Apr 30 2009

The Communists That We All Depend Upon

“Of all the inventions that have helped to unify China perhaps the airplane is the most outstanding.  Its ability to annihilate distance has been in direct proportion to its achievements in assisting to annihilate suspicion and misunderstanding among provincial officials far removed from one another or from the officials at the seat of government.” – Madame Chiang Kai-Shek

 

It occurred to me recently while I was watching coverage of the G-20 in London that despite the reality that the United States and China are something less than allies in a diplomatic sense, the two countries are certainly joined at the hip economically.  This amuses me greatly when I think about what many of us in the U.S. – at least of my generation – were taught in school about China and communism in general.

 

Coincidently, yesterday I received an article published by Wharton Business School that included some very interesting facts and figures that support my observation above.  Most amazing, “China’s foreign exchange reserves have increased sharply over the past decade, from $216 billion in 2001 to $1.52 trillion in 2007, then $1.95 trillion in 2008.  Some estimates put the current figure as high as $2.3 trillion.  As a percent of GDP, China’s foreign exchange reserves grew from 15.3% in 2001 to 45% in 2008.  Economists estimate that about 70% of those reserves are held in dollar-backed assets.  China now holds as much as $1.36 trillion in U.S. securities and government debt.”  For more, read Attached at the Wallet: The Delicate Financial Relationship between the U.S. and China.

 

Most believe that China merely considers U.S. Treasury-backed debt the safest investment they can make, but others are suspicious that China is primarily keeping the value of the Yuan low and the U.S. economy as liquid as possible in order to sell more Chinese goods.  I am convinced the truth lies somewhere in between.  It is quite clear that unless China just wants to wipe out the whole global economy (which seems unlikely) – then these two super powers will continue to operate in much the same manner.  The U.S. certainly needs China to continue buying her debt and China needs the U.S. to keep buying Chinese products – and all the other countries are essentially on the sidelines hoping that nothing happens to damage this relationship beyond repair.

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Apr 07 2009

Our Two Favorite Investment Geniuses

“I will die and go to hell if it’s a Ponzi scheme – it’s no Ponzi scheme…if it is a Ponzi scheme, why are they finding billions and billions of dollars all over the place?” – R. Allen Stanford

 

Well, I didn’t do very well last month with only one post, so I will try to do better in April.  I thought it was about time we revisited the status of Messrs. Madoff and Stanford.  As most of you probably noticed, there has been a good deal of continuing coverage on Mr. Madoff, but Mr. Stanford hasn’t received much national coverage since the initial story broke.  I say lucky Mr. Stanford – right?  Unfortunately for him and his business associates, just because the media has other fish to fry doesn’t mean the SEC does – but more on that in a minute.

 

It shouldn’t be such a surprise to Mr. Bernard Madoff or his family and business associates that when you deceive a whole slew of powerful people and institutions and oh, by the way, burn through $50 billion of other peoples’ money – you might just be sued by some of the victims.  This of course is exactly what is happening and let me just add that those doing the suing are going after every penny or any asset with tangible value.  Madoff started transferring assets and sending money to family members almost immediately, but he has clearly been found out – so the lawsuits will ensure that what remains will probably mostly end up with the lawyers – but better than Madoff or anyone he wants to have it.  Bernard’s brother Peter recently received some bad news when he learned that he had to return the vintage Aston Martin that was purchased for him last year – if this was only his biggest problem.

 

As for Mr. Stanford, he vehemently denies any wrongdoing and maintains that the SEC decided to make his company the scapegoat after completely missing the Madoff scam for two decades or longer.  Apparently, while there are some shady things that went on at Stanford Financial, they hadn’t yet spent the entire $8 billion that they brought in with high-yield CDs and there is some indication that significant assets are still held by the firm.  This hasn’t discouraged the SEC and according to spokesman John Nester, “We stand by our allegations.”  And there you have it.  I bet James M. Davis and Laura Pendergest-Holt are hoping all the money can be accounted for – or they will be joining R. Allen in the pokey for a long time!

 

 

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