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!

How To Spot A Toxic Wife

The UK Telegraph had an interesting article on a new breed of Toxic Wives. Their sole aim in life is to find a rich husband, had a kid and then get a divorce and milk him for half of his wealth.

According to Susie Ambrose, who runs a ''gold-digger-vetting'' agency there are

increasing amounts of women who are desperately materialistic and who have learnt the art of ''faking love''. They don't want to marry for emotional support, intimacy or companionship; they are driven by monetary rewards.

Unfortunately, with the global financial meltdown, TWs are having a rough time with their rich husbands suddenly going broke overnight. The result is to try and take 100% of whatever is left.

Well, in order to save yourself the heartbreak and financial ruin, here's some tips on How to spot a Toxic Wife:

1 Women who are secure in themselves and have a more developed emotional intelligence and personal depth do not feel the need to show off. Check whether or not she is festooned with 'designer' accessories. Listen carefully to what she says. How often does she name-drop?

2 On first acquaintance, she will want to find out if you're rich or not. If you find yourself discussing your assets within the first 10 minutes you know her agenda. She is not going to waste time on you if you don't have serious money.

3 She will flirt without first finding out if you're married or involved with someone else. She has no scruples about stealing another woman's man.

4 Even though she may have an impressive job, her main asset is sex. She will come on in a highly provocative manner, be wearing lots of make-up and revealing clothes. Potential toxic wives are extremely clever. Do not equate intelligence with emotional values and worth.

5 Often she will use the FSFM tactic (feel sorry for me). This will manifest itself on the second or third date. She wants to assess how generous you can be and will tell you how ''naïve" she is and how "misled'' by some nasty people she owes money to. As a chivalrous male, you get out your chequebook.

6 You must find out how motivated she is. Ask her what her future goals, dreams and aspirations are.

7 Toxic gold-diggers tend to target older men. And your level of physical attractiveness makes no difference. Do you genuinely wildly arouse her or is this all an act?

8 She will choose the most expensive item on the menu or the most expensive drink.

9 Men, who have been recently widowed or divorced are great prey. You are at your most vulnerable.

10 Before you marry, go on holiday together or spend at least some time co-habiting. Remember, if you make a mistake you will pay for it for the rest of your life.

Here's a funny email from Bill Bonner author of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, a wildly entertaining book on history of manias, investing and finance that I'm currently reading right now.

“Don’t you know there’s a worldwide financial meltdown?” we asked Elizabeth last night. “This is no time to be buying new furniture.”

“Well, I needed a new desk. But I’m not buying anything else.”

“Aren’t you picking up a new horse trailer tomorrow?”

“Yes, but I ordered that before the crisis hit. When I thought you had some money...before you started worrying about going broke.”

The phone rang.

“Who was that?” we asked a few minutes later.

“That was the curtain man. I need to get new drapes for the living room.”

“What’s wrong with the old drapes?”

“They’re just not right.”

“They’ve been okay for the last 13 years...what’s suddenly not right about them?”

“They’ve never been right...and I’ve finally realized what it is...so I’m going to change them.”

“Don’t you realize that there’s a global financial crisis? This is no time to be spending money.”

“Yes, but the crisis is likely to go on for 10 years...and I don’t want to live with drapes that aren’t right for a whole decade...and then buy them after we’re too old to enjoy them.”

“You’re not one of those ‘toxic wives,’ are you? You know, those women who leave their husbands after they lose their money.”

“Don’t be silly. You didn’t have any money when I married you. And I’ll stick with you even if you go broke. We may not have any money. But at least we’ll have nice curtains to look at. That’s why I’m getting them now...while you’ve still got some money left.”