I tremendously respect China and what they have accomplished. I really hate writing bad about China actually. But, the economic pundits are saying China is fabulous, and commodities are fabulous. But, if China doesn’t quite make it, ie has a revolution of massive chaos with a police state repression of great magnitude, then everybody in the commodity sector, and funds, and ETFs will get creamed.

As you know, I expect China will fail to become the next US and I don’t know if any other country could even do it anyway, because the US did its economic miracle with new technology and cheap energy. Maybe if we can find new cheap energy (there certainly is) then China could handle the transition. But for now I think China is doomed. Really. With out going into all my reasons in a book. I have good reasons. Since I’m covering many topics at once let me throw in a potentially massive cheap energy source on the table of discussion – methane hydrate. Investigate that. The earth is rich in carbon fuels. Still very rich. That stuff also burns clean.

In a way, I would think that with basic commodities up so much (copper, steel, etc) that a smart guy would rotate out of that sector. Unless you believe that the currency chaos will make those wealth havens?

But that is a big question because if world currencies collapse, then forget economic activity, and imagine what a drop in demand would do to commodity prices.

I think that the economic banking and currency crisis is being managed to lead to a one world currency. In maybe 3 years. Ready for a surprise?

See, everybody talking about commodities as the wealth savior, are fighting last year’s war maybe? Maybe they are not looking ahead to what a China in economic depression would do to markets. But that story is just about to emerge in spades in later 2010 I bet.

See, so everybody is in last year’s big thing, and will miss the new one, right in front of our eyes now – sovereign debt crisis, currency crisis, and a soon coming China crisis that will shake everybody’s investing plans to the core.

Why do you think I am so focused on liquidity and cash??? Because most markets are peaking again, and if China is about to let go, you want to be in cash (don’t forget they are two months into a credit tightening regime and what that led to the last two times – market crashes of a large scale) if commodities were to crash like they did in Summer 2008, an event which we predicted that April by the way, I think that prudent squirrels would survive fine, if in 50 50 gold cash. There would be some gold losses but then gold is at a high too.

And, if there are new banking crises, combined with currency crises, liquidity is the only major defense, unless you plan on buying a small farm. Seriously.

But most of us cannot just drop everything and move to the country. So we have to make plans that work for us. But in any case, I think that just understanding that today everything is now in flux, is in question, is essential. Which means we all will have to redo our expectations. Frankly, we need to lower our expectations.