JUST ONE SAFE HAVEN:

A Contrarian View On China And Interest Rates (Steve Hanke, 12.05.05, Forbes)

Everyone’s calling for a revaluation of about 20%, which I don’t think is going to happen because if you had a 20% revaluation in China, you’d have about a 16% Chinese deflation. This would be like the Great Depression. It would be a disaster. The main population group that would be hit would be the 800 million peasants in rural China. The deflation would just wipe them out. If the idea is to overthrow the Communist government, this will do it. If you revalue the yuan 20%, you’ll get a 16% deflationary impulse, and you’ll have a major revolt on your hands and probably a regime change. I don’t think this will happen because the Chinese know what the results would be. Instead, there will be continued pressure and a very high probability of protectionist legislation coming out of the U.S.

Next, let’s look at U.S. bond purchases. The normal rate of U.S. bond purchases by foreigners is about 2% of gross domestic product. Today, it is about 7% of GDP. About five percentage points of that is from private investment in U.S. bonds. This explains why long-term interest rates are so low. You’ve had a surge of private money coming into the U.S. bond markets. Therefore, anything that would spook foreign private investors is something we have to worry about. I personally think that right now there’s a durable dollar and a durable U.S. bond market, and that these flows explain the so-called low-interest rate puzzle. [...]

My conclusion: stay as safe as you possibly can in your portfolio. I wouldn’t be net long any stock market in the world, with perhaps the possible exception of Japan. [...] I think the dollar remains OK, and U.S. Treasuries, particularly TIPS (Treasury Inflation Protection Securities), are where I’d want to park most liquid assets for safety at this time.