But with all the artificial stimulus money floating around, here and abroad, you can never be sure of what you see. Is this a real recovery or is it an artificially ripened tomato, and hence an imposter? When the stimulus money stops flowing, will the recession get worse?

CNN’s bailout tracker reports that U.S. government stimulus has totaled $2.8 trillion so far this year, with another $8.2 trillion in commitments. Most of this money has gone to the financial sector. Some of it has gone to infrastructure projects and to consumers (“cash for clunkers,” for example).

That is a lot of money. It is hard to say how all of this spending has artificially boosted economic activity in some sectors of the economy. It is obvious that such spending cannot continue indefinitely.

Take a look at this next chart, which shows you how the stimulus spending reaches a peak sometime in early 2010 at $57 billion and then takes a dive.

Of course, the government can always decide to spend more. But as it is now, this is a pattern of spending we can expect to distort the various sectors it flows to. You can see also on the chart where the money goes, including that big red layer that goes toward highways and transportation.

We may yet see a surge in business activity as we get to 2010. But after that, we’ll see if this seeming recovery in the making is real or manufactured by funny money.

Source: Peak Stimulus

Whichever way you look at it, government’s power is growing in direct proportion to the decrease in free enterprise.

As George Will points out in the Washington Times, “TARP’s $700 billion, like much of the supposed ‘stimulus’ money, is a slush fund the executive branch can use as it pleases. This is as lawless as it would be for Congress to say to the IRS: We need $3.5 trillion to run the government next year, so raise it however you wish – from whomever, at whatever rates you think suitable. Don’t bother us with details.”

Will’s point is that you can’t simply whisk money out of thin air without consequence. Someone’s got to pay in the end. Ultimately, it will end up costing the middle class and the wealthy through inflation, higher taxation or both.

Of course, politicians are focused on another battle right now – the battle for re-election. This means the long-term health of the US economy is not their concern and short-term patches are the most we can expect.

The scam is in plain view, but it remains difficult to see. That’s because it’s on a scale greater than most of us can grasp. We now have a government that has taken on as its raison d’être the role of arbitrator of wealth. It is doling out tax dollars to whomever it chooses. And this is happening without adequate oversight.

Will this a) lead to a more competitive and vibrant economy that’s driven by merit and consumer choice or b) lead to an economy that awards incompetence and bad decisions and that is defined by widespread political cronyism? We think we know the answer… As Will puts it:

The Obama administration’s agenda of maximizing dependency involves political favoritism cloaked in the raiment of “economic planning” and “social justice” that somehow produce results superior to what markets produce when freedom allows merit to manifest itself, and incompetence to fail. The administration’s central activity – the political allocation of wealth and opportunity – is not merely susceptible to corruption, it is corruption.

The MSCI World Index and the S&P 500 Index just posted their best monthly gains since April 2003, gaining 10.9% and 9.4%, respectively. Credit spreads or the difference between super-safe Treasury bonds and riskier bonds saw premiums plunge last month while 90-day LIBOR rates rallied from 1.19% on March 31 to 1.02% yesterday.

Indeed, even the most adamant bear would have to consign some flexibility to this rally, which has swallowed most asset classes since March 9. Stocks, non-Treasury bonds, most commodities and REITs have all participated in a broad-based rally over the last seven weeks.

But before popping the champagne, let’s not forget that back in early March stocks were pricing in a depression following a stunning 58% peak-to-trough collapse since October 2007. Banks have led this rally since March 9 (+76%) and the same banks will be responsible for its eventual demise.

My view remains the same since March: This is a bear market rally just like the prior three rallies that occurred from late 2007 until March. Ultimately, we might not break through the March 9 lows this year but the odds remain high that we’ll retest those lows this summer.

Wall Street analysts and many European investment strategists continue to believe that we’re in a new bull market driven by massive government stimulus, cheap valuations and near-zero global interest rates. That might be possible but, in all probability, it’s highly unlikely.

Housing prices are still declining, unemployment hasn’t stabilized, domestic consumption is way down and deflation is officially in town since March for the first time since 1955, meaning companies don’t have the flexibility to mark up their goods and services. Furthermore, no bull currently alive has ever witnessed a credit deflation; it would be unwise to underestimate the scope and duration of credit destruction and the time required to heal business and consumer balance sheets.

A long-time bear that eventually enjoyed his day in the sun starting in late 2007 is Albert Edwards of Société Général in London. According to Edwards, “The current pop in the market is not dissimilar to the many bear market rallies between 1929-1933 where signs of economic stabilization were met with strong 25% rallies, most especially in late 1929 and mid-1931. This optimism was subsequently crushed.”

The above table depicts the long sequence of bear market rallies during the Great Depression. The Dow posted a total of five false rallies until bottoming for good at 41.22 in July 1932. The length of the current rally thus far is seven weeks; from 1929 until mid-1932 the average bear market rally lasted 10.1 weeks, suggesting there’s still some juice left in this upward march. But the Piper is coming.

Back in February and March I also suggested it would be a good time for long-term investors to begin accumulating stocks following the second worst crash since 1929. I still believe March marked a good entry point to add value. Yet I don’t think we’re through the worst yet, either.

The massive up-crash we’ve seen since March has been alarming. Previous bull markets in history have typically been accompanied by some profit-taking and healthy backing and filling; that’s not happening with this rally, which has been characterized by vicious rallies almost every other day without a pause or correction. I don’t like this action.

Meanwhile, it’s hard to be a bear this spring. I find my place at the table is a lonely one as stocks and non-Treasury bonds skyrocket. Still, I’m sticking to my guns and remain heavily under-weighted in stocks; in fact, my net exposure is net short or negatively exposed to equities.

Source: Evil Lurks Behind the Shadows of 1929-1932

Here she recommends to buy gold, invest in stocks with discrimination and keep your money liquid in treasuries.

This from Sandy:

The stock market did not react well to the government’s $787 billion economic stimulus plan.

On Feb. 23, 2009, the Dow tumbled to 7,114 – hitting an eleven-year low. The other major indices, including the S&P 500 and the Nasdaq, fell as well.

The latest economic numbers aren’t any better. The price of single-family homes plunged 18% and the Consumer Confidence Index, which was down slightly in January, plummeted more than 12 points in February to 25.

The combination of bad economic news and a tanking market means this recession will take longer to recover than most analysts expect.

Bombarded by bad news, average investors are on the verge of dumping all their shares entirely. But is that best thing to do with your money now?

The answer is no. Here are a few investing strategies that make sense given the current market conditions…

(1) Buy gold. The surge in gold prices means investors are anxious to protect their capital against inflation, currency depreciation and bank failures. The rise in gold (which is sitting near $1,000 an ounce) is consistent with other indications that the market is bracing for a delayed upturn in inflation between 2010 and 2012.

There would have to be “growing positive sentiment” towards the banking sector before gold prices fell. But that isn’t likely to happen anytime soon. Morgan Stanley came out with a report saying that gold would go up over the next three years. The reasons: a falling dollar, higher inflation and a flight to safety.

Morgan Stanley predicts gold will average $1,000 in 2010 … $1,050 in 2011 … and $1,075 in 2012, up as much as 34% from previous estimates.

Adam Lass, senior editor of WaveStrength Options Weekly, suggests buying shares of the SPDR Gold Trust. Adam writes, “I expect the dollar to resume its habitual relationship to the euro, yen and gold shortly, and recommend that investors continue to buy shares of the SPDR Gold Shares Trust (GLD:NYSE), which has gained some 25% over the past four months.”

(2) Buy stocks, but do so discriminately. This week the Dow fell to levels not seen since 1998. One year ago, the Dow was sitting at 12,694. As I write, it’s at 7,365. But you don’t need me to tell you this. You see the damage to your portfolio every time you look at your 401(k) statements.

As prices decline, this also means there are companies you can buy for less than the cash they have on hand. In fact, in an academic study done by Berardino Palazzo of New York University’s economic department, he found that companies with highcash-to-assets carry a positive premium for investors. Palazzo explains, “Firms that are sensitive to economic shocks tend to use cash holdings as a hedge against future cash flow shortfall, and this conservative management approach pays off.”

There are certainly plenty of companies with cash on hand to choose from. In a study done by Jason DeSena Trennert, managing partner and chief investment strategist at Strategas Research Partners in New York, he found corporate balance sheets showed that cash as a percentage of total assets is as high as it’s been since the 1960s.

Chris DeHaemer of BreakAway Investor offers these companies for consideration:

**AuthenTech (AUTH:NASDAQ) is a technology company that provides fingerprint authentication sensors. Its fingerprint sensors allow users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor. The sensors are used in various applications related to security, password replacement, financial transaction authentication and personalization applications.

Its sensor-related products are used in GPS navigation systems, cell phones, memory keys, laptops… even desktops.

The company has zero debt and roughly a cash equivalent of $2.21 per share. It currently trades around $1.37 per share.

**Exxon Mobil (XOM:NYSE). If you prefer a non-technology-related company, there’s always Exxon Mobil with $39 billion in cash, which is equal to $7.72 total cash per share. Exxon reported a profit of $45.2 billion for 2008. This amount breaks the record for an American company.

Zachary Scheidt of Taipan’s New Growth Investor suggest buying companies in sectors that will continue to thrive during this economic crisis.

One such sector is healthcare. There are basically four individual factors that combine to make this quite an exciting opportunity:

• Stability and growth: Healthcare stocks offer plenty of stability, but the growth is potentially astronomical;
• Demand has little do with economics: A person’s health sits right at the top of just about everyone’s priority list;
• Demographic trends point to more demand: The current population (domestically and internationally) is aging and in need of more care than ever seen in the past;
• Political agenda favors healthcare: One of Obama’s campaign promises was to re-work the healthcare system and to make sure affordable care was available to all.

(3) Another way to protect your money is to keep it liquid in treasuries or certificates of deposit.

Because of the scandal that broke loose with the SEC charging Allen Stanford in an $8 billion fraud case (using certificates of deposit), you’d think that all CDs are time bombs.

But that’s not the case. The dead give-away in the Stanford case is that his “certificate of deposit” promised double-digit returns. Stop right there. Certificates of deposit don’t yield high returns. They’re low risk, which means low yield.

A CD has a specific, fixed term – often three months, six months, or one to five years – and carries a fixed interest rate. They are also insured by the FDIC (up to $250,000). The longer you are willing to have your CD investment locked up, the higher the CD interest rate your bank will offer you.

CDs are best used for cash that you want to stay liquid. As the market continues to implode, you might want to consider putting a portion of your money into a CD. As the market begins to bottom out, you’ll have access to that cash to buy stocks at reduced prices.

While most major banks offer CDs, we recommend the Ultra Resource Index CD offered through EverBank. EverBank asked our group’s opinion on creating a CD that would allow investors to take advantage of global markets.

We suggested a CD made up of six countries with strong resources and strong cash reserves, including Australia, New Zealand, Singapore, Hong Kong, Canada and Norway. You can lock in terms for three to six months with no account fees.

EverBank is a healthy and stable company. It enjoyed strong growth during the first three quarters of 2008, posting a 129% increase in earnings compared to the first three quarters of 2007, or $50.1 million. The company also has assets worth $6.5 billion and serves 440,000 customers worldwide.

I do have to tell you that we have a business relationship with EverBank, and we receive a financial benefit from the sales of this product. But we firmly stand behind EverBank and their products and think they are a solid way to grow your wealth.

If you’d like to learn more about the Ultra Resource Index CD – to get in on an once-in-a-lifetime opportunity to profit from today’s currency boom before the masses – you should check out this Special Report we’ve put together for you. Download this FREE Report now.
Source: What to Do With Your Money Now

President Obama’s team was hard at work weeks before his Jan. 20 inauguration, crafting an ambitious $825 billion economic stimulus plan, parlaying with the U.S. Treasury Department and Congress to ensure its speedy implementation, and assembling the team the nation’s 44th chief executive felt he needed to get the job done.

The current package, which has been endorsed by House Appropriations Committee, has yet to get overall congressional approval, but ultimately, the plan’s focus on job creation, infrastructure development, increased regulatory oversight, tax relief for businesses and America’s middle class, and aid to states struggling with budget shortfalls will remain intact.

In his inaugural address yesterday (Tuesday), President Obama made it very clear that he understands the scale of the challenge that his White House team faces. To a crowd that was repeatedly chanting “O-BA-MA, O-BA-MA,” the newly sworn-in president detailed the broad-ranging initiatives his administration plans to pursue.

“The state of the economy calls for action, bold and swift, and we will act – not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together,” President Obama told the gathered throng. “We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.”

Will Spending + Tax Cuts = Jobs?

The House bill contains $550 billion in federal spending and $275 billion in tax cuts. In an effort to spur job creation, House Democrats have slated $90 billion for highway, transit, and public works projects. On top of that, the bill allots $102 billion to helping workers find new jobs and retaining employer-provided healthcare.

“High unemployment and rising costs have outpaced Americans paychecks,” a summary of the bill read. “We will help workers train and find jobs and help struggling families make ends meet.”

Specifically, some of the plan’s highlights include:

• $79 billion for states to fund schools and educational programs.
• $18.5 billion for renewable energy and energy efficiency research and improvements.
• $16 billion in college financial aid and higher student loan limits.
• $13 billion in K-12 education spending.
• $6 billion for mass transit improvement and expansion.
• $5 billion for public housing construction and improvement.
• $10.1 billion in water-system improvements.
• $3.8 billion to build new military and veterans’ hospitals.
• $4.5 billion for defense-construction projects.
• $6 billion for federal building construction and repair.
• $4 billion for governments and housing agencies to deal with foreclosed and abandoned homes.

Hard-Hitting Parts of the Plan

Lawrence Summers, the director of the National Economic Council, said earlier this week that he expects the stimulus package will pass within a month. But he, along with many analysts, have been quick to point out that the road to recovery will be long, and the total effect of the stimulus will not be immediately felt.

“These problems weren’t made in a week or a month or a year and they’re not going to be fixed in a week or a month or a year,” Summers said. “There’s almost no question the economy is going to decline for some time to come.”

Less than half of the $30 billion in highway construction funds outlined by the plan would be funneled into the economy over the next four years, according to an analysis by the Congressional Budget Office (CBO). Less than $4 billion in highway construction money would reach the economy by September 2010, The Associated Press reported.

Only $26 billion, or 7%, of the total $274 billion dedicated to infrastructure spending would infiltrate the economy by Sept. 30, the end of the budget year.

However, other features of the plan will have a more immediate impact. The $275 billion in tax cuts the administration has planned for 95% of tax filers, and additional aid for social programs and state governments will take effect much faster.

“Some of the adjustments will take place almost immediately,” Summers explained. “People will see income in their paychecks, state and local governments will get support to prevent layoffs … and there are a ton of shovel-ready projects that are out there that aren’t going to have to be cancelled when this program passes.”

One of the first measures to be included in the plan will almost certainly be President Obama’s “Making Work Pay” tax perk, which provides $500 to individual taxpayers and $1,000 to couples. This measure is widely expected to take the form of a credit on payroll taxes.

“If you send people a check for $500, they can put it in the bank,” Clint Stretch, managing principal of tax policy at Deloitte & Touche USA LLP told MarketWatch.com. “If you raise everybody’s paycheck by $10 or $20 a week, they will spend it.”

The House proposal calls for tax credits to be extended to small businesses. The 2008 stimulus bill let small businesses to deduct as much as $250,000 of certain expenses, and the current stimulus package would temporarily extend that measure.

Also, companies could enjoy an extended bonus-depreciation provision, which would allow them to immediately write off one-half of the cost of certain capital expenses and deduct the rest over time.

The Obama administration has also pledged to keep stricter tabs on the $700 billion Troubled Assets Relief Program (TARP). The first $350 billion authorized by Congress has all but vaporized at this point. But there is no way to tell what effect the money has had, as the banks that refused capital infusions are refusing to disclose how they spent it.

“There’s going to be a very different level of rigor in the evaluation of institutions,” Summers said. “The institutions that are healthy and don’t need [the money] to survive are going to be expected to lend.”

Summers said the new administration intends to create a Web site that will detail where the bailout money has gone, as well as details of the banks’ repayment obligations and the expected repayment schedule.

President Obama on Jan. 12 asked Congress for the second half of the bailout funds.  Summers insisted the administration would take a “more proactive approach” to managing the funds, ensuring they are not focused “on the needs of banks, but on the need of the economy for credit.”

David Axelrod, another top advisor to the Obama administration, echoed those claims on ABC television program “This Week,” saying Obama would “have a strong message for the bankers.”

“We want credit flowing again,” he said. “We don’t want them to sit on any money that they get from taxpayers.”

The administration is also expected to clamp down on executive pay for companies in line for bailout funds.

Said Axelrod: “We have to make sure the money doesn’t go to excessive CEO pay and dividends when it should be going to lending.”

Key Cabinet Members

President Obama has already made many of his key appointments – crucial if his new administration is to hit the ground running. Now those nominees must run the gauntlet of U.S. Senate confirmation.
The Senate confirmed six cabinet members yesterday afternoon, but delayed the confirmation of Sen. Hillary R. Clinton as the U.S. secretary of state. Those confirmed, and their new posts, consisted of:

• Steven Chu, energy secretary.
• Tom Vilsack, agriculture secretary.
• Arne Duncan, education secretary.
• Ken Salazar, interior secretary.
• Janet Napolitano, secretary of homeland security.
• Peter Orszag, head of the White House budget office.

Sen. Clinton’s confirmation was held up by the objections of a single Republican senator, John Cornyn, R-Tex., who continues to have concerns over non-Americans who might be making large donations to the charitable foundation run by Clinton’s husband, former U.S. President Bill Clinton, the Canadian Broadcasting Corp. reported late yesterday.

That means there will be a roll call vote today to confirm Clinton as Obama’s foreign envoy, the CBC said. Last week, the U.S. Senate foreign relations committee voted 16-1 to endorse Clinton as the next secretary of state. A Republican senator from Louisiana on the committee cast the only vote against her nomination.

Clinton was President Obama’s chief rival during the Democratic presidential primary.

Among the other nominees who must still be confirmed, the key nominees may well be Mary Schapiro, Barack Obama’s choice to head the U.S. Securities and Exchange Commission, and Timothy Geithner, the president of the New York Federal Reserve who has been tapped to take over as U.S. Treasury secretary, succeeding Henry M. “Hank” Paulson Jr., the architect of much of the Bush administration bailout plan. Money Morning has reported extensively on both nominees.

Schapiro, currently the chief executive of the Financial Industry Regulatory Authority, the securities and brokerage industry’s self-policing organization, has been tapped to head the SEC – just as the embattled agency is being called on to help restore investor confidence shattered by the worst financial crisis since the Great Depression.

Although she’s a seasoned regulator, critics question her toughness: Schapiro nevertheless spent much of last year cracking down on small brokerages and minor players – even as the mortgage storm swirled and Bernie Madoff’s Ponzi scheme went undetected, The Wall Street Journal reported.

Schapiro – regarded as a “strong investor advocate” – told the Senate Banking Committee last Thursday that her tenure would “have a laser-like focus on fraud and investor protection,” Reuters reported. “With investor confidence shaken, it is imperative that the SEC be given the resources and the support it needs to investigate and go after those who cut corners, cheat investors and break the law.”

Money Morning experts wonder if she’s not being brought in to merge one or more other regulatory agencies with the SEC in order to create a “super-agency” with unified oversight of the U.S. financial-services industry.

On the Geithner matter, Stuart Levey, the Treasury Department’s undersecretary for terrorism and financial intelligence, has agreed to stay on until the Senate confirms a permanent successor, published reports state.

Revelations that Geithner failed to pay $34,000 in taxes while employed by the International Monetary Fund (IMF) several years ago derailed Senate Democrats’ plans for a speedy approval for Geithner. Bipartisan backing was still strong, but the delay in his confirmation hearing always opens up the possibility that opposition could build.

Senate Republicans, who have been mostly deferential to Obama’s nominees, were blocking efforts to fast-track Geithner’s nomination, with at least one Finance Committee member saying the tax questions deserved greater scrutiny.

Obama had hoped for approval by yesterday, but the GOP objections made that impossible, meaning Geithner’s confirmation hearing will be held today.  Two Republicans formally objected to scheduling the hearing this Friday after the panel disclosed that Geithner had failed to pay some taxes he owed between 2001 and 2004.

“Look, is this an embarrassment for him? Yes. He said so himself. But it was an innocent mistake,” Obama said when the tax troubles surfaced a week ago. “My expectation is that Tim Geithner will be confirmed.”

According to recent published reports, several Democrat and Republican senators on the Finance Committee voiced strong support for Geithner, who actually placed phone calls to individual senators, hoping to persuade them his tax problems were the result of innocent errors. Many members of Congress on both sides of the aisle believe he’s the very best candidate for this job – which is going to take someone with superlative skills and qualifications, given that the financial crisis continues to grow in complexity with each passing week.

Source: The Obama Blueprint for Solving the U.S. Financial Crisis

Surviving the Bailout: The Grim Arithmetic

Surviving the Bailout: The Grim Arithmetic

I awoke this morning in high spirits in anticipation of the playoff game between the Baltimore Ravens and the Miami Dolphins. Feeling expansive, I decided to practice my Portuguese by watching a Sunday morning news review on Brazilian television. (One of the signal advances in the world in recent years has been the advent of satellite TV, which makes it possible for DISH subscribers to watch several Brazilian channels, as well as those of dozens of other countries that were formerly a world away.)

I briefly toyed with changing the channel to watch Meet The Press , but the beautiful blonde who was presenting the news on TV Globo was more fetching than David Gregory, not to mention Senator Harry Reid, so I settled back to be alarmed over what she had to say.

Her script was mostly about Obama and his “recovery” program, sandwiched around a brief interview with Raul Castro, the 78 year-old president of Cuba.

Castro invited Obama to meet him for direct talks. He said that Obama had awakened hopes he could not fulfill but wished him luck. The rest of the news report focused on Obama’s multi-trillion-dollar plans to foster economic recovery, underscoring some grim realities that will inform your and my prospects of surviving the bailout.

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China also lowered its deposit rate by the same amount and reduced the proportion of deposits lenders have to hold as reserves by 0.5 percentage points to 15.5%, Bloomberg reported. All rate cuts will take effect Tuesday.

China’s slow burn of its interest rates is a calculated response to falling numbers across its board: gross domestic product could fall as low as 5% next year, way down from the 11.7% growth in 2007; exports fell for the first time in seven years last month; imports and manufacturing numbers also fell.

Unemployment figures are getting ugly, too. So far, the global financial crisis has taken 4 million city jobs from migrant workers and pushed urban unemployment up to 9.4%, the Chinese Academy of Social Sciences estimated last week. The result is rising gang violence and increased police measures and surveillances in cities hardest hit, Reuters reported.

China is also facing a dangerous decline in inflation, which limped at 2.4% annual pace in November, its fourth consecutive month-to-month drop and a sharp drop from the 4.0% posted in October, its National Statistics Bureau reported two weeks ago.

“The surprise is how small the move is,” Mark Williams, an economist with Capital Economics in London, told Bloomberg. “There’s been a sudden very rapid deterioration in all China’s economic data over the last 8 to 12 weeks.”

Last month, China cut interest rates by 1.08 percentage points, its biggest reduction in 11 years.

Also last month, China announced a massive $586 billion economic stimulus plan that will pump money into low-income housing, water and energy projects, airports, disaster relief and new railroads for the next two years.

“China understands that it’s gaining importance in the world economy and that it’s going to participate in that process,” said Keith Fitz-Gerald, Money Morning’s investment director and a former professional trade advisor who’s spent more than two decades focusing on investment opportunities in China, Japan and the rest of the Asia region.

“Many experts will see this as just a ‘bailout’ that’s directed at Chinese infrastructure projects, Chinese technology companies and at holding the global financial crisis at bay,” Fitz-Gerald said. “But the real message here is that Beijing is going to pull out all the stops to ensure that its economy does not falter. And that’s because China realizes that it’s become the super glue that’s holding the rest of the planet together.”

Source:Bank of China Tries to Spur Economy with Fifth Rate Cut in Three Months

It’s this focus on developing jobs and infrastructure, or “new material product” – absent in any similarly focused U.S. stimulus so far – that will keep China’s economy on the fast track economically, while also helping boost the Red Dragon’s ailing stock market.

China’s governmental policies famously (or infamously) favor specific state-sponsored companies – especially the infrastructure companies Beijing deems integral to the nation’s physical renaissance. And a large portion of the stimulus money is expected to go right into the coffers of these companies.

Stocks have responded accordingly, advancing an additional 11% last week. The Shanghai index extended those gains yesterday (Monday), climbing 3.6%, or 72.11 points, to close at 2090.77, as investors held out hope that additional stimulus plans would be unveiled following another high-level government meeting in China this week, The Associated Press reported.

Further fueling investor ardor was Beijing’s declaration that it would not be investing in troubled Western financial firms any time in the near future.

China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), has lost roughly $6 billion of the $8 billion invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. Lou Jiwei, the company’s chairman, last week rejected the notion of putting any more of the government’s money into banks outside of its homeland. And he did so citing an overwhelming fear.

“I don’t dare to invest in financial institutions now,” Lou said last week at a conference in Hong Kong, Bloomberg News reported. “The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”

China has a long history of doing things on its own terms, says Keith Fitz-Gerald, Money Morning’s investment director and editor of The New China Trader. But before you label China’s back-patting and trash talk as propaganda, step back and consider which of the two you’d rather invest in: A disheveled U.S. market, or infrastructure development in China, the fastest-growing economy on the planet?

Investors have chosen the latter.

“In such uproar, it’s not clear how much is bottom fishing versus bottom building,” Fitz-Gerald said of the Shanghai index’s recent run up. “However, the fact that many Chinese companies have superb numbers is undeniable.”

Following China’s State Investment Cycle

Unlike in the United States, and many other Western economies, consumerism isn’t the main engine of China’s economy.

Rather, it’s the government – a running tally Fitz-Gerald has labeled as “China’s state investment cycle.”

About 70% of China’s economy is driven by state investments, with consumers filling in the other 30%. For the United States, those ratios are reversed, Fitz-Gerald says.

The recent $585 billion stimulus plan is just one of several gigantic investments the Chinese government has made (See chart: New Material Product). Other recent examples include its litany of Olympics investments, such as stadiums and arenas, hotels, restaurants, roads, tourist attractions and more.

There are three things to consider here.

First, China is in the midst of one of its largest state investment cycles ever – generating streams of profit never before seen.

Second, when China spends big money, it feeds the companies big enough and capable enough to handle the job. It will be those companies on Beijing’s short list that rise to the surface in the next few months, Fitz-Gerald said.

And third, despite consumers driving only 30% of its economy, China has the largest middle class in the world at 300 million people. What’s staggering about this is that they are only starting to spend their growing wealth. So when these state investments give consumers more income to spend, the only problem the government will have is keeping economic growth from getting out of control.

‘Aimed at Growth …Adding to GDP’

But before getting too far ahead of the current reality here, let’s return to the Shanghai index’s rally. Much of it has been driven by clear signals that state investments will continue.

As of now, the index is nearly 67% off its October 2007 high. And that proves two things:

• First, China’s biggest companies have been severely affected by the global economic crisis.
• And second, they remain some of the cheapest stocks in the world.

The bottom line is this: The U.S. economy – as measured by gross domestic product (GDP) – will decline by 5.0% in the current quarter, followed by declines of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman Sachs Group Inc. (GS) predicts.

On the other hand, analysts predict China’s GDP will grow anywhere from 5.0% to 10.0%, easily making it the world’s fastest-growing economy, no matter where it lands in that range.

Fitz-Gerald believes the direction of China’s GDP is evident in the direction its government thinks, at least economically. And if there’s one thing that pares down each country’s economic thinking, it’s a look at each their recent economic stimulus packages.

“The U.S. government is running around rewarding bad behavior,” Fitz-Gerald said. “China’s package is aimed at growth, creating jobs and adding to its GDP.”

Source: China Stocks Advancing as Beijing Boosts Investments

As ECB President Jean-Claude Trichet announced the largest cut in the Eurozone’s 10-year history, he said that the region is bracing for negative growth next year.

“Global and euro-area demand are likely to be dampened for a protracted period of time,” Trichet said at a press conference in Brussels today, Bloomberg reported.

The ECB estimates average annual real gross domestic product (GDP) growth to be between 0.8% and 1.2% in 2008, between -1.0% and 0.0% in 2009 and between 0.5% and 1.5% in 2010.

The ECB’s rate reduction followed two other huge central bank cuts in Europe.

The Bank of England cut its rate by one percentage point to 2%, its lowest level since 1951. That cut followed its 1.5 percentage point cut to 3% less than a month ago. Sweden’s central bank also slashed a record 1.75 percentage points from its primary interest rate.

Meanwhile, France unveiled its own economic stimulus plan today – a $32.9 billion (26 billion euro) injection that will target infrastructure, support local authorities and help its own ailing auto industry. The goal is to increase its GDP by 0.6% next year and push its deficit to 3.9% of the GDP, Reuters reported.

Wrapping everything together, are the Eurozone’s latest economic statistics, also released today, that said that GDP shrank 0.2% in the second quarter, investment dropped 0.6% and household spending remained flat.

Holger Schmeiding, chief European economist at Bank of America in London, said Europe is facing a “very serious recession.”

“Despite a major monetary stimulus and some help from lower oil prices and a looser fiscal policy, we do not expect the economy to recover before late 2009,” Schmeiding told Bloomberg.

Outside the Eurozone, four other countries recently slashed their primary lending rate earlier this week.

• New Zealand reduced its interest rate by 1.5 percentage points to 5.0%, a five-year low.
• Indonesia made its first interest rate cut since December 2007, reducing its key interest rate by one-quarter of a percentage point to 9.25%, Reuters reported.
• The Bank of Thailand cut its main interest rate one percentage point to 2.75%, its biggest reduction in eight years and its first cut in 16 months.
• Australia also cut its lending rate by a full percentage point to 4.25%, a six-year low.

Source: Record Rate Cuts and Economic Props Light up Europe

He said that fault for the US’s economic morass belongs to opposition party Democrats.

Apparently, President Bush feels they’ve undone in 16 months the stirring economic policies his Republican brethren crafted while they controlled congress during his term’s first six years.

And, yes, there is plenty of blame to go around. After all, both parties totally whiffed on the benefits of the economic stimulus plan that was to be the war in Iraq. All that’s done so far is run up a tab that has easily eclipsed a half-trillion dollars, as well as inflict catastrophic costs on the lives of US military and Iraqi families.

As far as the economic stimulus part goes, I suppose a case can be made that the war has been very good for the corporations that supply the 30,000 well-armed mercenaries, whoops, I mean private security forces that now work in Iraq. Their war-zone salaries alone cost the US about $6 billion a year.

Still, as the President tries to convince us that, in less than a year and a half, those crazy tax-and-spend Democrats have wrecked a thriving US economy, it should be noted that during the GOP’s six-year run as the majority on the Hill, Bush vetoed just one (sort of) spending bill.

It was a bill that would have lifted the federal ban on funding embryonic stem cell research. But, that was it… one veto in six years.

But, since the Democrats gained their destructive congressional majority, Bush has tripled his veto output.

Last October he vetoed a bipartisan bill that would have expanded children’s health insurance. He said that the $30 billion extra (spread out over five years) that Congress added to the plan was too expensive. He only wanted to bump the plan’s budget by $5 billion.

Under the Democrat’s venal economic watch, Bush also vetoed a bill that would have limited the CIA’s use of “harsh” interrogation techniques.

And, he nixed a $124 billion war-funding bill… but not because it was too expensive. He killed that bill because it would have set target dates for troop withdrawals from Iraq.

That’s it.

Pash Da Boddle

Other than that, be it six years of GOP spending or 16 months of Democrats signing checks, President Bush’s attitude can only really be described as “whatever.”

By the way, I stole that “whatever” from Eugene Robinson, who writes for The Washington Post.

While I’m at it, I am going to purloin a great Robinson line. Back in October he wrote, “To say that George W. Bush spends money like a drunken sailor is to insult every gin-soaked patron of every dockside dive in every dubious port of call.”

So, the president is trying to defend and deflect. That is a very “presidential” thing to do. Maybe he’s finally growing into the job.

But, to accept no blame for the US economy’s current state is also a very Karl Rovian thing, as well.

If Elected I’ll Serve

Now, I am not so arrogant to think that I could have done an overall better job as president during the past seven years and four months.

But, I think I might have done a better job understanding the issues… or at least being more up front with Americans about the effect my stances would have on them. For, my biggest disagreement with the current president is about his weak dollar policy.

It’s a policy that has honked me off for years.

In fact, as your president I would have promised not to engage in monetary policy before I had at least consulted the experts at the Federal Reserve Bank.

Between naps, golf and visits to the White House wine cellar (okay, and long lunches with Scarlett Johansson and Sheryl Crow) I would have begun my monetary research online, say at a Fed website.