Shanghai Is Not What You Would Expect When You Visit the World’s Largest Emerging Market

In 1982, early in my Management Consulting career with Deloitte, a Big 4 (Big 8 at that time) Accounting and Consulting firm, I made my first to trip to China. I was on an engagement in the Middle East at the time and our client was Saudi Arabian Airlines. I was based in Jeddah, Saudi Arabia however worked with clients and traveled extensively throughout the region.

As part of the project, I had the opportunity to visit Hong Kong and Beijing however every one told me to avoid Shanghai as it was dreary and in the dumps. Today, Shanghai is not the kind of city most expect to see when they visit the world’s largest Emerging Market.

Amazingly, the Pudong area, which is ground zero of the hustle and bustle of Shanghai and representative of the China Dream, did not even exist 20 years ago.

Construction on the New Open Economic Development Zone, which has grown to become China’s pulsing financial and commercial hub, only really began in the early 1990s, right around the time the nation’s economy embarked on a two-decade long, double-digit annual growth rate transformation.

This (the unapologetically capitalistic city seems to scream out) is what, Made in China, built for us.

While the Developed world spent the better part of the last few decades buying knick-knacks they didn’t need with money they didn’t have, China Inc. got busy both producing those same products, and lending the world’s consumers the money with which to buy them. The result is one of the largest trade imbalances in modern economic history. At a staggering $2.4 trillion, the Middle Kingdom’s foreign reserve stockpile is by far the largest in the world. And, although a not-insignificant $900 billion of those reserves are held in steadily depreciating greenbacks (not to mention a large euro holding), the Chinese are wasting no time converting those paper cash piles into tangible asset stakes.

Also, China has been on a resource-buying binge over the past ten years, inking deals with major mining companies from Africa to Australia, South America, The Middle East and all over Asia.

Just last month China signed more than $8.8 billion of new commercial and mining deals with resource giant Australia, despite its southern neighbor’s onerous new resource profits tax laws. The Middle Kingdom’s voracious industrialization inhaled around $41.7 billion worth of Australia’s minerals in 2009, including almost $20 billion of iron ore and concentrates.

Last year China also became Brazil’s number one trading partner when it agreed to lend $10 billion to Petrobras in return for guaranteed oil supply over the next decade. I invite you to read here my recent article “Energy is One of the 5Es of the Evaluation Framework” that contains a discussion about this transaction between Brazil and China. Other projects between China and its South American BRIC counterpart included a $5 billion steel plant at the Acu port in Rio de Janeiro. This deal represents China’s largest ever investment in Latin America’s richest resource economy and its biggest foreign steel-plant investment.

The world’s fastest growing economic superpower is also looking closer to home in an effort to feed its unwavering appetite and to divest itself of paper promises.

“Central Asia is rich in mineral resources, particularly rare metals, copper and gold that China needs for economic growth,” President Hu Jintao announced on a recent visit to Central Asia, where he signed gas and nuclear agreements and promised cooperation in port construction and transportation infrastructure. I invite you to read here my recent article on China and rare earths.

Conspicuously absent from these and a slew of other high profile deals were the “emerged” markets. While the Petrobras deal was going down, for instance, politicians in the US were eagerly handing out hundreds of billions of other people’s dollars to Goldman Sachs (via AIG), and bribing its citizens to purchase new kitchen appliances, most of which were probably made in China anyway.

Of course, all this stimulation comes at a terrible cost. Not only must the US economy swallow the opportunity cost (of the goods and services that might have been produced had those trillions not been siphoned off to bailout the nation’s failed banking, insurance, and auto industries), it must also contend with seemingly uncontrollable debt loads.

Barely 9 months into the current financial year, the US in the past few weeks, passed the $1 trillion annual deficit mark. Though marginally smaller than last year’s total at this point, such a figure is hardly a cause for celebration.

The world’s most indebted economy – on a gross basis – is also notching up a worrying tally of single day records.

The Washington Times reports:
- The largest one-day increase in USA national debt was on June 30 (circa 2010) and it totaled $165,931,038,264.30.
- This one day amount is bigger than the entire annual deficit for fiscal year 2007.
- It is larger than the $140 billion in savings the new health care bill will produce over its first 10 years.
- The one day amount works out to nearly $1,500 for every US household, or more than 10 times the median daily household income.

And now that the future demand has been brought forward, through “Cash for Clunkers” and other government stimulus and spending programs, the USA is struggling to keep its economy afloat. The citizens of the USA have allowed their government to essentially spend their personal savings AND their future earnings.

Meanwhile, China is struggling to cool its own economy down. It is all the government can do to keep a lid on growth at 11.9%, the figure recorded in the first quarter of this year. Stronger domestic demand and a rebound in exports forced the International Monetary Fund to upwardly revise its outlook for China’s 2010 GDP, from 10% to 10.5%. Housing prices are still rising by an incredible 12.4% per month, according to the latest available figures, even after Beijing introduced a series of tightening measures aimed at dampening real estate speculation. I invite you to read here one of my recent blog posts about China trying to cool their economy.

Almost nobody expects China to keep such a breakneck pace. In fact, many are warning of sharp corrections ahead. As many are well aware, nothing moves up or down without (sometimes major) corrections. Straight lines are for geometry classes, not markets. Over the long haul, however, the trend is pretty clear. I invite you to read here one of my recent blog posts about the Chinese economy being out of control.

While it may seem like it is Time to Exit the Dragon, it’s difficult to imagine the emerging middle-class consumers of China returning to the lot of lowly-paid factory workers without a struggle. It is almost as difficult to imagine an American working for less than the minimum wage but it might soon be a reality for the American worker. This situation will probably awaken the Free Agent Entrepreneurial desire among many to consider a shift from a W2 wage system to a 1099 ownership system and lifestyle. I invite you to read here an article about Looking to Retool as a Digital Entrepreneur.

Many still see China as a ripe buying opportunity but this is not the kind of wealth creating opportunity that you are likely to see in the headlines of the evening business news and that is why those who know they need to be savvy with their money, like the insiders, belong to a wealth creating community.

They gain the necessary financial education and they obtain association with, access to, and membership in a wealth creation community to regain control over their financial lifestyle. As a result, they obtain examples of alternative wealth creation strategies such as debt reduction, asset protection, and wealth acceleration with investments in items such as precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

I trust this article provides a little more insight into the global economy and while some may say it is Time to Exit the Dragon, others highlight what may be ripe buying opportunities among a handful of Chinese companies that trade in US Indexes, or as ADRs, and have extremely attractive valuations.

It is wise to monitor world affairs and consider alternative wealth generating strategies. I will provide updates in future articles and at my blog over the next few weeks.

In closing, I want to thank Joel Bowman of Agora Financial as he was the source of some of the materials about the breakneck growth in China mentioned in this post.

Internet Marketing for the Digital Entrepreneur, explains Mike Farrell aspenIbiz

As a result of the job loss situation and the poor economy, there are numerous Digital Entrepreneurs considering an Internet Based business where they leverage a suite of best practices, Internet software tools, education, and support in a community of gifting colleagues thereby placing themselves at the center of the New Economy 2.0 & the Ascendancy of the Entrepreneur.

Innovation on the internet is proceeding at a super-fast pace. Phone books are going away … print advertising is disappearing … at any time over 1.5B people are searching for something on the Internet.

When you buy something on the Internet, you want to buy from someone that you believe is an authority and someone that you can trust. As a result, there is certainly innovation occurring on the Internet with the Web 2.0 technologies that include social networking, blogs, video-sharing channels, and micro-blogging … these are being used by agents and representatives with home-based businesses to become a trusted authority.

A few years ago during my career with Deloitte, a Big 4 Accounting and Consulting Firm, I worked on a consulting project with Microsoft in Redmond and lead teams undertaking marketing and advertising activities as part of a very large product launch. Our team was fond of a saying, “a fool with a tool is still a fool.”

In order to be effective and not be foolish by solely emphasizing technology during the product launch, it was important for our team to understand how the rules of marketing and PR (public relations) in the offline world had evolved and merged into a set of new rules for Marketing and PR in the New Economy 2.0 of the Internet.

In the offline world, marketing is a one-way interruption with yesterday’s message. Here is a listing of several of the old rules of marketing and advertising:

- marketing simply meant advertising (and branding);

- advertising needed to appeal to the masses;

- advertising relied on interrupting people to get them to pay attention to a message;

- advertising was one-way – company to consumer;

- advertising was exclusively about selling products;

- advertising was based on campaigns that had a limited life;

- creativity was deemed the most crucial component of advertising;

- it was more important for the ad agency to win advertising awards than for a client to win new customers; and

- advertising and PR were separate disciplines run by different people with separate goals, strategies, and measurement criteria.

In the offline world, PR is a money pit of wasted resources dealing with the journalistic black hole. The following old rules of PR are becoming obsolete:

- the only way to get ink and airtime was through the media;

- companies communicated to journalists via press releases;

- nobody saw the actual release except a small number of reporters and editors;

- companies had to have significant news before they were allowed to write a press release;

- jargon was okay because the journalists all understood it;

- you were not supposed to send a press release unless it included quotes from third parties, such as customers, analysts, and experts;

- the only way buyers would find out about the press release’s content was if the media wrote a story regarding it;

- the only way to measure the effectiveness of press releases was through “clip books” which noted each time the media decided to pick up a company’s release; and

- PR and marketing were separate disciplines run by different people with separate goals, strategies, and measurement techniques.

Marketing in the online world is not about generic banner ads built to trick people with neon colors or wacky movement. It is about understanding the keywords and phrases that buyers in your target market are using, and designing and activating a series of micro-campaigns to drive buyers to pages that are full of the content they seek.

In order to do this effectively, it is best to understand the new rules of Marketing and PR in the online world that are listed below:

- Marketing is more than just advertising;

- PR is for more than just a mainstream media audience;

- Your are what you publish;

- People want authenticity not spin;

- People want participation not propaganda;

- Instead of causing one-way interruption, marketing is all about delivering content at just the precise moment your audience needs it;

- Marketers must shift their thinking from mainstream marketing to the masses to a strategy of reaching vast numbers of underserved audiences via the Web;

- PR is not about your boss seeing your business on TV - it is about your buyers seeing your company on the internet;

- Marketing is about your organization winning business - not about your ad agency winning awards;

- The Internet makes public relations public again, after years of almost exclusive focus on media;

- Companies must drive people into the purchasing process with great online content;

- Blogs, online video, ebooks, news releases, and other forms of online content let organizations communicate directly with buyers in a form they appreciate; and

- In the internet, the lines between marketing and PR have blurred.

In the offline world, marketing and PR are separate departments with different people and different skill sets. In the online world, marketing, advertising, and PR are converging hence there is just one set of Internet Marketing rules for the Digital Entrepreneur to follow.

People do not like to be sold to, however people want to shop and buy.

Great content helps potential buyers see you, relate to your brand, and understand and value what you have to offer (your products).

By utilizing hypnotic writing, your content will drive a (lead and/or) customer to take the action you want!

Internet Marketing for the Digital Entrepreneur is not a battle of products … it is about using multiple online tools all directed toward increasing the visibility of brand You Inc, generating viral and word-of-mouth online awareness, and utilizing key tactics to ensure success in the knowledge economy.

The Internet provides opportunities you never had before. Internet Marketing is all about selling anything, to anyone, at any time, anywhere in the world!

Finally, a great book to read is "The NEW RULES of MARKETING & PR" by David Meerman Scott. It is the source of a majority of the old rules and new rules listed in this article. This book also contains an action plan that can be followed to harness the power of the NEW RULES!

In closing, be sure to meet me at my website, WhoIsMikeFarrell, learn some tips about being No 1 on Google at apenIbiz My Go-To-Market Partners, my affiliate website, and learn how to be savvy with your money like the insiders at aspenIbiz The Conspiracy For Your Money blog.

The Law of the Opposite - Your Internet Marketing Strategy is Determined by the Leader ... explained by Mike Farrell aspenIbiz

There are laws of nature so why shouldn’t there be laws of marketing? You can build a great-looking airplane but it is not going to get off the ground unless it adheres to the laws of physics, especially the law of gravity.

So it follows that you can build a brilliant marketing program only to have one of the laws of marketing knock you flat if you don’t know what they are.

One of the laws is the Law of the Opposite.

In strength there is weakness. Wherever the leader is strong, there is an opportunity for a would-be No 2 to turn the tables.

Much like a wrestler uses his opponent’s strength against him, a company should leverage the leader’s strength into a weakness.

If you want to establish a firm foothold on the second rung of the ladder, study the company above you. Where is it strong? And how do you turn that strength into a weakness?

You must discover the essence of the leader and then present the prospect with the opposite. In other words, don’t try to be better, try to be different. It is often the upstart versus the old reliable.

Coca Cola is a 100 year old product. Only seven people in the history of the world have known the Coke formula which is kept in a locked safe in Atlanta. Coca Cola is the old, established product. However, using the Law of the Opposite, Pepsi Cola reversed the essence of Coca Cola to become the choice of a new generation, the Pepsi Generation.

In other words, by positioning yourself against the leader, you take business away from all the other alternatives to No 1. If old people drink Coke and young people drink Pepsi, there is nobody left to drink other brands in the cola beverage category.

Sometimes you need to be brutal.

Scope, the good tasting mouthwash, hung the medicine breath label on its Listerine competition. But don’t simply knock the competition. The Law of the Opposite is a two-edge sword. It requires honing in on a weakness that your prospect will quickly acknowledge.

One whiff of Listerine and you know that your mouth would smell like a hospital. Then quickly twist the sword. Scope is the good-tasting mouthwash that kills germs.

Marketing is often a battle for legitimacy. The first brand that captures a concept is often able to portray its competitors as illegitimate pretenders. A good No 2 can not afford to be timid!

As an Internet Marketing professional, you need to understand the Law of the Opposite. If you are not the leader in a product category but want to be a strong second, you need to position yourself opposite the leader because every market becomes a two horse race (as described in No 8, the Law of Duality).

Many Internet Marketing entrepreneurs are using techniques and tools like mind-mapping, keyword research, Attraction Marketing Formula, Magnetic Sponsoring, and MindMeister to conduct the market research and plan a successful marketing campaign. They then use the power of MyStory marketing, brand You Inc, and hypnotic writing skills, in their marketing campaigns, to deal realistically with the position of their brand and the strategy they want to pursue in the world that includes the Law of the Opposite.

The goals is to not emphasize why their offering is better, feature and function-wise, over a competitor’s but to develop a message that is recognized, accepted, and agreed to so that it will seduce and persuade a customer that what is offered to the target market is real and will work for them.

Marketing is not a battle of products. It is all about the strategy you use to benefit from the Law of the Opposite and if you are not the leader then you must do the opposite of the leader to appeal to the group that does not want to buy from the leader.

You can find out more about Internet Marketing and home-based businesses by reading updates that will be posted at my blog over the next few weeks.

The Law of Duality - Every Market Becomes a Two Horse Race, explained by Mike Farrell with aspenIbiz

Early in the lifecycle of a product category, a product ladder with many rungs is formed. Gradually, the ladder becomes a two-rung affair.

In batteries, it’s Eveready and Duracell. In rent cars, it is Hertz and Avis. In hamburgers it is McDonald’s and Burger King. In toothpaste, it’s Crest and Colgate.

The Law of Duality suggests that over the product category’s lifecycle, the lower rungs on the ladder will lose market share and disappear; the top rung will lose market share, and the No 2 rung on the product ladder will gain market share ensuring the market is a two-horse race.

Are the results preordained? Of course not. There are other laws of marketing that can also affect the results.

Furthermore, your marketing programs can strongly influence your sales, provided they are in tune with the laws of marketing. For example, instead of going out and attacking two strong leaders, what you can do is carve out a profitable niche (like Crest prevents cavities as described in No 5, The Law of Focus).

Knowing that marketing is a two-horse race in the long run can help you plan strategy in the short run.

It often happens that there is no clear-cut No 2. What happens next depends on how skillful the contenders are.

What is especially tragic from the economy’s perspective are the resources wasted in many high value product categories, however this is the cost of capitalism.

Look at the history of the automobile industry in the USA. In 1904, 195 different cars were assembled by 60 companies. Over the next 10 years, 531 companies were formed and 346 perished. By 1923, only 108 car makers remained. This number dropped to 44 by 1927. Today, Ford is on the top rung of the product ladder with General Motors and Chrysler fighting for the second rung on the ladder.

Successful marketers concentrate on the top two rungs. Jack Welch, during his reign as chairman of General Electric, said “Only businesses that are No 1 or No 2 in their markets could win in the increasingly competitive global arena. Those that could not be No 1 or 2, were fixed, closed, or sold.”

This kind of thinking has build companies like Procter & Gamble into powerhouses where it is either No 1 or No 2 in more than 80% of its product categories.

Early in a product lifecycle, the No 3 or No 4 rung on the product ladder looks attractive. Sales are increasing. New and relatively unsophisticated customers are coming into the market. These customers don’t always know which brands are the leaders so they pick ones that look interesting or attractive … hence the interest by many Internet Marketing professionals in MyStory marketing and brand You Inc. Quite often, these brands turn out to be the No 3 or No 4 rung on the product ladder.

As time goes on however these customers get educated. They want the leading brand based on the naïve assumption that the leading brand must be better.

The customer believes that marketing is a battle of products. It is this kind of thinking that keeps two brands on the top. Customers think the top two brands “must be the best because they are the brand leaders.”

As an Internet Marketing professional, you need to understand the Law of Duality. In order to compete, use brand You Inc and MyStory marketing methods and techniques to create your own product category or define a niche where you can be the leader and hold the top rung of the product category ladder (as described in No 7, the Law of the Ladder).

Many Internet Marketing entrepreneurs are using techniques and tools like mind-mapping, keyword research, Attraction Marketing Formula, Magnetic Sponsoring, and MindMeister to conduct the market research and plan a successful marketing campaign. They then use the power of MyStory marketing, brand You Inc, and hypnotic writing skills, in their marketing campaigns, to deal realistically with the position of their brand in the world that includes the Law of Duality. The goals is to not emphasize why their offering is better, feature and function-wise, over a competitor’s but to develop a message that is recognized, accepted, and agreed to so that it will seduce and persuade a customer that what is offered is real and will work for them.

Marketing is not a battle of products. It is all about the strategy you use to benefit from the Law of Duality to ensure your brand and product is one of the top two brands of the product ladder as the market becomes a two horse race.

You can find out more about Internet Marketing and home-based businesses by reading updates that will be posted at my blog over the next few weeks.

Business Sours on China

A few years ago, I was in China on a business trip.

At the airport, as I was leaving, the departure authorities asked if I was leaving with any RMB (Chinese currency). Knowing that I was under the allowable $10,000 amount, I told him I had 3,500RMB (approx $500USD). He gasped like I was some crook. He had several others rush over. They huddled and he then told me I had to get out of line and go exchange all my RMB to USD.

I asked why (since I was under the limit)? The only answer I got was that it was illegal to carry that much RMB out of the country. I was surprised! I explained that I was returning in a few weeks and would use the RMB I had on me, at that time (saving some exchange fees) and that I had done this before. They did not care - I was told I could not leave with the RMB and needed to exchange them for USD.

A few days later, it was widely reported in the press that China was adjusting the peg of the RMB to the USD and after the adjustment, those RMBs would be worth more USDs - China was just trying to keep the more valuable stuff, ie the RMB, local and not out floating on the world wide economy.

The real target of this activity was to reduce currency speculation, where the currency would leave the country weaker than the value of the currency when it returned to the country. This is a natural reaction when a country knows it is increasing the value of its currency.

While this just may seem to be an oddity of conducting business on the global stage, it is similar to conditions that are now also occurring.

In a previous post on this blog “Is the Chinese Economy Out of Control?”, it was mentioned that due to the size of stimulus provided during the GFC, in a very short time by the Chinese government, there will likely be some serious unintended consequences.

These unintended consequences could manifest themselves in terms of foreign policy or China becoming more assertive on the global stage.

There are many recent developments within China indicating it is now asserting itself on the global stage causing global businesses to sour on China. These are examples of the unintended consequences mentioned in the previous blog post.

When China was admitted to the World Trade Organization in 2001, it affirmed its emphasis on opening its economy to foreign business however these recent developments are indicating a tilt toward promoting dominant state owned companies, again, an example of unintended consequences.

The ongoing Google incident, where Google who has had troubles with China’s censorship rules, has recently experienced intense hacking attacks against its network, providing an opportunity for a local Chinese search engine to dominate an Internet market of 400 million uses.

Another example is the bullying associated with the drummed up “spying charges” against executives (based in China) of Rio Tinto, a resource and mining company with headquarters in Australia. The charges were later reduced to bribery after China obtained significantly lower iron ore prices for long term contracts.

Coca-Cola recently had a bid, for a local Chinese juice company, not accepted by government regulators on the grounds that if the acquisition went through, consumer prices would increase and smaller companies would be crowded out of the market (even though the company that was to be combined with Coke) would hold about 20% market-share … this led to calls that the Chinese were protectionists (of their local markets) and raising trade barriers.

Technology executives are highlighting that recently issued procurement rules in China are favoring “indigenous innovation” limiting access by foreign suppliers to tens of billions of dollars of contracts for computers, telecommunications gear, and office equipment.

Foreign makers of wind turbines and solar panels say they are being shut out of big renewable-energy projects in China or being forced to license production to local companies at prices set by the government.

It is also becoming clear that China feels it has less need for foreign funds. A few days ago, China’s Premier, Wen Jiabao, told the Americans to stuff it and strongly defended what amounts to China’s policy of currency manipulation.

In what amounted to an extension of its reach in the global economy, Wen warned various world leaders that removing stimulus too early would lead to second dip in the global recession.

Wen also defended China's currency manipulation. Defying the global consensus, Wen said, "I don't think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency."

In a floating-exchange rate world, no one forces a currency to appreciate. If people don't want to own it for yield or sound monetary and fiscal policies, it's hard to "force" a currency to rise. You can, however, forcibly depreciate your currency by selling it and buying others. And that's exactly what China's been doing for years.

To be fair, China's currency manipulation is a form of economic stimulus. By pegging, or linking, it's currency to the U.S. Dollar, China engages in a kind of perpetual devaluation. It preserves the price competitiveness of Chinese exporters. And more importantly for China's economy, a humming export engine keeps employment high, achieving the primary goal of political stability.

But there is no doubt that China's currency policy is costing jobs in the Western world.

In the meantime, deleveraging activities of the household and the private sectors in the Western world, along with Euro weakness, are increasing the demand for the dollar. While these trends can see-saw a bit, these currencies are moving relative to one another, however relative to gold and other tangible things, all of them will lose value. The U.S. Dollar is bad. But it is less bad than the Euro at the moment.

All of this currency movement is adding to the tension between an already tense U.S. & China relationship and essentially goading the U.S. Congress to take some action.

As the banker to the U.S. (meaning the largest buyer of U.S. debt), many suggest it is best to not irritate the banker as they may stop lending money to the U.S. If China were to stop buying U.S. debt, yields on the 10 year note would take off like a rocket causing runaway inflation, and that would be bad, very bad!

I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy (including the interaction of the currency and debt markets) will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.

To gain the necessary financial education, it is best to obtain association with, access to, and membership in a wealth creation community. As a result, you will obtain examples of alternative wealth creating strategies such as debt reduction, asset protection, and wealth acceleration with investments in items such as precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

I trust this article provides a little more insight into the global economy, why we have mutually dependent economies, and serious unintended consequences that are brewing as a result of TARP and Economic Stimulus. As China becomes more assertive on the global stage, they feel they have little to learn from the rich nations of the West, since they widely believe the financial crisis was caused by a blow-up of the Western World’s financial system.

It is wise to monitor world affairs and consider alternative wealth creating strategies. I will provide updates in future articles and at my blog over the next few weeks.

Is the Chinese Economy Out of Control?

Is China trying to take a shortcut to greatness? To understand what's taking place in China today, we need to rewind the clock about a decade.

At that time the Chinese government chose a policy of growth at any cost. It kept its currency, the renminbi, at artificially low levels against the dollar -- this helped already cheap Chinese-made goods become even cheaper than its competitors.

The global consumers were eager to buy them and China turned into a significant exporter to the US.

If free-market economic forces were at work, the renminbi would have appreciated and the US dollar would have declined. However, if China let its currency appreciate, its exports would have become more expensive and the demand for Chinese products would have declined; thus its economy wouldn't have grown at 10% a year.

But China isn't your long standing democracy and using the government-controlled banking system, China accumulated a couple trillion dollars of foreign reserves in US Dollars and Euros. This had unintended consequences in that it helped keep US interest rates at very low levels and lent a friendly hand in the financing of a huge consumption binge by the US consumer, which was China's largest customer.

The more China sold to the US, the more dollars it accumulated and thus the more US Treasuries it bought, driving down the interest rates in the US. The US consumer was in turn happy to leverage its future (through the "always" appreciating asset, its home) and delighted to consume cheap Chinese-made goods.

This match made in heaven between China and the US consumer worked great as long as housing prices kept rising and like an ATM, housing kept supplying dollars to its owners to spend. But all good things come to an end and great things come to an end with a bang.

Let’s now fast-forward a year. Today the global economy is stabilizing but the US consumers of Chinese-made goods are now deleveraging, unemployment is high, and US banks aren't lending.

Despite this, the Chinese export-based economy has reported a growth rate of 8.7% in 2009. The rest of the world looks at the Chinese growth miracle with envy as it seems that China has figured out economics of the next business cycle. But don't hurry to trade your democracy for an authoritarian system. The Chinese grass is not as green as it appears.

First, one should always be skeptical of economic numbers that are put out by any Government, yet alone the Chinese government. The high growth rate of last year in China occurred when its exports were down more than 25%, tonnage of goods shipped through its railroads was down by double digits, and its electricity consumption fell like a rock.

Second, China will do anything to grow its economy, as the alternatives will lead to political unrest. A lot of peasants moved to the cities in search of higher-paying jobs during the go-go times. Because China lacks the social safety-net of the developed world, unemployed people aren't just inconvenienced by the loss of their jobs, they starve (and this helps explains the high savings rate in China) and hungry people don't complain, they riot! Once you look at what's taking place in the Chinese economy through this lens, then the decisions of its leaders start making sense, or at least become understandable.

Unlike Western democracies, where central banks can pump a lot of money into the financial system but can't force banks to lend or consumers and corporations to spend, China can do both very fast. The Chinese government controls the banks. Thus it can make them lend and it can force state-owned enterprises (one-third of the economy) to borrow and to spend. Also, China can spend infrastructure project money very fast -- if a school is in the way of a road the government wants to build, it becomes a casualty for the greater good without a lot of delay due to environmental or society related concerns.

China has spent a tremendous amount of money on infrastructure over the last decade and there are definitely long-term benefits to having better highways, fast railroads, and more hospitals. But any government is horrible at allocating large amounts of capital. Political decisions (driven by the goal of full or near full employment) are often uneconomical and full of corruption and cronyism that result in projects that destroy value.

Infrastructure and real estate projects are where you get your biggest bang for the buck if your goal is to maintain employment, because they require a lot of unskilled labor. This is where in the past a lot of Chinese money was spent. This also explains why the Chinese keep building skyscrapers even though the adjacent ones are still vacant.

In addition, China has built the largest shopping mall in the world, the South China Mall, which is still 99% vacant years after construction. China also built a whole city, Ordos, in Inner Mongolia, on spec for one million residents who never appeared. China is a less shiny but more drastic version of Dubai.

We look at China and are mesmerized by its 1.3 billion people representing huge target markets. There is speculation that the Chinese consumer will pick up the demand slack for the US and European consumers who are deleveraging and buying fewer Chinese-made goods. This may happen but it will take decades. The US and European consumers are two-thirds of much larger economies. The Chinese consumer is only one-third of the Chinese economy.

We have to remember that economic bubbles are usually just a good thing taken too far. This was the case with railroads in the US in the late 19th century. The railroads were supposed to change the landscape of the US, and they did, but that didn't prevent a lot of them from going out of business first. The Internet was supposed to change how we communicate, and it did, but in the process it generated a tremendous bubble, followed by the loss of wealth for many.

The Chinese economy is no exception. Its long-term future may be bright but in the short run we've got a bubble on our hands. The temporary mirage of economic resiliency must be followed by huge pain and drastic consequences because every cycle has an up and a down. This is a law of nature and the laws of economics do not work differently.

I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy (including the interaction of the currency and debt markets) will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.

As an example of alternative wealth creating strategies … consider investments in precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

I trust this article provides a little more insight into the global economy and the mutually dependent economies. Due to the size of the stimulus provided in a very short time, by the Chinese government, there will likely be some serious unintended consequences that will manifest themselves, also on the world stage. These consequences could express themselves in terms of foreign policy, such as dangerous undercurrents to Taiwan’s peaceful reunification, or in terms of China becoming more assertive on the global stage because they feel they have little to learn from the rich nations of the West, since they widely believe the financial crisis was caused by a blow-up of the Western World’s financial system.

It is wise to monitor world affairs and consider alternative wealth creating strategies. I will provide updates in future articles and at my blog over the next few weeks.

In 2010, Demand for Commodities is Creating Investment Opportunities

Emerging markets kicked into high gear a few years ago (see previous post on this blog titled “The World’s Center of Gravity is Continuing to Tip in Favor of Emerging Markets”) and this was fully evident in the middle of 2008 as many commodity prices reached all-time highs.

As global demand increased, the prices for commodities like oil, corn, sugar and cotton rose to dizzying heights.

The market cooled off in late 2008 and early 2009 as part of the deleveraging initiated in Phase 1 of the Global Financial Crisis but now commodities are beginning to move back up.

Many commodities have achieved a 50% retracement back up to 2008 highs and this upward movement signals to many a continuing uptrend.

After worldwide demand destruction in late 2008 it appears a solid uptrend is being formed.

This uptrend is a combination of fundamental factors with the most important driver coming from markets like China and India.

These emerging markets consume everything from oil to orange juice, and after the sudden fall of 2008, the craving for so-called luxury goods, from the people of these emerging markets, has just started.

Worldwide demand for these staple commodities (fuel for a car, coffee is a new delicacy, and corn-fed meats on the dinner plate) will continue to rise.

After you get past all the investment bank upgrade and market consensus reports, there are plenty of solid reasons that gold is set to rise in the next 12 months.

From a technical perspective, gold has not reached its inflation-adjusted all-time high. For that to happen, gold would need to be at $2,000 an ounce — a 75% increase from today’s price.

In 2010, this could easily happen. However, a more conservative, yet realistic goal would be $1,500 gold — which could very easily happen in the next 12 months.

Other than technical indicators and charts, there are plenty of fundamental reasons to assume the metal will go higher and two of the most significant reasons are listed below.

First and most importantly is that there is an implicit flaw with Western government funding models. Governments like ours here in the U.S., naturally choose short-term fixes for long-term problems (it probably has to do with the lack of term limits for politicians and frequent re-elections). Most likely these features of our government and political system will not magically change overnight, nor will it likely change by the end of 2010.

So the probabilities are high that fears of inflation will remain large and as a hedge, many will demand gold, hence increasing gold prices. And, as the short-term fixes expose more government-monetized debt, prices of the precious metal will also go higher.

The second reason that gold will shoot to $1,500 in the next 12 months is supply related. Many of the gold fields in South Africa are finding it more difficult and hence more expensive to mine the gold that is deep in the earth. With gold being harder to obtain, the price will be higher due to increased mining costs and inevitably, there will be less supply of gold brought to market due to these expensive mining methods and ongoing difficulty in the mining process.

As demand rises and supply is reduced, you can bet that prices for gold will have nowhere to go but higher than the current $1,100 an ounce.

I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.

As an example of alternative wealth creating strategies … consider investments in precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

I trust this article provides a little more insight into the world of the commodity markets and with the raging demand due to the rise in the living standards in many of the world’s emerging markets, there are numerous alternative wealth generating opportunities. This increased demand places commodities in a super-cycle that will likely last another decade. In the commodities world, there are no CEOs on the inside cooking the books nor do you have accounting firms puffing up the profits - you just have prices responding to pure supply and demand. This is why many refer to the commodities markets as the last bastion where there is pure capitalism. It is wise to have exposure to the commodities markets as the world’s economies respond to the emerging markets.

I will continue to introduce alternative wealth creating strategies to consider in future articles and updates at my blog over the next few weeks.