• The Critical Importance of International Diversification

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    I’ve spent
    the last few days at a Chinese offshore strategies symposium here
    in Shanghai as a guest of the conference organizer. It’s been
    a fabulous event, full of camaraderie and relationship building,
    all set in one of the Pudong district’s finest hotels.

    But beneath
    the overall good vibe lies a very somber goal. There are no illusions
    here about what’s going on in the world. No one is trying to
    spin a good news story about bankrupt, insolvent western nations.
    And, surprisingly, prominent Chinese economists were even critical
    of China’s own long-term economic prospects.

    The opening
    speaker yesterday morning railed against China’s quantitative
    easing measures. As a percentage of GDP, Chinese money printers
    make their American and European counterparts look like pithy amateurs
    – trillions have been conjured out of thin air, most of it
    ending up in the housing sector.

    Apparently
    the Chinese didn’t learn much from the US property bust; they’ve
    made precisely the same mistakes, and it’s starting to have
    serious effects on the broader economy.

    Meanwhile,
    speaker after speaker acknowledged the massive insolvency issues
    that await the United States… and further argued that Greece
    is just the beginning of Europe’s problems.

    Here’s
    the thing about governments going bust – it’s been happening
    for centuries. Default is nearly as old as the concept of the sovereign
    bond itself, and history is generous with examples.

    Spain has defaulted
    15 times since the 16th century. Greece has defaulted 5 times since
    the 19th century. Portugal has defaulted 7 times since the 16th
    century.

    What’s
    happening right now is nothing new. Neither is government response.

    You see, when
    governments get deeper and deeper into debt, their options start
    to run out. They become desperate, and history shows a common pattern:

    First, they
    impose capital controls. They compel individuals and businesses
    to repatriate funds from abroad, or prevent them from moving new
    funds overseas. This is happening in several countries right now.

    For example,
    Argentina’s fascist president Cristina Fernandez just ordered
    oil, gas, and mining exporters to repatriate all export revenue
    back to Argentina. This was her very first presidential decree after
    winning re-election just days ago.

    The second
    thing they’ll do is direct capital into government bonds. Pension
    funds, central banks, commercial banks, private corporations, and
    even individual investors will be forced into the ‘safety and
    security’ of government debt. That means YOU.

    This is also
    happening all over the world right now – Hungary, Ireland,
    Argentina, etc.

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