Forbes 

            9/29/2013 @ 11:14AM |464,090 views

 If Republicans Want To Shut Down Washington, They'll Have To Ask
 China's Permission First

 In their never-say-die efforts to defeat Obamacare, Tea Party
 Republicans brought the federal government a giant step closer
 to shutdown last night. What they seem not to have considered
 is how America's foreign creditors will react.

 Although China, Japan, and other major creditor nations have no
 dog in the Obamacare fight, they have a strong interest in
 preserving America's basic financial, economic, and social
 stability. From their point of view, the Tea Party contingent is
 not following the script and a corrective may prove necessary.

 If the creditor nations were to sell just a small proportion of
 their American assets, they could send Wall Street into a
 tailspin, with unpleasant implications for many Republicans.

 They are unlikely to push things that far but even if they were
 merely to slow the pace of their buying, bond yields would
 rocket and stocks could fall 15 percent in the space of a couple
 of weeks. A key thing here is that American asset valuations are
 at historic highs - the Standard & Poor's 500 is on a P/E of 19
 and long-term bonds yields are still near their lowest levels in
 decades.

 It is sometimes suggested that by triggering a sell-off,
 creditor nations would be cutting their own throats. Actually
 this is a characteristically myopic Western way of looking at
 things – a view that completely misunderstands how things have
 changed now that East Asians call the tune. The point is that
 the creditor nations are long-term holders who are largely
 indifferent to short-term fluctuations.

 As a general rule, the East Asian creditor nations hate drawing
 attention to themselves. But they are quite effective behind
 the scenes in making their views known. One of the most
 important ways they wield influence is through major Wall Street
 investment banks. These latter in turn spend large amounts on
 political contributions, typically backing both Republicans and
 Democrats. Their money gives them plenty of face time to advise
 American elected representatives on "good economics," a term
 that more and more these days amounts to economics that serves
 East Asia's interests. Meanwhile American investors generally
 are short-term thinkers who rarely show much intestinal
 fortitude in riding out downturns.

 It remains to be seen how markets will react tomorrow but the
 betting is that, in the absence of a climbdown by Republicans,
 we will see a significant correction. And if Tea Party stalwarts
 continue to stick by their guns in the weeks ahead, we could see
 damage particularly in techs and other high P/E stocks. For the
 record, major tech stocks that seem most richly valued on a
 forward P/E basis include CRM, LNKD, CCI, FB, and ADBE. Although
 future prospects may justify such valuations, the short-term
 action could be quite bumpy - certainly bumpy enough to frighten
 a lot of the Republican rank and file.


 *This article is available online at:
http://www.forbes.com/sites/eamonnfingleton/2013/09/29/
if-republicans-want-to-shut-down-washington-theyll-
have-to-ask-chinas-permission-first/*


BOB KLAHN bob.klahn@sev.org   http://home.toltbbs.com/bobklahn

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