**Peter Schiff will be speaking to Michael Campbell & the Audience at the World Outlook Conference.

China’s Inflation Problem Looms Large

The global economy has become so unbalanced that even government ministers who would normally have trouble explaining supply or demand clearly recognize that something has to give. To a very large extent the distortions are caused by China’s long-standing policy of pegging its currency, the yuan, to the U.S. dollar. But as China’s economy gains strength, and the American economy weakens, the cost and difficulty of maintaining the peg become ever greater, and eventually outweigh the benefits that the policy supposedly delivers to China. In the first few weeks of 2011 fresh evidence has arisen that shows just how difficult it has become for Beijing.

Twenty years ago, China’s leaders decided to ditch the disaster of economic communism in favor of privatized, export-focused, industry. The plan largely worked. Over that time, China has arguably moved more people out of poverty in the shortest amount of time in the history of the planet. But somewhere along the way, China’s leaders became addicted to a game plan that outlived its usefulness.

In order to maintain the peg, China must continually buy dollars on the open market. But the weaker the dollar gets, the more dollars China must buy. And with the U.S. Federal Reserve pulling out all the stops to create inflation and push down the dollar, Beijing’s task becomes nearly impossible. Last week, it was announced that China’s foreign exchange reserves, the amount of foreign currency held at its central bank (mostly in U.S. dollars), increased by a record $199 billion in 4th quarter 2010, to reach $2.85 trillion. These reserves currently account for a staggering 49% of China’s annual GDP (if the same proportional amount were held by the U.S., our measly $46 billion in reserves would have to increase 163 times to $7.5 trillion).

In order to buy these dollars, the Chinese central bank must print its own currency. In essence, China is adopting the Fed’s expansionary monetary policy. In the U.S. the inflationary impact of such a strategy is mitigated by our ability to export paper dollars in exchange for inexpensive Chinese imports. Although prices are rising here, they are not rising nearly as much as they would if we had to spend all this newly printed money on domestically produced goods. The big problem for China is that, unlike the U.S., the newly printed yuan are not exported, but remain in China bidding up consumer prices. As a result, inflation is becoming China’s dominant political issue.

It was recently announced that in November China’s consumer price index rose 5.1% from the same time a year earlier, with food prices rising more than 10%. As unrest builds, the Chinese government has unleashed a series of policies to address the symptoms.

For the remainder of this article, plus a more detailed analysis of global food inflation by Michael Pento and articles on other investment topics, please see the latest edition of Euro Pacific’s The Global Investor Newsletter.

I was speaking with a friend who asked why 48% — why not 100% cash?

The short answer is that we are seeing some signs of a pullback, but not necessarily anything more ominous. Additionally, the 3rd year of a Presidency has lots of tailwinds in it for the markets.

But the longer answer is a bit more nuanced. Have a look at the chart and table below, from Jim Stack of Investech Research. The Bull Market Duration chart shows that in terms of overall rallies, the present run is not too long in the tooth. This present run is not yet two years old, about half of the average length of rallies over the past century. I read this as suggesting longer term investors can stay long(ish), so long as they have risk discipline in place:

China’s Yuan, Rare Earths & Selection of Critical Mining Projects

Michael Campbell: Tyler Bullhorn who will be speaking at the World Outlook Conference now joins me. Before I ask you a couple of questions Tyler, I want to thank you for your great help with the Money Talks Trading Contest. People can just simply go to MoneyTalks.net and click on the trading contest banner centre column to compete for lucrative prizes inluding 5 – 1 oz Gold Coins from Border Gold, a $2500 rough cut diamond from Indicator Minerals, a $13,320 Salmon Fishing Trip by WestCoast Fishing Club, Silver Jewelry from Teck Corp & 50 1-oz Silver Coins from Endeavour Silver. There is still time to enter and win and I hope people are taking advantage this great way to learn and compete.

Tyler, what are one or two things people do that are big mistakes when they approach the markets?

Tyler Bollhorn: Well of course there’s so many mistakes and most of them revolve around some kind of emotion. But one thing that I think people should take to heart at this time of year in particular is to learn from your mistakes. As you come into a new year, it’s a good time to review the trades that you’ve made and analyze them. I always like to say that the market is cruel because it gives the test first, and the lesson second. Losses are essentially tuition that you paid for and you need to learn from the mistakes you’ve made.

So everyone should at this time of year just go through everything that they did in 2010, analyze it a little bit, and figure out if you’ve got some common problems. People tend to sell their winners too early and hang on to their losers too long. From the lessons that you’ve learned you can modify your trading plan so that you improve your overall performance for 2011.

Michael: And again that’s one of the reasons I like the trading contest, because you get to practice. I’ve learned a lot of things over the years and sometimes I’ve been too slow to learn that’s for sure. I’m always amazed at my ability to learn the same mistake a few times over, and he Trading Contest is a great way to do it. given the only money you have on the line is the $19 entry fee. Besides the instruction you’ll get about how to be successful and the valuable prizes. I look at Jim Dines who has been in the business for five decades who always has his Dinesism’s, which is another way of saying; this is a big mistake I made and this is what I learned from it.

Tyler: I think that the Trading Contest really helps people to learn because you’re doing it.  You’re not just reading it out of a book or talking about it with your friends, you’re actually in there doing it. But the main thing is that you’re not risking your capital when you’re playing a game. And why would you start trading with your real money if you can’t make money in a simulation like we have at the Money Talks Trading Contest, a game that I’m doing here where 100% of the entry fee goes to Special Olympics?

Michael: What are the best trades you’ve made?

Tyler: In the Trading Contest there’s a lot of very short term trading going on. For myself I’ve done about eight trades in the game so far this year in conservative stocks like Ford where I’m up 8% in ten days. In more rocket ship type stocks I’m up 26% on a company called Biodel, symbol BIOD, so far only on a two day hold. The game rewards you for percentage’s gained, but also for the rewards you get for the risks you take. We’ve had some people notch some 100 point scores on relatively short term trades, so  people still have the time to get the 15 trades that they need to do in order to get a full ranking and be eligible for that $5,000 gold prize.

Michael: One of the things that you do in the game is show people entry points and exit points through playing the game. So if someone’s a novice they’re not thrown to the wolves. There’s lots of information on the site thanks to Disnat. Your StockScores.com helps people as well, and that’s the whole point. To learn  your entry points, your exit points and risk control.

Tyler: Yes, we have a leader board posted so you can see the top 20 people in the game, AND you can click on their name and see the trades that they have made, actually see the charts of the trades they have done. Where they entered, where they exited, plus the reward for risk lines that we draw on those charts. So if you’re someone starting out in trading and you maybe don’t know a lot yet, it’s a great learning tool because you can follow some of these great traders across Canada that are really making some superb trades in and out of the market.

Michael: That’s great Tyler, we appreciate your help with it. It’s going to be a great new year and we look forward to seeing you at the World Outlook Conference, in the meantime people can go to www.stockscores.com to enter the Money Talks Trading Contest.