Two things will define 2009. One is the huge $1 trillion economic stimulus package featuring “smart grids,” roads and bridges.

The other is the winding down of the war in Iraq. I believe that this will supersede handling the aftermath of the current eruption of violence between Israel and Hamas in the Gaza Strip.

The promise of ending the war helped President-Elect Obama get elected, though I believe the policy differences between the two presidential candidates were not as great as generally perceived.

Now Iran and Afghanistan are Obama’s problem. It’s not quite as urgent as the deteriorating state of the economy, but it’s close. Obama will begin withdrawing troops as soon as he can. That may not be until 2010. If violence and instability regain traction, it could be the year after. But much of the planning will be laid out this year.

But downsizing troops doesn’t mean downsizing our involvement. The goal is to save lives. And the quid pro quo will be spending more money.

The U.S. government doesn’t have much of a choice. If it doesn’t, any semblance of peace and stability in Iraq would be jeopardized.

So talk about reducing contractor levels in Iraq is just that– talk. The next stage will be outsourcing reconstruction and security functions to the private sector.

Such private-sector functions have been complementary to the overall role of the U.S. military in Iran. In the next stage, the U.S. military will complement the central role of the private sector in Iraq.The companies already providing their services over there are in a better position than anybody to know what‘s going on. And they also don’t believe the talk of cutting back the private-sector presence.

For example, William Ballhaus, the CEO of DynCorp (NYSE:DCP), an infrastructure and security company with a large presence in Iraq , said that with existing commitments stretching military manpower, capacity, contractors add value by letting the military focus on security operations.

Iraq’s needs are gigantic. Usually, a country’s needs grow organically as it modernizes and the economy expands.

But Iraq is emerging from a devastating war followed by years of destructive civil violence. Rebuilding Iraq is going to take a great deal of effort, money, and heavy equipment.

Think construction equipment… transportation and infrastructure services… and know-how.

Iraq will be getting loads of new stuff, including tow trucks, communications vehicles, hauling vehicles, aerial platforms for construction, fire and garbage trucks, and heavy-load hauling vehicles.

And Uncle Sam, of course, will be paying the bill.

Ballhaus, in his last quarterly earnings conference call, said that he expects Iraq will continue to provide American infrastructure contractors with plenty of business for several years.

He says that a withdrawal will increase work, at least temporarily. He also expects Obama to increase U.S. involvement in Afghanistan, and that an increase in force levels should lead to more work through 2010.

So this is the deal. U.S. government spending in Iraq and Afghanistan isn’t going to slack off. If anything, it’ll go up as reconstruction and security responsibilities shift to the private sector.

The companies that can take advantage of both of Obama’s huge infrastructure programs – the one that will play out in the U.S. and the one that will play out in Iraq and Afghanistan – will be big winners in 2009.

Source: The Other Infrastructure Stimulus Program: Iraq and Afghanistan

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