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Solar Eclipse

    This reprint from today's blog omits specific stock

advice which is only provided to subscribers:

    It may be the impact of the solar eclipse in China and India today but

there is increased skepticism about emerging market shares.

   Jim Rogers jr., my husband's buddy from Balliol College (Oxford) told

Bloomberg today that “China may be ahead of itself” with its fantastic

stock market rally this year. Jim has not bought any more Chinese shares

since last October, the service added. Jim, a former New Yorker who is

raising his young daughters in Singapore so that they can learn Chinese

easily, had been a perma-bull on China for years. Intrepid Jim famously

invests in frontier markets, which he reached in his younger days by

motorcycle, and more recently by a specially equipped yellow car. But he

is growing cautious.

   Another emerging markets expert concurs. The spectacular rally in

emerging markets "looks like another bubble in the making" says Robert P.

Smith, author of "Riches Among the Ruins: Adventures in the Dark Corners

of the Global Economy." 
   Smith, founder of Turan Corp., a Boston firm specializing in trading

emerging markets' currency and sovereign debt, knows how to  evaluate

creditor claims against foreign governments. He believes the rally that

brought the MSCI EM Index up almost 70% since early March 2009, is a

bubble. He thinks this is the result of exaggerated expectation of growth

occurring in emerging economies despite depressed consumer demand in

developed countries, particularly in America. 
   The optimism assumes there will be "decoupling" whereby developing

economies grow independently of those in the developed world. Its

proponents point to the expected growth from China's stimulus program,

which together with an overhaul of the healthcare system, represent over

16% of China's 2008 GDP. 
   Smith is skeptical that so much money can be quickly spent in an

efficient manner, "much of the stimulus may be going to politically

connected loss-making enterprises and thus will result in no lasting

growth. We may discover in a few months that the rich valuations at which

we now buy EM shares are unsupported by the risk adjusted prospects for

earnings and experience sharp losses."

   There are many reasons for caution on China, where we have seriously

lightened up by taking profits lately. The stimulus is all very well, but

China does not have efficient economic controls, and the risk of

inflation is much higher than in developed economies. A reversal of

course, like Ben Bernanke described in the Wall St. Journal yesterday,

would be tougher to implement from Beijing.

   Moreover, there is real political risk which worries Beijing as well as

foreign investors. The border tribes are restless along the old silk road

and the mountain fastnesses of Tibet. Making nice with Taiwan is all very

well, but that is not where instability will come from. The ruling pols

made a deal with the country: keep us in power and you will have a better

life. But that can go wrong if the stimulus is reversed.

   Revolutions occur not when the populace is miserable, but as a result of

rising expectations, or their frustration.

Chinese demand is certainly boosting commodity prices and raw materials.

   I am not sure if this will be enough to pull the world out of its

economic funk. American factories are running at 2/3 of their capacity,

putting people out of work, and it is unlikely that Chinese growth even

at 8% or more this year will fill the gap.

   First of all, the match is not very good. What we make is not the raw

materials they want. Secondly, China accounts for about 7% of world GNP.

That means its boosted economy will add at most 0.50% to world output.

That is not much.

   We know that Chinese statistics are awful. A large command economy with poor

controls has been mobilized to boost growth. But local party bosses can

massage the numbers to make themselves look better – and they do.

Moreover, leakage from corruption and graft is high. And excess

enthusiasm by the local population (rushing to open brokerage accounts at

the rate of 50,000/day) may not be very positive globally at all.

   Skepticism about China is matched by worries about India. Its monsoon

rains are short and the agro-dependent economy may suffer. Higher food

prices hurt poor countries. The solar eclipse is cutting off the sun in

India as well. Bad rains mean a bad wedding season and cheap Diwali

gifts. Gold will not go up, if the rains do not come.

   Single-minded focus on emerging Asia is dangerous. Decoupling is unlikely

to come from Latin America either, but at least the long-term secular

trend is up there, despite their greater dependence on US growth. I would

take with a large dose of salt  economist Louise Yamada's forecast today

that all emerging markets are in a long-term secular bull market. On the

other hand, I do not buy Bank of Ameerica-Merrill's forecast that you can

make a return of 20% a year in Latin America either.

   We put some stops on our China portfolio yesterday. They were not reached

because the stock market is over-focused. China announcing subsidies for

solar power (to sooth the US) got our simplistic speculators to overbuy

Chinese solar stocks to the exclusion of all else.

   Stock market hype is dangerous anywhere in the world. Investing wisely

requires thought, examination, pondering news and developments. We remain

interested in investing in the developing world but wary. We are stock

pickers, not trend-players.