Paul Samuelson Warns: China will turn pessimistic on the U.S. dollar

These are sobering words from renowned economist Paul Samuelson.

Some day -- maybe even soon -- China will turn pessimistic on the U.S. dollar.

That means lethal troubles for the future U.S. economy.

When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared. China, Japan and Korea now hold dollars not because they think dollars will stay safe.

Why then?.....

The threat that China and others might divest the dollar is starting to cause jitters in the Treasury market. If the countries he mentions held on to their dollar assets --but cut back on their purchases of U.S. Treasuries-- interest rates would spike straight up over a short period of time. The given in this equation is that the amounts of Treasuries coming on the market in the years ahead is enormous.

Growing supply, and the likelihood that U. S. Treasury debt will get downgraded, means that the risk premium for owning longer dated treasuries is likely to rise and rise sharply. During that early 1990s this risk premium rose to more than five percent.

So lets say we find ourselves with a three percent inflation rate in the next 12-18 months. What is the rate we could see in the ten years treasury?

8-11 percent. Inflation, inflation expectation, dollar risk, supply, plus a fair rate of interest. It is not hard to envision five or more points of risk premium.

Does it make good sense in this environment to be fully invested in stocks?

My guess is that we are going to see a sharp uptick in inflation in the next 12-18 months. Given the enormous expansion in the money supply it is not hard to envision three percent inflation. Add in the necessary risk premium for owning longer dated securities, and it is not hard to envision sharply higher rates.

Right now most analysts continue to mention how inflation is not a problem. In 1980, when inflation was hitting 1.5 percent per month analysts were forecasting higher inflation and higher interest rates right into the peak.

Are we at the trough in inflation now? Is inflation bottoming?

Anybody old enough to remember when the ten year treasury yield was above 15 percent?

Three month treasury bill at 14 percent?

It is time to be risk adverse. Not the time to be betting the ranch in the stock market.

To read the entire Samuelson article go here.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Nikkei Up on Last Session of 2008, Logs Worst Year Ever

Japan's Nikkei 225 Average fell 42 percent in 2008, the worst loss in its 58-year history, though the benchmark gained 1.3 percent on its final half-day of trade.

Its annual losses were the worst ever, surpassing the 38.7 percent tumble marked in 1990.

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Nikkei Up on Last Session of 2008, Logs Worst Year Ever

Japan's Nikkei 225 Average fell 42 percent in 2008, the worst loss in its 58-year history, though the benchmark gained 1.3 percent on its final half-day of trade.

Canon and other exporters gained as the dollar rose slightly against the yen before falling back, while oil and gas field developer Inpex climbed as oil extended gains on concern that Israeli attacks on Gaza could disrupt Middle East crude oil supplies.

Toyota Motor bucked the trend by slipping 1 percent, badly hit like the rest of the auto sector -- one of the Tokyo market's worst performing sectors this year -- by the worsening global economy. The Nikkei gained 112.39 points on Tuesday and rose 4
percent for December, its first positive month since May. But its annual losses were the worst ever, surpassing the 38.7 percent tumble marked in 1990.

The broader Topix index gained 0.5 percent on Tuesday to 859.24 but was also down 42 percent for the year. Trade will resume on Jan 5.

Market players forecast a tough 2009 but said that hopes of further economic stimulus packages to stem the worsening of the global economy were providing some lift.

"Everyone's pinning their hopes on economic stimulus policies by the United States and possibly China, which is keeping the market supported for now," said Tomomi Yamashita, a fund manager at Shinkin Asset Management.

"But people aren't watching things like company results as closely as they should be. We can't say for sure that the market's bottomed out until we see these next spring."

In one possible sign of things to come, shares of Sharp edged down 0.3 percent to 636 yen after the Nikkei business daily said the consumer electronics maker will book an extraordinary loss of more than 50 billion yen ($555 million) for the year to March 31, largely due to an impairment loss on its stake in Pioneer.

But other market players said the worst was likely over.

"The main problems in the United States are being tackled one by one, meaning a lot of uncertainties are being removed," said Hideyuki Ishiguro, a supervisor in the investment strategy division at Okasan Securities.

"The market has also factored in the various company losses this quarter and the gloomy predictions for next quarter, so these alone are unlikely to send it to new lows."

The U.S. government said on Monday it was pumping $5 billion into auto and mortgage lender GMAC LLC and lending up to $1 billion to automaker General Motors, ensuring the solvency of a company considered crucial to GM's survival and providing some marginal support to Tokyo shares.

Resources Shares Climb, Exporters Up

Oil prices rose after surging more than $2 on Monday amid concern that Israeli attacks on Gaza, which continued on Tuesday as Israeli aircraft fired missiles at government buildings in the Gaza Strip, could disrupt Middle East crude oil supplies.

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Resource-linked shares such as Mitsubishi Corp and other trading houses climbed as a result.

Mitsubishi Corp, Japan's largest trading house, rose 2.8 percent to 1,238 yen and fellow trader Mitsui & Co gained 3 percent to 901 yen. Itochu Corp gained 1.8 percent to 443 yen. Oil and gas field developer Inpex surged 5.1 percent to 698,000 yen.

Blue-chip exporters rose as well, with Sony gaining 1.2 percent to 1,922 yen and Canon rising 2.8 percent to 2,770 yen.

But Toyota slipped 1 percent to 2,905 yen, though fellow automakers Honda Motor and Nissan Motor both rose.

Trade picked up on the Tokyo exchange's first section, with 854 million shares changing hands, compared with last week's morning average of 597 million. Advancing stocks outpaced declining ones by nearly 3 to 1.
Copyright 2008 Reuters. Click for restrictions.

URL: http://www.cnbc.com/id/28429197/