Forbes <http://www.forbes.com/>

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 ΓÇô 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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