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Big Changes In China Rippling Worldwide

Big Changes In China Rippling Worldwide
BY CRAIG R. SMITH

China is undergoing a fundamental economic shift in 2016; from an industrial economy to a more service-oriented economy. Nations can only build so many steel and automobile plants before they become counterproductive. For China's economy to remain healthy, it also needs domestic consumption. On the upside, these changes will slowly begin to transform China into a cleaner country as well.

China chart China will soon attract more science, technology, engineering and math (STEM) industries to employ its huge population. And while there is still infrastructure to build, we are observing dramatic changes in the second largest economy in the world. But there are some inherent problems in China that deserve our attention.

1. Capital flows - For years China has allowed huge amounts of capital outflows to purchase land, businesses, natural resources and strategic partnerships around the world; while also buying up U.S. debt which finances profligate spending in Washington D.C. Either a revaluation of their Yuan currency or opening their country to capital inflows will be required. Chinese leaders do not want to lose control of their industries (private or public) by allowing massive waves of foreign investment. Nevertheless, a calculated balance of flow will be important to China's future.

2. Job creation - I suspect China will create considerably more service-sector jobs without an immediate corresponding GDP increase during this transition. Some of this will occur by intentional government targeting, the rest by sheer market forces. It will however put China is a more balanced position ten years from now.

3. Slowing growth - The world is readjusting China's financial growth expectation, which is a painful process. China's 10+% growth rate over the last decade cannot continue forever. There need to be periods of resets to allow the market to catch its breath.

4. Energy reboot - Economic sectors, which once represented huge contributions to China's GDP, will change. A perfect example is the energy sector. While lower energy prices will have positive effects for consumers, the loss of jobs and bankruptcies in other oil-producing countries must also work themselves through the system.

Historically, the global economy has a unique ability to adjust to change in order to survive. Some nations will prosper, some will stagnate and some will shrink. One need only to look to the soaring growth of Japan in the 1980's compared to the country's stagnation over the last three decades. As the world adjusts and capital moves, winners and losers are created.

But where can investors find a safe refuge during changing times like these? The best solution is, and always has been, gold. And this time will be no different. In the last five years we have witnessed China, central banks and governments worldwide buying huge amounts of physical gold and silver as national wealth insurance.

The start of 2016 has been packed with market chaos, shutdowns, tripped circuit breakers and $1.5 trillion lost in the first week of trading. The recent stock market declines should come as no surprise to our readers. I've been very public about my market volatility concerns which, as I told Fox Business on December 30, have prompted me to exit the stock market entirely for the first time in my investing career.

During uncertain times investors traditionally seek one of the following; Growth, Capital Preservation or Speculation - in hopes of making big profits off of wild market swings.

In my world, the answer to where your money should be depends upon; age, temperament and ability to remain calm while the world remains jittery. If you are always wanting more and your happiness depends on it, then you must expect to take bigger risks. The potential rewards might be huge, but the losses could also be huge.

If your financial goal is to preserve the wealth you have accumulated until this readjustment is complete and to live out your life financially secure, you MUST own gold. Gold is the only true currency which can serve as a viable, alternative hedge when holding U.S. dollars.

Gold maintains purchasing power, or the new term you will be hearing is PPP (purchasing power parity). For example, how much of my income does it take to buy a Big Mac in the U.S. versus a citizen who lives in Hong Kong?

U.S. gold prices today are lower than they were three years ago due to artificial dollar strength compared to other currencies. But when the dollar resumes its 80-year downtrend, U.S. gold prices should rise, but this will merely offset the negative effects in PPP due to a lower-valued dollar.

Domestically the average American family's income has been flat or lower since 1999. With 70% of our GDP dependent upon consumption, we need to get more money in the hands of middle class wage earners if we expect economic growth to resume.

We can accomplish this by shrinking the size of the federal government and reducing regulations and taxes, which would unleash the market forces that big government has all but snuffed out. The larger the government, the smaller the people. Our founders never intended government to become the Leviathan it is today.

As technological advances continue, America will be doing more with less. If Americans wish to maintain our standard of living it will require new skills and thinking outside the box when planning for the future. We are America and we can do it! We still have the best workforce, the greatest technology and the strongest capital markets in the world. However, we are not the only game anymore.

China will have a rocky road for the next 2-4 years. However, China will house 30% of all the Fortune 500 companies over the next 25-30 years. China is a real player and should not be ignored. India is on the move also. Emerging markets will eventually recover from their slowdowns.

baloons I believe Russia and the Middle East are the biggest wild cards. With energy prices collapsing it can have two effects:

1.) Forced diversification in their economies to adjust for the loss of oil and gas revenues.

2.) A need to dramatically increase military spending to further intimidate the world through saber rattling and terrorism.

In the end, 2016 and beyond is no time for cry-babies who refuse to see the world as it is and then adjust accordingly. Since the 2008 crisis I have said all the excesses and misallocation of assets must be cleared out of the system in order to get back to sane, value-based markets. That process has begun and the sooner one acknowledges it, the better.

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