FALLS CHURCH, Va.–Wall Street historian Charles Geisst had a few things to say about the state of the global economic system in a Jan. 15 story for the online edition of the Financial Times. Geisst addressed the growing economic power that’s spreading throughout the Middle East and Asia:

Citigroup is raising $14.5 billion and Merrill [Lynch] $6.6 billion, largely from private investors and governments in the Middle East and Asia, representing the biggest-ever single transfer of capital to US banks from abroad. It could raise pressure from US politicians concerned about foreign influence on the US banking system.

“Not since before World War I have companies gone looking for foreign capital as much as they are now,” said Charles Geisst, a Wall Street historian. “It poses a number of significant problems.”

Before Tuesday, UBS had raised $11.9 billion from the Government of Singapore Investment Corporation and Middle Eastern investors, Citi $7.5 billion from the Abu Dhabi Investment Authority, Morgan Stanley $5 billion from China Investment Corporation and Barclays $5 billion from China Development Bank and Singapore’s Temasek Holdings.

Geisst’s observation highlights the fact that the world continues to move toward a multipolar economic and political system with new economic powers (individual countries or blocks of countries) rising.

This transformation springs from the assumption of global economic growth leadership by the East, the investment thesis that guides Silk Road Investor. Most investors understand what’s happening in Asia as a shorter-term story, but I see a much greater, longer-lasting impact.

As I wrote back in November, things in the US will get worse before they get better, and the world will also be affected (see Silk, 28 November 2007, Infusions). However, Asia is in much better shape to deal with a recession now than during any previous global slowdown.

Asia as a whole isn’t burdened by overstretched home prices, huge household debt levels or large current account deficits. The banking system boasts a record-low loan-to-deposit ratio, and banks are ready to loan to the corporate sector at favorable terms.

The leading economic indicators (six-month percent change annualized) in Asia are much stronger than in the G-7, as the graph below depicts. Expect Asia to slow, but not as much as the extremely pessimistic sentiment currently indicates.

Source: Bloomberg

As I mentioned last week (see Silk, 9 January 2008, Difficult Times for Longs), this is the economic side of things. Asian markets in particular will suffer along with the rest of the world given the never ending surprises the wonderful world of structural finance so generously keeps offering us.

Short-term market gyrations notwithstanding, the trend remains positive for emerging economies and markets, with Asia leading the way. And because this is the main game in town, Asia has been trading at premium valuations. The current correction is quickly changing that and will eventually set us up with another great opportunity to buy into this great bull market.

Portfolio Moves

Sell AU Optronics (NYSE: AUO). The Alternative Holdings recommendation has produced a decent return of around 20 percent.

Use the proceeds to buy iShares MSCI Taiwan Index Fund (NYSE: EWT) as a play on a potential new beginning for the Taiwan economy. I’ll include the fund in the Alternative Holdings; buy it as a secondary Taiwan alternative. Chunghwa Telecom (NYSE: CHT) remains my core recommendation.

I recommend the exchange traded fund (ETF) because it’s the easiest way to get exposure to the rest of the Taiwanese domestic sector (e.g., banking), which I expect to perform well in the future.

The reason for my optimism is the results of the latest legislative election in Taiwan that gave the Kuomintang-led (KMT) Pan-Blue Coalition 85 seats in the 113-member parliament. The presidential elections are scheduled for 22 March 2008–a clear advantage for the KMT, which advocates better relations with Mainland China. This appears to be registering with the people; they’ve seen their country going backward economically while the rest of the region has been charging forward.

Taiwan isn’t in position to survive economically without China’s assistance. This reality is just now being recognized, and the political parties are expected to act accordingly. As in South Korea, economic development is taking precedent over extreme nationalistic policies.

An eventual understanding between Taiwan and the mainland–Beijing has indicated its willingness to talk to a responsible government–will help Taiwan’s economic development. Increased foreign direct investment (FDI) will flow to the island, just as China did with Hong Kong 20 years ago.

I haven’t recommended any changes in the still well-positioned Long-Term Holdings Portfolio. If you have big gains and you’d like to take some profits off the table, do so.

I continue to favor the stocks in the Silk portfolios and recommend buying them, especially during periods of weakness. Follow the Fresh Money Buys recommendations and invest some of your funds in the recommended hedges to produce even better results. In today’s market environment, patience is required.

The Short Trade

During the November market turmoil, I recommended shorting the Chinese insurers for extra protection. See Silk, 13 November 2007, Flash Alert: Hedging the Portfolios.

My US trading recommendation was to short China Life Insurance Co (NYSE: LFC). The profit was around 20 percent as of 15 January 2008. If you’ve shorted China Life Insurance Co, stay with the position and set your stop-loss at USD75. This is a hedging trade for a long-only portfolio, and this is why the stop-loss is so loose.

Fresh Money Buys

The investment process is constant. So if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the portfolios on the left-hand side of your screen for details.

• Russia (energy, telecommunications)
• Hong Kong (real estate, banking, infrastructure)
• South Korea (banking, electric power)
• Philippines (telecommunications, real estate)
• India (pharmaceuticals)
• China (consumer, coal, e-commerce, oil, water)
• Singapore (banking, telecommunications, industrial)
• Malaysia (ETF)
• Taiwan (telecommunications, ETF)
• Europe (industrials, communications equipment)
• Japan (banking, industrials)
• Macau (gaming)