volumewhiz (98.81)

The ASEAN Theory

December 30, 2009 – Comments (1) | RELATED TICKERS: SPY , EWM , CHN

Since the March lows, this market has exploded upwards, gaining 61%.  Most of us have expected some sort of pullback, now long overdue, since August or September.  Yet stubborn strength persists even now at this year's highs.  Throughout December, the dollar, which has strongly and inversely correlated with the market all year, rebounded.  Did the market follow the dollar's lead by correcting by what should be 1,000 points or so?  Of course not. Unemployment continues to climb, home sales are slowing and government overspending is persists.  So what is going on?

Some months ago, I sat down and begin piecing together a theory based on history and global interest.  Shucking aside the pessimistic theories of "The Creature from Jeckyll Island" and the conspiracy theories that come with the book, I was determined to identify a theory or a theme that would suggest the guys running our country aren't sitting on the sidelines with their hands in their pockets.  In fact, the theory that I have adopted is one that would actually suggest that the guys up top are brilliant, again, IF it is true.  So, let me know what you think and feel free to correct or adjust. 

Five or six years ago, Malaysia, responding to the Asian Currency Crisis of the late 90's, decided it was time for the Pacific Rim countries to eliminate the dollar from its trade.  Realizing this was a daunting task for such a small country, Malaysia gained the favor of ASEAN or the Association of Southeast Asian Nations. They even went so far as to name a date when this would take place.  Although I have been unable to confirm, my recollection is that it was in June of 2003.  Well, the U.S. countered these efforts by establishing two free trade agreements; one with Malaysia and one later with Singapore.  For the time, these agreements passified the countries and brought much welcomed business to them. 

However, it was no surprise when, some years later, China emerged as the chair of ASEAN.  It was also no surprise when they began using rhetoric which implied there was some unfinished business; removing the dollar from foreign trade.  With its powerful political clout, China has slowly chipped away at the project.  After the U.S. economic downturn affected virtually every other nation on the planet, China easily gained support from surrounding countries including the BRIC nations (Brazil, Russia, India and of course, China). Although talked about for years, it wasn't until this past summer that word came; Brazil and China were finishing up the final paperwork to completely eliminate the dollar from Brazil/China trade by mid-year 2010. I think it is safe to say that the removal of the dollar as the de facto currency of the world has begun. 

So, what does this have to do with the market going straight up and why is it not all bad?  Well, consider several things.  First of all, what happens to all the dollars that are sent back to the U.S?  Foreigners still own these dollars, so they won't just give them back rather, they will find somewhere to spend these dollars.  In the case of Brazil and China, the amount in question is about $50 billion.  This money will flock home and find its way to buildings, houses, land, steel, grain, stocks, cattle; you name it.  Secondly, if this global event is going to come to pass, China is probably our best bet to carry this torch because they don't want to see our economy fail.  Hence, if they can make this happen slowly enough, it could well bouy our economy for years.  It would creat jobs and profits.  To put it in perspective, there is roughly the same amount of currency outside of our country as there is inside of our country, so we are talking about trillions of dollars. 

Thirdly, if dollars are not in favor globally, then what is to stop our government for printing whatever amount of money they need in the near term?  This further weakens the dollar, but a continually weakening dollar would actually encourage foreigners to shun the dollar, thus increasing this sending of the dollar home or "foreign investing" (granted, it's "foreign investment" for the wrong reasons, but who cares?) in the U.S.  See, we have never been in this position before!  It could literally be a good thing, but as it is with rain, we don't want too much of it at any given point in time. Fourthly, in the past, we have had to raise interest rates to encourage foreign investment, but we already have foreign investment with this scenario, so isn't it a reasonable assumption that interest rates can remain low indefinitely?  Therefore, if the government can convince the banks that they won't lose a ton of money because of the threat of rising interest rates, doesn't that create an environment where banks can loan again?  Certainly! 

Sure, this realization has challenges in the future.  Foreigners will own much in this country, but they already own 75% of Las Angeles.  We, theoretically, would be paying rent to everyone else, but we have greater problems today.  We narrowly averted a global meltdown and now the U.S. government has the muscle to print whatever money they wish because it fits into their agenda.  The trick here, in my opinion, will be to ride this wave of inflowing dollars, to quickly mobilize our nation to create new industry via new technology, to substantially improve our educational system and to successfully employ an exit strategy of the dollar, which might well be the introduction of the Amero down the road.  Hopefully, we are looking at what could well be a five to ten year event and we likely have some time.  But, we can do a lot as a nation in that time frame.