Indonesian President States that Democracy in Indonesia is Permanent

In a short speech yesterday, Indonesian President Yudhoyono declared that threats to democracy would no longer be an issue for Indonesia, as evidenced by the relatively smooth election that took place in July: "Through this election the people have demonstrated that our democracy has achieved a point of no return." While his reelection is encouraging given the type of economic policies he will likely implement, it's important to keep in mind the typical troubles experienced by large, complex, developing democracies (i.e. India...see Newsweek's comparison here). Indonesia has a long way to go in terms of development and investors can take advantage of that. Infrastructure, education, and health care seem to be the next major challenges for Indonesia, which many investors are already positioned for via ETFs like IDX.

Chart courtesy of StockCharts.com

Just for comparison with the BRIC countries, here is a chart displaying GDP growth rates from 2005 to 2008 along with the projected growth rates through 2014. These projections are from the IMF.

Disclosure: No position

Watch the VIX for Hints on Market Pullback

Chart courtesy of StockCharts.com

On Thursday of last week, the volatility index (VIX) spiked 6.6% in the face of a broad market selloff. This move, however, comes after about two weeks' worth of a decline in the VIX, which occurred even as stocks slid. What does this mean for the stocks in the short term?

During a pullback, it is helpful to know the likelihood of investors buying or selling into the weakness. Since the markets are currently declining down towards key points of support (S&P 890 and 875), investors could either reload at those points or sell off in order to prevent further losses. The VIX suggests which way investors are likely to go.

In this case, if the VIX continues to spike then it is more likely that the S&P will break through its support levels. The higher VIX reading would suggest that investors are more concerned about the market falling out from under them, making investors more prone to panic selling. It would discourage new long positions by making put protection more expensive. If the VIX declines back towards its levels from early last week, however, then investors would be more comfortable reloading on long positions because panic selling is less likely and put protection is cheaper. So for a hint at what the markets will do once they hit the next support levels, watch the VIX until they get there.

Will the Chinese Drop American Debt? The Behavioral Perspective...

There has been a lot made out of the prospect that China will drop US treasuries, and even that the rest of the world will follow suit and take on some form of a new global currency. Let's look at it from a behavioral perspective.

China essentially has two choices: 1.) It could continue buying US treasuries, while running the risk that the debt will continue to fall in value, or 2.) Begin selling off its treasuries and adopt a new preferred form of reserves. Which decision makes the most financial sense? That would be option 1. If the second option were implemented, it would result in a massive loss of reserves for the Chinese. Their remaining treasuries would plummet and they would put themselves in a race with other treasury-holders to dump them the quickest.

Yet if they choose option 1, don't they still have to deal with the dollar slowly losing its value? Of course, but it's not like the Chinese don't have any say in the matter. This is the beauty of viewing this issue from a behavioral perspective. If you were the Chinese and you had decided to hold onto your US debt, yet you didn't like the American devaluing their own debt by printing money and spending excessively, what would you do? You would threaten to dump it. This is why we're seeing the Chinese and other foreign nations question the legitimacy of American debt and suggest a switch to something else. They know that the US can't run without the Chinese buying treasuries, so by threatening to sell off American debt, the Chinese are hoping to put a little fear in the back of the mind of the US government. As a result, the US is more likely to try to maintain the value of the dollar, and by extension the American debt held by the Chinese. It would be highly unlikely that the Chinese would actually follow through on this threat, and if they did it would probably occur a long way down the road. But for now, at least from the behavioral perspective, it is reasonable to believe that this threat is empty.