In his newsletter, Daily Wealth, Steve Sjuggerud makes the following argument: with the U.S. interest having been lowered to zero, which causes Hong Kong’s interest rate to drop to zero as well, and in a situation where stocks are incredibly cheap, he predicts that Hong Kong stocks will go through the roof.

Does that mean we should all go out and buy Hong Kong stocks?

My take on this:  Not so fast!

Yes, Steve Sjuggerud is correct when he says that Hong Kong is the freest market in the world.  He is also correct in his assessment of the HK dollar being linked to the US dollar.  He may also be correct in his claim that the HK market is poised to take off.

But any correction in the HK is also going to be directly tied to the health of the Chinese mainland economy.  Keep in mind that the Japanese have had very low rates (at times below zero percent) for the last 20 years in an effort to jumpstart their economy and it has been a dismal failure.

Booms caused by low interest rates create mal investments and a misalignment of capital.  Genuine booms occur when you have real production.

If the HK takes off, it will be because Mother China will go on an internal spending binge (mostly on needed infrastructure such as roads and energy).  However, the banking system in China is in many ways even more screwed up and corrupt than what we have in the West, and is carrying large amounts of debt that will somehow need to be discharged.

Any recovery in HK will be very sporadic and fraught with risk.

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