Approximately 3,000 tourists a day from 13 Chinese providences will be permitted into Taiwan, beginning July 18. There have been no regular flights from China to Taiwan since 1949, when just a few years after the end of World War II, the armies of Chinese revolutionary leader Mao Zedong moved into Shanghai and the existing Chinese government under Chiang Kai-shek decamped to Taiwan.

Under Zedong, China pursued hardline Communism for the next 30 years, with limited liberalization thereafter. Taiwan, on the other hand, opted for a free-market economy, and the country has been a haven of low-tax capitalism ever since. Having concluded their first meeting in nearly a decade, tensions are beginning to thaw.

“The significance is that it reflects a certain political reality,” Joseph Cheng, a politics professor at City University of Hong Kong said in an interview with Bloomberg News. “China has to show goodwill to the Taiwan people so as to prevent them from moving down the road to independence. China has come to appreciate the basic parameters in Taiwan – the improvement of economic ties and let’s forget reunification for the time being.”

Direct flights across the Strait of Taiwan could add about 60 to 80 basis points to Taiwan’s economic growth Goldman Sachs Group Inc. (GS) analyst Enoch Fung said in a report Friday.

Goldman currently forecasts Taiwan’s gross domestic product growth will slow from 5.7% in 2007 to 4.5% in 2008.

Trade between China and Taiwan totaled 43.9 billion in the first four months of the year – a 22% improvement from 2007, Bloomberg reported. At the end of April, cumulative investments from Taiwan in China reached $46.4 billion.

[Editor’s Note: All this growth that China is experiencing from new business and tourism does carry a price-tag, including a major spike in pollution. Just cleaning up the country’s drinking water will force the government to shell out $80 billion between now and 2010. Investors who know about these opportunities stand to profit in a big way. And Money Morning Investment Director Keith Fitz-Gerald - a longtime expert on Asian investing - can uncover those profit plays with his specialized investing service. Indeed, he just returned from an investment trip he headed to China, Hong Kong and Japan. To find out more, please click here.]

Source:  New Travel Arrangement with China Could Lead to Stronger Economic Growth in Taiwan

“Why bother?”

“They think they won’t get it back… But there’s the paradox: the sky is said to be falling…but investors aren’t running for cover.”
First, the news headlines:

The Dow went nowhere yesterday. Gold dropped $5. Oil held at just under $115.

There is also a growing realization that the U.S. economy is sinking into recession (about which, more below…)

Yesterday, we organized our thoughts on the economy into a series of 4 points:

1. There’s a whole lot of ‘flation’ going on.

2. The de-flation takes the air out of housing and the financial industry; the in-flation gasses up commodities, gold and oil.

3. Together, they are re-adjusting the U.S. economy (and, to a lesser extent, the United Kingdom and other Anglo-Saxon economies) downward…reducing the value of assets and labor (more about that too…keep reading), but also reducing the value of their debts.

4. This is fine with us…it’s just capitalism at work.

Last night, leaving the office, we walked by a TV studio. The wind was blowing; it was a spring day in London but it could have passed for January in New York. Still, there was a long line of people waiting to get into the studio.

Further down the street was another line – this one a line of bums and down-on-their-luck street people – waiting for a food truck. One was wrapped up in a sleeping bag on the sidewalk…another was shaking his head at no one in particular.

But here at The Daily Reckoning headquarters, we’ve never seen the line we wanted to join. We’d rather go hungry than wait behind others for a sandwich. And as for wanting to see a TV show…we’d have to be crazy.

We only bring it up to remind ourselves that people love lines. In Russia, before they abandoned communism, if people saw a line forming, they’d get in it…figuring that there must be bread or cucumbers, or maybe a list where they could sign up to buy a car, at the other end. In Paris and London, people wait in line to get into nightclubs. And in America, the line of young people trying to get into Harvard, MIT or Johns Hopkins is unbelievably long.

No, dear reader, count us out. But most people do not like being alone. They don’t trust themselves to figure out what they should do. Instead, they look around and see what others are doing…

That is why financial markets tend to move in such broad patterns. People get in line…share the same sentiments…believe the same things – even when those beliefs are far-fetched or absurd. One day they believe that the world is coming to an end…the next, they believe it will never end. In 1999, we recall that President Clinton remarked, “things could be better.” Now, if you read the papers, you might think they couldn’t be worse.

Sometimes it is hard to know what people are really thinking. Pollsters have found that they often say one thing – often what they think they should say – while they actually believe the contrary. And poets have figured out that they often don’t know what they think.

This subject matters to us because crowd behavior affects prices. When people think the sky is falling, they don’t want to lend money. Why bother? They think they won’t get it back…or won’t be around to enjoy it. Interest rates go up fast. Asset values plummet.

But there’s the paradox: the sky is said to be falling…but investors aren’t running for cover. The S&P is still selling at nearly 20 times earnings. In other words, a person who buys a share is willing to wait 20 years to get paid back out of earnings – if all remains the same. Twenty years is a long time in the stock market. Like dog years, companies measure time in quarters, not years. Only one of the original Dow companies – General Electric (NYSE:GE) – is still on the list. So, a 20-year outlook is fairly optimistic.

Historically, the range of price/earnings ratios varies from about 10 on the low side to 25 on the high side. Anything below 10 is usually a great buying opportunity. Anything above 25 is usually a great selling opportunity. At 20, the market is expensive…but not outrageously so.

What makes us wonder is how stocks could remain so expensive in the face of what appears to be such bad news?

Yesterday, for example, brought more depressing headlines.

“US Economy: Worse than Believed,” begins the Washington Post, citing the Fed’s Beige Book report.

“Offering a picture of [the] US economy being squeezed from all directions, the Beige Book, a compilation of anecdotal reports of US business conditions prepared by the US Federal Reserve, showed economic conditions in the US have weakened almost nationwide in the past six weeks.”

Manufacturing output is down. Construction is down. Demand is down. Business Week points out that statisticians made it look like consumers were spending more than they actually were – by jiggling health care costs. Handled properly, says BW, consumer spending figures would show a drop since last November.

Out in California, house prices have fallen 26%, adds another piece from Business Week.

Rice hit another record high – amid more grumbles from the sweaty mobs.

Australia is ‘drying up,’ adds the International Herald Tribune.

The art market is “bracing for a bust,” says this morning’s news.

Our own MoneyWeek cover story tells us, “Why the credit carnage is far from over.”

And even Harley Davidson (NYSE:HOG) has had to announce cutbacks.

What is this world coming too?

Nothing bad, apparently.

Because people are still buying stocks at 20 times earnings. And they are buying Treasury bonds with yields that are scarcely above the level of consumer price inflation. In short, they don’t think the sky is falling at all.

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets

Click here to watch the video and find out more.

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From TFN by Today’s Financial News

The reader feedback expressed near unanimous concern about present day US tendencies. You’ll note that I clearly did not say that we are presently a fascist country. It was more of an open discussion as to the possibilities of that. All can draw their own conclusions.

One gentleman suggested I travel the world more to see perspectives other than just “American”. That’s the best idea I’ve heard in a while. Maybe MaryEllen, our publisher, will fund a few years of “research” for me and the Mrs?

Here’s a sample of reader feedback from “Thomas”:

“Enjoyed your article this day in IDE and find much with which to
concur. However, in your “typical traits” of fascism you list something that has been a source of confusion and great misunderstanding since the so called “red baiting” days of the 1950’s:

Trait # 11. Patriotic fever is whipped up in regards to “communists” (terrorists, etc).

Your first 10 traits of fascism, as well as traits 12 through 16, all accurately describe communism! Nazism and communism are both fascist. Hitler and Stalin were both fascists and their regimes by definition were both socialist.

I am 65 years old and have been a student of politics since the late ’50’s and I vehemently disagree that I share a trait of fascism because I recognize in communism and terrorism a threat to my beliefs as a patriotic American.

As I say, I am merely a life long student of political science and
economics and bear no doctorate; so it humbles me to be addressing this reply to you; but this subject is something that has rubbed me raw for a very long time.”

Thank you, Thomas. I also stumbled when seeing that particular trait of historic fascism. There is likely a fine line somewhere between healthy patriotism and blindly following official propaganda.

I would never label someone as ‘fascist’ because of their patriotism. In fact, I believe it is patriotic to be having this discussion. Patriotism is a very good thing. It can, however, be carried to an extreme and also be abused by authorities. You are one hundred percent correct to decry such a label for your genuine patriotism.

People are fantastic pretty much wherever I’ve had the privilege of traveling. Oppressive governments are another story entirely. We are soon to visit one of the most oppressed countries on Earth- communist China. You’ll be hearing about this adventure.

No thinking person wants their government to become authoritarian and limit individual liberties. I decry any trend in that direction.

Clearly, we’ve strayed far from our roots. The US has long since passed into overt socialism. Socialism works in some places but it’s not for me. I guess you could say that most of my best friends are socialists. Smile.

We’re now pretty close to being a similar entity to that which we gained our independence from so long ago. That is sad. I don’t want a King George, King John, King Barack or Queen Hillary. Much less have powerful entities behind the scenes pull their strings.

Some will question my patriotism in even bringing up this topic. Not my problem as freedom of speech is still the law of the land. My allegiance is to the US Constitution and the principles laid down by our Founding Fathers. Those who trample on these inherent truths are the ones who should be called into question. Excuse me, didn’t they swear to uphold same?

You can endlessly debate the various meanings of communists, fascists or socialists. They all have a lot of commonality. Let’s call them commufascisocialists. Again, these ideologies are the absolute antithesis of our Constitution and Bill of Rights. If we stray we will pay. We’ve clearly strayed.

Once again, let’s look at some of the primary “free man” principles that were the basis of the “great American experiment” via our Constitution:

Rusty

P.S.  To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.