and put more money towards schools, clinics, and roads, Reuters reported.

“We must truly enhance our sense of crisis and take full account of the hardships,” said the policy document. “Pay attention to rural social stability and appropriately address pressing conflicts and problems sparked by requisition of rural land, pollution, migration and resettlement, and handling of (village) collective assets.”

In his interview with the Financial Times, Premier Wen confirmed that the government will inject $30 billion (200 billion yuan) into the Agricultural Bank of China, an institution that lends to the country’s impoverished rural regions.

“The China Agricultural Bank is the last among five national banks which is now undertaking a banking reform,” Wen said. “Our decision for this recapitalization is around $30 billion.”

Source: China Considers Expanding Stimulus to Combat Unemployment

The strong export growth should also give China’s central bank more room to maneuver in its battle against escalating inflation at home.

After growing 21.9% in April, Chinese exports climbed 28.1% to $120.5 billion last month, China’s customs bureau reported. Exports to the United States grew 9.1% in the first five months of year, while exports to the European Union climbed 27.4%.

The increases demonstrate that global demand for Chinese goods remains strong, even though many Western markets are battling the fallout of a worldwide financial crisis. Indeed, the export statistics are serving as evidence of an economic theory known as “decoupling,” in which emerging economies in Asia and Europe have developed enough market place muscle to no longer be dependent on the U.S. economy for growth.

And “decoupled” markets can survive – and even thrive – even if the United States were to spiral down into a recession.

The report “suggests that those saying that exports are collapsing are wrong,” Stephen Green, head of China research at Standard Chartered Bank PLC in Shanghai, said in a report.

Trade did grow with the more mature economies of the West. But China got its biggest boost from such emerging markets as India. Two-way trade with India increased by 70% in the first five months of 2008, the fastest rate of growth among China’s Top 10 trading partners.

China is also forging stronger ties with Latin America. In 2004, Chinese President Hu Jintao predicted that Sino-Latin American trade would reach $100 billion by 2010.

In reality, it reached $102.6 billion in 2007, surging 42% from the year before.

The fact that Chinese exports have more than weathered the global financial storm is a huge blow for critics who had earlier predicted this credit-related mess would cause China to stumble.

China’s economy grew by 10.6% in the first quarter of 2008, despite complications stemming from the U.S. credit crunch, the Chinese New Year and the worst ice storm the country had seen in decades.

“We have a lot of evidence to support the decoupling view,” Timothy Bond, Merrill Lynch & Co. Inc.’s (MER) chief Asia economist, said in a research note.

Indeed, the recent surge in exports is proof that China will continue to advance – with all but a complete collapse of the U.S. economy. The growth in sales overseas sales, regardless of what happens in the United States, but they also proved that Chinese trade isn’t dependent on the weakness of the yuan.

The Yuan’s Rebound

For years, the United States and other Western powers have claimed that China has kept its currency, the yuan, artificially low to boost exports. But the yuan gained more than 10% on the dollar in the year through May, and still exports surged.

In the past year in fact, even with the freefalling dollar, China’s trade surplus with the United States has grown from $12.6 billion to$14.3 billion, a gain of 13%. And the fact that exports are accelerating along with the value of the yuan will give China’s central bank some latitude in dealing with inflation.

“Robust export growth could dispel domestic concerns that a stronger yuan is hurting exports too much,” Gene Ma, head economist at China Economic Monitor, told BBC News.

The yuan has appreciated 5% against the dollar so far this year, making Chinese goods more expensive in foreign markets. At its current rate, the yuan will almost certainly improve on the mere 7% gain it posted against the dollar last year. And that will help China control inflation and shift from what its central bank called “heated” growth to a more-sustainable economic expansion.

In fact, the effects of a stronger yuan already can be seen. Consumer inflation slowed to 7.7% in May from 8.5% the month prior, two government officials said Tuesday, citing statistics bureau data.

“Inflation has peaked, at least temporarily,” Ben Simpfendorfer, a currency strategist at Royal Bank of Scotland in Hong Kong, told Bloomberg. “Pork prices have stabilized to some extent. Vegetable prices certainly have.”

Food costs account for 34% of China’s consumer price index, and growth in agricultural prices slowed to 19.3% in May from 24.2% a month earlier, according to the Ministry of Agriculture.

The Consumer’s Viewpoint

Furthermore, the recent surge in oil prices probably won’t affect China’s consumer prices because of generous government subsidies. The government can afford to subsidize the price of fuel and is likely to continue to do so, Mark Williams, an economist at Capital Economics Ltd., said in a recent report.

“Even if international oil prices remained at their current levels, the total net subsidy bill for the year would probably amount to less than half of one percent of GDP,” Williams wrote in a June 5 report. “The costs of keeping prices down are still manageable given the strength of China’s state sector. Officials are wary of anything that could raise inflation expectations.”

And even though as producer prices climbed an astonishing 8.2% in May, inflation could still recede in the second half of the year – in part because figures will be compared with prices from last year when food prices soared uncontrollably.

“The worst is behind us now,” Paul Tang, an economist with the Bank of East Asia Ltd. (OTC ADR: BKEAY) in Hong Kong, told Bloomberg. “The question is more about at what pace the improvement is going to be realized in coming months.”

Source: China’s Export Machine Shifts Into High Gear, Even as U.S. Market Decelerates

“Resurgent inflation, everyone agrees, seems a global problem while a slowdown may be largely limited to the US with some spillover effect to Europe,” according to a report in India’s Financial Express newspaper.

China exported deflation for the last 15 years by stocking the shelves of retailers in the West with products made in their factories employing cheap labour and easy capital. Chinese imports constitute 7.5% of spending by Americans on consumer goods, but they make a higher share of categories such as toys, foot ware and clothing.

A closer look at drivers of Chinese inflation is in order to anticipate what to expect from the world’s factory in the coming years. The cost of manufacturing in China has been rising not only due to rising fuel and commodity prices, but also due to upward pressure on wages partly as a ripple effect of the new labour law and increasing cost of capital as a result of increase in interest rate by the Chinese central bank.

However, high food prices were the main driver of the steep rise in the country’s CPI.  China’s non-food prices in April were only up by 1.8% year-on-year.

“Last week,” says Peter D. Schiff in Money Morning, “several key Chinese officials, typically not known for their candor, conspicuously noted the need to both stimulate domestic consumer spending and to bring down roaring inflation.

“While at first blush these two goals might appear mutually exclusive, China’s leaders do have a “magic bullet” that can hit both targets at once.

“A stronger currency, commensurate with China’s increased economic strength, will simultaneously tamp down inflation and enable Chinese consumers to buy more goods and services. However, for reasons not entirely clear to me (or few others, for that matter), China’s leaders are resisting this simple-and-beneficial solution.

“By prodding China’s citizens to spend more, the country’s leaders say their goal is to decrease the nation’s dependence on exports. If China’s consumers, who currently save 50% of their incomes, saved less, more of the nation’s production output would be consumed domestically and China would be much less vulnerable to downturns in its overseas export markets.

“Without a vibrant domestic market, over-leveraged Americans will apparently remain China’s most important customers.”