Once again the G20 leaders got together, this time in South Korea, and produced some generalized statements of good intention. But apart from the fast-growing Asian countries agreeing to allow some currency controls, the meeting failed to make any real commitment to end the imbalances in the world. China didn't promise to let its currency value rise. The U.S. did not agree to stop quantitative easing. So the currency war, in which nations try to devalue their currencies in order to gain a competitive advantage, is free to continue.
Meanwhile, the biggest economic news came from China itself where the latest inflation figures came in at around 4.4%. This was higher than consensus expectations, but in line with the whisper number. China responded by putting new restraints on lending to developers and selling some zinc to curb commodity prices.
Some commentators in the West like to interpret every slightly negative stat as a sign China's economy is about to collapse. They also forget that China's government, unlike that of the U.S., does not have to use every means possible to keep its economy going. Rather, China has the opposite problem. Every now and then it must apply the brakes a tad to keep things from overheating. This is how we see China's response to the inflation figures. China's economy is in no danger of receding and will remain strong for years.
Germany has the advantage of being economically strong while sharing a currency, the euro, with some of the world's most troubled economies. These economies – known as the European PIIGS - are Portugal, Italy, Ireland, Greece, and Spain. The PIIGS suffer from high sovereign debt burdens and weaker growth, and their economic problems are currently holding down the value of the euro.
In effect, Germany now gets the benefit of a dramatically undervalued currency that boosts its exports, without having to undermine the euro itself. It's winning the currency war without even trying.
As you know, we do not think the euro will hold together as a common currency over the long haul. European nations like France and Germany have a long history of war and have very different values and views on economics. For them, the euro is both a mixed marriage and a marriage of convenience that has little hope of reaching its golden anniversary.
Nonetheless, the euro's demise may not come for many years. For now, Germany certainly has good reason for staying in the union. China, with its vast currency reserves, may help the EU by supporting countries like Ireland, Greece, and Portugal, whose problems might otherwise tear things apart.
Consequently, we think Germany is the one Western nation whose exports will remain healthy. We therefore have taken a closer look at German stocks and found a few gems.
Bottom line for this week: don't panic about last week's action. Hold onto your gold, commodities, and stocks. And take a look at some of our European gems. The major trends remain in place, and we will take advantage of them.（From Dr. Stephen Leeb’s e-mail)