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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