Will World Trade Come To A Halt?

Here's an interesting email I received today. It's from Chris Mayer, a newsletter editor. He thinks that the Buy American Mantra might cause global trade to stop as countries everywhere erect trade barriers. Not a pleasant thought.

I’ve come to calling what we’re going through the “The Great Suppression.” It reflects the efforts of nearly every government everywhere to stem the unfolding depression -- even if it means nationalizing the banking system and destroying the currency in the process.

(A short digression on the word “depression”: Time was people called every economic bust a depression. The word “recession” came along later as a euphemism for “depression.” Politicians didn’t want to scare people, you know. In fact, the Oxford English Dictionary says that the word “recession” in this sense first appeared in an edition of The Economist in 1929. I like the old term better. Forget the technical jargon of today’s stuffed shirts.)

The most insidious effort of the Great Suppression is the clampdown on trade, which I’ve noted as a possible risk in prior alerts. It seems a natural turn of events. Economy gets bad. People lose their jobs. Workers clamor for help. Government blocks foreign competitors. Trade wars ensue.

The stimulus plan includes a “Buy American” provision. This means that any money toward infrastructure spending must use American-made iron and steel, equipment, etc. Sound good?

Well, funny thing is the companies that would benefit the most oppose the idea. Here is a quote from a Caterpillar spokesman:

“There is no company that is going to benefit more from the stimulus package than Caterpillar, but I am telling you that by embracing Buy American, you are undermining our ability to export U.S.-produced products overseas. Any student of history will tell you that one of the most significant mistakes of the 1930s is when the U.S. embraced protectionism. It had a cascading effect that ground world trade almost to a halt, and turned a one-year recession into the Great Depression.”

He overstates his case when he says the Great Depression would’ve been a one-year recession otherwise. Who is to say what might’ve happened? But it is clear that trade did grind to a halt. It is clear on the historical record that countries raised tariffs everywhere. It is clear that this did not help, and it took decades to unwind the damage to world trade.

As you know, I’ve been spending some time studying the Great Depression and the markets of the time. It’s like reading a realistic horror story. I am chilled by the spooky similarities between then and now. In fact, America in 1933 did implement a “Buy American” provision.

Whatever your political leanings on this question, you better think clearly when you invest your money. This provision is a big potential negative for investors. We own several American companies that have significant export businesses.

These are things I will watch carefully. A freeze in global trade will definitely have an impact on how we invest, should such a freeze materialize.

One thing I learned in Economics class was that trade tariffs have a net loss effect on the consumer. Of course, politicians never learn anything about economics. They're just interested in power and being relected!

Time To Short US Treasuries?

Barrons thinks that the yields US Treasuries are too low and are due to bounce this year, causing a major correction in the bond prices.

Amongst the reasons cited are strong gold prices:

One sign of trouble for Treasuries is the resilient price of gold, which has risen $150 an ounce since late October, to $880 an ounce, despite weakness in most commodity prices. Investors rightly see gold as an appealing alternative to low-yielding Treasuries and virtually nonexistent yields on short-term debt as the government cranks up its printing presses. Gold was up $45 an ounce last year, while oil was down 50%. Another worrisome indicator: The dollar has weakened recently, losing 10% of its value against the euro in the past month.

Chief investment officer at PIMPCO advised to get out of treasuries, stating that they're very expensive and offer no margin of safety.



Check out this post to see a way to profit from a potential decline in Treasuries.

When Will China Be The World's Largest Economy

Very recently there was a news article that China officially passed Germany as the third largest economy in the world, behind the U.S. and Japan. Most people shrugged, it was inevitable.

But it shows that China’s role in the global economy is bigger than ever. Even amid a global depression, China’s potential is mind-bogglingly vast. What follows are some thoughts on China’s potential:

China Will Be No. 1 When?

If China’s economy continues to grow at its current rate, it will pass the U.S. as the world’s largest economy in 18 years. Of course, it won’t grow at its current rate for 18 years -- not continuously, anyway. It will grow somewhat slower in spots and sometimes faster. What growth rate comes out in the end is anybody’s guess, but the 18-year guess will probably be off.

Then again, the guess also assumes the U.S. stays where it is. And that is also unlikely. The U.S. economy shrank last year and looks to shrink again in 2009. Meanwhile, China is one of the few big economies still growing, though at a slower pace. The result is that China will actually make up ground faster in 2009. As Ting Lu, a Merrill Lynch economist based in Hong Kong, notes: “In 2007, the gap between the growth rates of China and other big countries was huge. Actually, in 2009, the gap between will be even bigger.”

As the Great Depression II continues to lay siege to the world’s economies, China remains a coiled spring of growth. Even though China is now the world’s second- or third-largest economy, it still is a relatively poor country. And its resources are barely tapped.

The vast potential of China is hard to grapple with. Already, China has built the world’s largest building (Beijing’s airport terminal) and its longest transoceanic bridge. It has the world’s fastest train and the biggest dam. As John Pomfret, former bureau chief for The Washington Post in Beijing, observes: “It is a nation of builders, of grand schemes, of gigantism.” He calls China’s engineers “some of the world’s biggest risk-takers. Geeks with guts.”

Don't underestimate China's potential!