How to Play Middle East Unrest

Once again, China has raised reserve
requirements for banks to slow down lending and, hopefully, slow
inflation, too.
China reports that inflation accelerated to 4.9% in January. Part of
the reason is that drought has damaged
China‘s grain production and
food prices are up.

Chinese banks lent $158 billion in January. That
was more than double the rate of lending in December. Apparently, lending
typically surges in the early months of the year in

It’s no secret that Chinese stocks are out of
favor right now. Fraudulent accounting and a general sense that the
numbers for Chinese companies aren’t reliable has contributed to the bear
market for shares.

It’s likely that the numbers from the Chinese
government aren’t reliable, either. If I had to guess, I’d say that
inflation is probably hotter than what’s being reported. But the one
thing that is clear is that
will need to do more to combat inflation.

Reserve requirements for banks now stands above
19%. That’s much more than in the
U.S., and we might conclude that
Chinese banks are healthier than
U.S. banks. But again, with the
legitimate concerns about official numbers, there’s no real way to gauge
the health of Chinese banks.

*****It seems inevitable to me that
China will have to
let the yuan rise in value against the U.S. dollar. It’s also easy to
understand why
China is resisting. The relatively cheap yuan keeps Chinese goods
competitive. Letting the yuan rise would slow foreign investment
which would, in turn, affect employment and wages.

*****I’m not sure anyone would have predicted that
Facebook could take down a government. But we are definitely seeing the
free flow if information on the Internet empower people to oppose
repressive governments in the

It’s absolutely fascinating, and there’s no way
you can’t cheer for the people of these countries as they put their lives
on the line for a better way of life. The truth is setting them

Now, I understand the concern that fundamentalist
religious groups with anti-American sentiment could step into a power
vacuum and take control, like what happened in
Iran after the Shah was ousted.
But I would point out that even
Iran‘s government is under
extreme pressure. I’m not sure the general populace in the

Middle East wants
religiously oriented governments.

On the contrary, the people seem to want
governments that represent their economic interests. They want to make
more money and they want access to information. Basically, they want
freedom. And ironically, that means technology and the Internet. It means
iPods and iPhones, not imams. Mustangs, not mullahs.

*****When people talk about black swans, which are
basically unforeseen catalysts that have profound economic impacts, we
often think of something negative. But the unrest in the

Middle East has the
potential for a very positive outcome.

Just imagine of these countries became true end
markets, fully participating in the global economy? American companies
would be huge beneficiaries.

Of course, such change won’t happen overnight. And
it won’t come easy. So far, I think it’s no coincidence that strongest
resistance has come in countries that don’t have a lot of oil. But
resistance is there in
Iran, and it would be a mistake
to think that it simply won’t come to

If you don

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