A Marriage of Convenience

11/19/2009 3:06 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The leaders stood apart during the no-questions-please speech reading, brows furrowed like divorce court litigants while professing the undying friendship of their nations. And yet, despite the awkwardness, despite China's deaf ear to US pleas to free its currency and people, President Obama’s Beijing visit could be counted a success.

There was no public rehashing of recent recriminations over China’s currency peg, US tariffs, or the respective economic shortcomings, be they China’s failure to build a proper safety net or the US’s proclivity to rack up debt. The parties to this loveless marriage had made it through the close encounter with a minimum of irritation.

On the eve of the visit, China’s chief banking regulator had lambasted low US interest rates and record deficits for fostering a “huge carry trade” that “will pose new, real, and insurmountable risks to the global recovery.” That was rather rich, coming from a man who has presided over a near-tripling in bank lending this year. But then such is the tenor of the times. The governor of the Bank of Japan, who knows a thing or two about ultra-low rates, has made a similar complaint in recent days, as has Hong Kong’s leader.

All of which has Federal Reserve Chairman Ben Bernanke wondering how his foreign colleagues can tell an asset bubble from sensible appreciation. “It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said Monday. “It’s not obvious to me in any case that there are any large misalignments currently in the US financial system.”

If China disagrees, it has a funny way of showing this: Chinese holdings of US Treasury debt totaled a record $799 billion at the end of September, with longer-dated maturities making up a growing share of the total. The dollar rose on the news, though not in relation to precious metals. China holds only $40 billion of gold, a much smaller proportion of its $2.2 trillion in overall reserves than is the case for most Western central banks.

The Washington Post and The New York Times covered the summit as a watershed for China's growing might and increasing US reliance on Beijing in everything from economic management to the campaigns against global warming and nuclear proliferation. Yet because China owns all those dollars, the US can be said to own China. Chinese complaints about American overspending and low rates are a sign of weakness, not of strength. China has no way to call its loans—there aren't enough gold bricks to go around. The only alternative to the gradual depreciation of its dollar holdings is an abrupt rush for the exits—and the certainty of financial and economic ruin as the rest of the world follows suit and trade crumbles.

So, the stockpile of unwanted dollars grows, a running tally of the cost of protecting export-dependent jobs and forestalling worker riots. It may well prove to be a worthwhile long-term tradeoff. But these days it's definitely no bargain.

China's is hardly the only Asian power hoping to maintain the status quo at any price. Malaysia's ruling party has long propped itself up by favoring the Malay majority at the expense of ethnic Chinese and Indian minorities. This has left the local stock market at the back of the Asian pack and poised to catch up, Yiannis Mostrous thinks, as latecomers to the party seek relative value.

Meanwhile, the UK's ruling Laborites are almost out of goodies to hand out, shaving the government's already slim chances in the national election due next spring. Labor is now trying to appeal to moderates with promises of spending cuts (a script borrowed by President Obama in his interview with Fox News while in Beijing.)

John Snowden thinks the excess debt, public and private, will ultimately undermine stocks in the UK and the US. But in the meantime the FTSE 100 began the day up 6% on the month. Cadbury (NYSE: CBY, LSE: CBRY) continues to sweeten as the target of a merger play by Kraft (NYSE: KFT), with the possibility of a competing joint bid from Hershey (NYSE: HSY) and Italy's Ferrero. And the rates of UK gilts (government bonds) have actually dropped of late, because the Bank of England has been buying.

Plenty of investors have been buying shares of the Dutch online printer VistaPrint (Nasdaq: VPRT) without any inducement by a government. In fact, the stock has recently corrected from a record high on rumblings of regulatory risk out of US Congress. John Christy's not crazy about the valuation, but he likes the business and the stock chart. And that's a pretty common story at this point.

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