Tuesday, February 27, 2007

The Markets Today -- A few Thoughts on China, and the USA, Mostly

It's interesting. The drop of the Shanghai Composite Index should be no shock, as it has been going up so fast for so long, looking ripe for some possible downward volatility. So we have some. What's important about this? Volatility happens. Speculators lose money, mostly. I really believe that what is most important is long-term in nature. I would hope that if China is fortunate enough and its leaders wise enough to avoid messing up their great possibilities, (and I think they may be,) this century can be the beginning of a golden age for China and indeed, for many of the emerging market nations. But human history show us that the leaders of great nations are too often not much wiser than the rest of us.

There have always been spectacular downs as well as ups -- much volatility -- as market economies mature and grow stronger.

Consider Hong Kong, over the last forty years. Mark Mobius' book, Mobius on Emerging Markets, has a discussion of the huge volatility, the sustained very high economic growth rate, and the great rewards in terms of investor wealth which came to patient, careful, (dare I add diversified) investors. Hong Kong can be the model for even a huge nation like China.

So what would I, an individual American, hope to see from China over the rest of my lifetime? Economic growth and freedom, and a sense of responsibility to handle well the marvelous possibilities still opening up before the eyes of the world. It would seem to me that there is no need at all for aggressive, substantial expansion of military forces. Or for forceful resolution of the Taiwan issue. I am far removed from a position of influence, but my friendly counsel would be to seek all possible ways to defuse tensions, strengthen trust, reward that trust well, and to build on the many things which are shared between them, cultural and otherwise. I would think it would be very wise even to unilaterally renounce the use of violence against Taiwan. Peace, shared prosperity, and a genuine sense of enduring brotherhood are the best ways to bring people together. If Germany can be peacefully reunited, so can China someday. So can Korea, for that matter.

Chinese investors would be very well rewarded for avoiding speculative behavior; that is not a good way to build anything. they should seek ways to invest patiently, in well-diversified ways, at minimal expense, and also invest globally. While I am not expert on the details of the matter, I understand that there are limitations on the ability of small China investors to invest in the securities of other countries. I would hope that the need for such limitations would recede.

On the US markets today. I find remarkable the behavior of the traders, who take something like today's China market news as an invitation to, well pardon me, but to start trying to take the other emerging markets, the US and other developed markets down as well. There is no rationality visible in this, at least to a much less tactically-oriented fellow like me. If you are irrational enough to think that you can out-trade all the other nuts, er, speculators out there, I guess you just do not need something like a reasonable basis for all that buying and selling.

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