[MRM]

Herr Tab's is not just an Oracle, he is this board's Oracle. As such, he is entitled to dispense his wisdom as he sees fit in language he feels is appropriate to the situation, even if it is not entirely the English language that he is communicating in. Excuse the preposition. We all appreciate his wisdom when he shares it with us.

As to Stockman, he is a truth teller, but you always have to remember that he has a bit of a chip on his shoulder too. No one else is quite as accomplished of an economist, as capable or as perceptive as he. This doesn't mean he's wrong, it just means that when he belittles government officials, he has his own agenda - showing that he's smarter and more capable than them. It's probably fair to say that his generic analysis of the economy is objective, but when he critiques government performance, he will never admit that anyone did their job as well as he would have in the same situation.

Anyway, the two articles discuss different issues that may be facing the US (and world) at the same time, but are unrelated. First is the China bubble. We in the US have heard about the Chinese stock market falling, but that represents a tiny part of their economy and is really irrelevant to us because US and European investors have little exposure to the Chinese stock market. They have no accounting standards and the strong indication is that the generally accepted accounting principles for publicly traded Chinese companies would make a Greek bookkeeper blush. Therefore, almost no Western money is in the Chinese stock market. It could collapse without impact on the US.

The issue with China is that about 20-25% of the US economy depends on trade with China. This includes a significant amount of sales to China. The Multinationals based in the US and Europe now sell into four large markets that they depend on for revenue: North America (the US), which remains the largest single market; the EU, South America (especially Brazil) and APAC, meaning China. If China turns out to be a huge Ponzi scheme, US international companies, and all companies that support that market, will see a reduction in demand of at least 20-25%, similar to the Asian Contagion of the 1990s. This can be partly offset by increased efforts in the other three pillars of international commerce, but the loss of sales and profitability will be a significant drag on corporate earnings, which means a loss of revenue, tax base and jobs.

None of this future risk has been factored into the market yet. As long as the world's businesses can still sell into other markets to partially make up for the loss of China, we will see recessionary times rather than 2007-2009 style end of time when we can't see the bottom and we don't know how far we can fall. If there is a bottom. Current stock market losses are based simply on the fact that global demand is falling, and with it, earnings. As earnings fall, so does the value of companies. If China ceases to be a viable market, the current market weakness would be accelerated. As bad as it's likely to get, it will be bad times rather than the end of time. Inside China it will be the end of times. It will be a Chinese Great Depression that might result in great social unrest.

China has been growing as supposedly double digit gains, but as Stockman points out, GDP numbers include debt. Increasing national debt increases GDP, but at some point even the central bank runs out of money and the debt comes due. When the Chinese debt comes due you'll see huge unemployment in China, vast devaluation of the RMB, and massive internal deflation.

The article by Friedman is completely separate but complementary. The US's position in the world is based on the current world order. There are good reasons to think that the old world order is ending. Friedman asks what happens to us when our firmly held assumptions are no longer true.

I am not yet sure what this means for an investment strategy for North American and European investors and where is the safe harbor for the coming storm. I am still thinking on that and will report when I have a more complete evaluation. As of now, my thoughts are dollars under the mattress and European index funds. The dollar is very strong against the Euro and European markets are depressed. As they rebound the Euro will increase in value, giving an American investor a double whammy.