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The Daily Reckoning | Tuesday, May 18, 2010 Asian markets plummet...where the Middle Kingdom is leading the world, America's Got Talent...but it's all heading overseas, Plus, Bill Bonner on the Chinese people's greatest ever contribution to mankind and plenty more... The Great Money Shift The fall of the West and the rise of the East Dan Denning Reporting from St. Kilda, Australia... It will be a thoughtful reckoning today. Put on your thinking cap. There is a lot to think about. What exactly is going on in the world and what, if anything, can you do about it? Let's start with China, where Shanghai stocks fell 5.1% yesterday and are 26% off the index's 52-week high. If Chinese stocks are leading the economy, one crash is in and another could be just beginning. About the only bright side of any crash in Chinese equities - and any slump in the Chinese economy - is that we're talking about a run-of- the-mill kind of crash and not a systemic failure. That might not sound positive. But it is. It means that while the pain of a China crash would be sharp and probably not short, it wouldn't be the end of the world. Just the end of the world as we know it. And that would be fine too. Because over the next few decades, you get the sense that the balance of economic power in the world will have decisively shifted. It's shifting away from the over-indebted industrialized Western Welfare States and toward the higher-saving nations of the developed world. A few years ago, we called this "The Money Migration." And our view then was that this shift favored Australia, despite Australia's own massive private debt levels. But who knew that so much paper money would be destroyed in the transit between points A and B? Markets in Europe and the Americas were again indifferent yesterday. It's like investors can't quite believe that they're actually watching a junior reserve currency (the euro) slowly take off its shoes and socks and lower its disheveled self into its deathbed.  Can this really be it for the euro? Well, there is always the possibility that reports of the euro's demise are simply premature. That's how the 24/7 news media cycle works these days. Everything is a crisis all the time, especially right now. A lot of what passes for urgency is just manufactured panic. Despite the theatrics, though, there's something rotten at the heart of the currency. The real problem for the euro is that it is the unbacked liability of a political union that is slowly unraveling. The central planners and bureaucrats of Europe probably cannot imagine an economic landscape without their common currency. But they better start imagining it...and printing D-marks.  This must be what it's like to live on the slopes of a dormant volcano. You plant a colorful green garden in the fertile soil and live on the gentle slopes and pass your days comfortably. And then one fine day, in the twinkling of an eye, you are erased from existence by a searing hot pyroclastic flow. Game over. Except, switching metaphorical gears, we have always feared that the volcano underlying a global financial system built on debt could erupt at any time. It was never truly dormant. Throwing virgins into the crater to appease the gods - like throwing Fed money onto bank balance sheets - could not ever be a realistic survival strategy. Virgins don't prevent volcanic eruptions any more than easy money prevents insolvency. So what IS a realistic survival strategy? Well, the conventional wisdom - and we say this not really knowing what conventional people think - is probably to not try and time the market, to have a diversified portfolio with an asset allocation strategy designed to suit your risk and your financial goals, and to let time do your work for you, with annual rebalancing to make sure you are not over-exposed or under exposed to any particular asset class. That's how they write it up in the textbooks. For most of the last twenty years, that strategy has worked. But will it keep working in a world where you may see de facto default by sovereign governments or, if they manage to avoid that, massive inflation? What do you reckon? The Daily Reckoning Presents Atlas Is Not Shrugging... He's Just Outsourcing. AddisonWiggin Late last year, David Farr shot off his mouth and made a lot of people mad. But the insights that spring from his candid comments could make a lot of other people rich. Including you. With the inspired help of my colleague, David Gonigam, here's the story... Mr. Farr is the CEO of Emerson Electric. The firm makes electrical equipment, mostly for industrial customers. That said, its best-known product is likely in your kitchen sink - the InSinkErator garbage disposal. In 2009, Emerson broke into the top one-fifth of the Fortune 500 - jumping nearly 20 positions, from 111 to 94. Impressive, considering what happened to the stock market and the economy in 2008. Not that Emerson was spared the pain. The company slashed its work force nearly 14% in 2009 - 20,000 jobs gone. And Farr doesn't see things getting much better in 2010 - owing largely to the decisions coming out of the nation's capital. Which brings us to the things he said that made a lot of people mad. The forum: The Baird Industrial Outlook Conference last November in Chicago. "Washington is doing everything in their manpower capability to destroy US manufacturers," he said. "Cap and trade, medical reform, labor rules. What do they want to do? Raise taxes. They're just going to destroy jobs." Result? "Jobs are going to be created offshore. They're going to be created in India and China, places where people want the products and where the government welcomes you. They actually do something." Step back for a moment and take that in. India was once larded down by decades of Nehru socialism. China's economy was crushed by Mao's madman schemes. But now a major American CEO says that these countries offer a friendlier environment for manufacturers than the United States. "What do you think I am going to do? I'm not going to hire anybody in the United States. I'm moving. They are doing everything possible to destroy jobs." Farr's remarks in Chicago set off a firestorm that raced 300 miles down Interstate 55 to St. Louis. Since Emerson's founding in the 1890s, the firm has called the Gateway City home. Outraged letters to the editor poured into the St. Louis Post-Dispatch. One labeled Farr and his fellow executives "unscrupulous parasites interested in nothing more than short-term profits." Another addressed Farr directly: "How dare you try to blame Washington for your greed." Farr responded on the paper's Op-Ed page a couple of weeks later. Clearly, the public relations people had gotten to him in the interim. His Chicago remarks were passionate and spontaneous. The column read as if vetted by a conference room full of PR pros...and maybe a couple of lawyers. "We are a nation of varied beliefs and perspectives," the committee - er, Farr - wrote, "and there is room for honest disagreement on all of these issues. But none of us wants to see our country weakened to the point where it is no longer the global economic leader. "Greater government debt and diminished competitiveness mean global investment and good jobs will go elsewhere," Farr continued, "and America will risk slipping into second-tier economic status. That's not the legacy any of us want to leave future generations." He might have mentioned that the United States has the second-highest corporate tax rate, after Japan. The mushy article concluded with the truly bold declaration, "Action is needed now." That's OK, Dave. We know your true feelings. Atlas isn't shrugging. But he is outsourcing and moving offshore. Farr isn't just ranting against the Obama administration. He knows emerging markets firsthand. He ran Emerson's Asia-Pacific division in the 1990s. And Emerson has been steadily moving jobs overseas for years. That's where the growth is. First came the new factory jobs. Then came the new white-collar jobs - engineers and product designers. "If half of your sales go outside of the United States, you're going to have half of your engineering outside of the United States, too," Farr told Forbes back in 2004. That was at a time when manufacturing output in emerging markets was growing 8% a year...and just 3% in the United States. And that was supposed to be a healthy post-recession figure. Another factor in Farr's reasoning is something we highlighted last month. Don't forget about all those foreign-born engineering students at US universities who are choosing to return home. This could be one reason that 54% of US executives surveyed by the search firm Korn/Ferry say they'd be willing to accept a post overseas. That compares with just 37% four years ago. Already, 24% of the freshly minted MBAs from MIT have accepted overseas posts. A year earlier? Just 19%. Already by 2009, emerging markets accounted for one-third of Emerson's revenue. (That's up from just 14% when Farr became CEO, in 2000.) Foreign markets as a whole account for more than half of sales. That puts Emerson in pretty good company. Nearly one out of every five S&P 500 companies now generates a majority of its sales overseas. (Coca-Cola is perhaps the iconic example: 74% of its revenue comes from outside the States.) Those stand to be among the best performers among the blue chips in the years ahead. They're exposed to healthier business environments overseas. And they'll be insulated from the shock of a weakening dollar. But Emerson (for example) has already had a good run over the last year. Besides, if it's overseas exposure you're after, why not go for the real thing? David Farr and other American CEOs find emerging markets a friendlier place to do business. And if American blue chips get a good reception, imagine how well the homegrown companies are treated. That's the idea behind a fairly new exchange-traded fund (ETF) with a mouthful of a name: The Dow Jones Emerging Markets Composite Titans Index Fund (NYSEARCA:EEG). We prefer to think of it as the emerging markets "fund of tens." That is, it aims to buy the 10 top-ranked stocks in each of 10 sector indexes Dow Jones has developed for emerging markets economies. The sectors are the usual suspects - energy, financials, basic materials, telecom and so on. So the fund is never spread among more than 100 stocks. Not a bad way to hedge your bets if this is your first time getting into emerging markets investing. (And from the e-mail we get, we know you're skittish about this.) The practical result of this mix is that right now the fund is about 25% China and 25% Brazil - two emerging markets on a tear. The other BRIC countries, India and Russia, make up another 25%. South Africa, Mexico and other countries make up the remaining quarter. You even get a little exposure to former Soviet bloc countries like Poland, Hungary and the Czech Republic. The top three holdings account for a little over 15% of the total: Industrial and Commercial Bank of China Ltd. Gazprom, the Russian natural gas giant Petrobras, the Brazilian oil giant. The fund is fairly new, launching last July. For its first year, it's keeping expenses limited to a guaranteed 0.75%. Investing by sector, as EEG does, will give you the emerging markets exposure you're looking for, without too much exposure to any one country. Addison Wiggin,  for The Daily Reckoning Joel's Note: On your behalf, fellow reckoner, Addison traveled to China this week to investigate some of the many crises/opportunities in the Middle Kingdom. Your managing editor was lucky enough to join him here in the capital city, Beijing.  We've spent time with local experts, insiders and entrepreneurs...braved the hectic human traffic of the local gold market...investigated business ventures...and, as Bill Bonner (who is here also) mentions below, tasted some of China's "greatest contributions to mankind"...Peking Duck.  It's this kind of "boots-on-ground" analysis - factual, anecdotal and cultural - that helps one grab a solid feel for an investment landscape. And, believe us when we say, there are plenty of opportunities in this booming, busting, booming again arena.  But you don't have to travel all the way to China to reap the benefits of these investigations. All you have to do is get on the FREE "beta- list" to Addison's newest research service, Addison Wiggin's Apogee Advisory. That's right...gratis. So, how does this work? Read more here.  Bill Bonner Impressions of the Chinese Economic Boom Bill Bonner Reckoning from Beijing, China... Boom, Baby, Boom... What's going on in China? That's what we've come here to find out. We paid a visit to China 25 years ago and haven't been back since. More on China in just a minute... Let's look at what is going on in the West, first.  Yesterday, the Dow rose slightly - after taking a beating last week. Gold settled at $1,228. Dear Readers are out of stocks. So we're not particularly worried. But we're deeply interested. Has the bear market/Great Correction resumed - as we said it would? Or is this just more 'noise' - with no particular meaning? We don't know. But we intend to be in cash and gold when we find out. Back to the Middle Kingdom... First impression: this is not the same country it was a quarter of a century ago. The last time we were here there were almost no private cars. Everyone dressed in drab grey outfits and rode bicycles. There were no shiny new buildings. There were almost no restaurants. And if you saw a truck, it was likely to be broken down beside the road, with a couple legs sticking out from beneath it. Second impression: wow! So many daring new buildings...such broad streets...so many construction cranes...so many fancy cars...so many electric bicycles... ..there is no doubt that China is far outpacing Europe and the US in many respects...that the 21st century will be defined by what happens here, not what happens in the West. Third impression: China is in trouble. "Stocks dive on housing fears," says the headline at China Daily. The Shanghai Composite index suffered its biggest drop of the year yesterday - down 5% after losing 20% since January. According to the papers, the market has been spooked by the government's efforts to restrain real estate speculation. The Chinese have a lot of money. And Chinese investors have relatively few places to put it. They tend to buy real estate...or stocks. This has pushed up property prices by as much as 100% in some areas, over the last 12 months. And it has caused the government to worry about a bubble. Is the Chinese economy a bubble? Most likely - yes. Will it blow up? Again, most likely, yes. In fact, it seems to be blowing up right now. After leading the world in the bounce phase, it now may be leading the world in a return of the Great Correction. In a nutshell - China's economy is unbalanced...with far too much weight given to exports. Typical of successful export-oriented Asian economies, it has built too much capacity.  The last big economy to run into this problem was Japan. After the big boom of the '80s, Japan had too many factories...and too much capital invested in the export sector. When the stock market realized it, a big sell-off began. That bear market lasted at least until 2009 - 19 years. For all we know, it's still not over. Stock markets are always discovering what things are really worth. Right now, they're realizing that China's companies are not worth quite as much as they thought a few weeks ago.  Will the sell-off continue? We don't know. But most likely - yes. Because a big boom is typically followed by a big bust.  But wait a minute. How can we reconcile Impression #2 with Impression #3? How can China be the country of the future and still face a big financial upheaval? Well, that is the future!  Much the same thing happened in the US after 1929. The US faced a tough period of adjustment - made worse by the efforts of the Hoover and Roosevelt administrations. Instead of letting the problem take care of itself - as they did during the 19th century - the feds intervened heavily. In effect, they were trying to keep the future from happening. You can slow the future... You can make it more painful. You can drag your feet and shut your eyes...but the future is going to happen, whether you like it or not. As it came about, the future for the US was bright. It just had to live through the Great Depression and WWII first. China must be facing its own tests and challenges. Maybe they will be political. Maybe they will be only economic. But they are bound to be monumental... And the events in Thailand show us how they can be bloody too.  "Thai street battles escalate," says today's Financial Times. As of this morning, 29 people have died. More than 230 have been hurt. And a quarter of the country is locked down in a 'state of emergency.'  Thailand's troubles look less and less like street protests and more and more like a civil war. Who's right? Who's wrong? Who are the good guys? Who are the bad guys?  Who knows? As in most civil wars, it's probably a shame that both sides can't lose. But it shows what can happen.... And more thoughts... Last night, we went to a marvelous restaurant - 1949.  The restaurant is in a complex in the middle of the business district. At relatively little expense, the owners have created a stylish oasis - one that they can knock down in a few years in order to build a high- rise on the precious property. Dear Readers will recall that Peking duck is on our short list of the world's greatest, almost divine, inventions. Here, at 1949, we had Peking duck in Peking. And it was the best ever. The Chinese have been the source of many innovations - from pasta to gunpowder. But Peking duck is their finest contribution to human life.  *** "Talents heed the call of home," says China Daily. For many years, some of the brightest and best of young Chinese left the country. They considered the opportunities for education, entrepreneurship, and career advancement better overseas. Often, they went to the finest universities in Britain, Canada and America. Then, they took top jobs at multi-national companies, research institutes...and in academia. But now they're coming home, says the paper.  We met a number of these people yesterday. US-educated...sometimes US- raised...the overseas Chinese are now finding more opportunities back in China. Why? Because there is more money in China. Growth rates are higher. And new businesses find capital more easily.  In short, China is booming. And booms bring prodigal sons back home. "I studied law in America..." "I went to university in Montreal, Canada..." "I used to work for Baker Mckenzie..." "I grew up in Tennessee..." It seemed like everyone we met had ties to the US or Canada. But now they're doing business in China, not in North America... Boom, Baby, Boom!  Regards, Bill Bonner,  for The Daily Reckoning ------------------------------------------------------------------- Finally today, Joel Bowman has a quick two renminbi from Beijing, China... Now we've seen it with our own eyes.  Before we had only read about the Chinese middle class converting their growing wealth into gold for safekeeping. Today, we visited the local gold market ourselves. The multi-story complex was brimming with customers, so much so that the adventurous reader could basically crowd-surf from the gold ornament and jewelry section over to the bullion trading section without even touching the ground.  We were interested in purchasing some physical gold...for editorial purposes only, of course. Alas, we were unsurprised to discover that the Chinese traders do not accept foreign bankcards. And why would they? A paper I.O.U. is bad enough...but a plastic representative of a paper promise is even worse.  Fortunately, we've teamed up with a group of individuals who have direct access to the shiniest loot in the Middle Kingdom. Addison recently interviewed Nick Bruyer, CEO of First Fedral Coins, and asked a few questions about what Nick called "the Chinese gold secret you haven't heard of."  The interview, which covers everything from the basics of gold coin investing through to grading, taxes and the actual buying and selling of the metal, can be viewed for free here. If you haven't yet seen the video, we encourage you to take a gander now. It's entirely free and you get a coin investing primer - also free - for stopping by. We'll be back later in the week with more from behind the Wall.  Until then... Cheers, Joel Bowman Managing Editor for The Daily Reckoning