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Mark's Market Blog

10-1-10: Trade war.

By Mark Lawrence

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The markets were more or less flat this week. I expect them to resume their climb soon, and continue up for most or all of October.

S&P 500 April 14 2010 to October 1 2010

Trade wars continue to heat up. A year ago the US put a tariff on Chinese tires, claiming they were dumping them. China retaliated this week with a 100% tariff on US chicken, claiming we sell below cost. Japan is asking China for compensation for their damaged coast guard boats. China is asking Japan for compensation for, um, scaring their captain when he hit the coast guard boats?

Last week I mentioned that China cut off rare earth shipments to Japan. Evidence is piling up that this is exactly what happened. Japan is enormously vulnerable to this - most of their products (cars, industrial CAD machines, robots, computer) depend on rare earths. The US uses half of the rare earths that Japan uses, and most of ours go into military applications. None the less, the key take-away here is that China is flexing their muscles. I believe they have a very mistaken view of their place in the world. I believe we're moving steadily, perhaps even inexorably towards trade war with China. I'm beginning to think it might be China that fires the first major shot. If this happens, it will be very hard on the US, but it will cripple China to the point of revolution. I also believe we will fight back in our usual fashion: expect the CIA to be very active behind the scenes stirring up trouble for China in Tibet, Nepal, Viet Nam, anywhere we can. We'll deny it of course. The only sign we peons will have is that shortly after the trade war gets hot, lots of other things will coincidentally get hot for China.

If the trade deficit continues on current trends, we will lose 500,000 more jobs this year to China. At a time when US unemployment is increasing, this cannot continue.

Here in the US, the house voted 348-79 to declare trade war on China. The senate has not had such a vote yet, but this is meant to scare the Chinese. I expect rather than being scared, they're more likely to be offended by us questioning the new Masters of the Universe. Donald Trump says, "Borrow $100 thousand and the bank owns you. Borrow $100 million and you own the bank." The Chinese don't seem to have any understanding of this. If they take their $1T in treasury bonds and announce "We're selling them," all that will happen to us is Bernanke will print up 10 billion $100 bills, crate them up, and ship them off to China, saying "No problem, here's your money." Meanwhile, as I seem to say every single week, selling our debt back to us will also sell our jobs back to us. Seems ok to me. China is currently running a trade deficit with the entire world except the US. US consumers are 5% of the world population, but we account for 50% of the world's consumption. The other 95% of the world wants to sell stuff to us: shoes, handbags, shirts, cars, computers.

Personally, I export about 25% of my production. I ride a Harley and drive a GMC pickup, so that trade deficit thing: it ain't me. Interestingly, I sell almost nothing into Germany; I sell about 15 windshield in the Netherlands for every windshield I sell in Germany, even though Germany is about five times the size. I've never sold anything into China. I'm considering buying a new motorcycle soon, and I've decided it won't be a BMW: the Germans don't buy nothin' from me, why should I buy anything from them?

The dollar continues to drop in value. The first chart below is popular this week, seemingly showing the dollar falling off a cliff. However, we put this in perspective in the second chart below, the same chart but for 5 years instead of 5 months. Anyway, a lower dollar boosts US exports by making them cheaper, and slows US imports by making them more expensive. The rest of the world is threatened by this: everyone wants to export their way out of this recession, and the US is the preferred buyer of exports. So nearly every other country wants their currency to drop along with the dollar - the race to the bottom that I talked about a few weeks ago has started. This is interesting as all the central bankers know very well that you import jobs and debt together, so other countries are trying to boost their jobs at our expense by selling lots of their currency and buying lots of US treasury bonds. This race to the bottom will not end well.

The value of the dollar is dropping off a cliff these past five months. . .

. . . or is it? 5 year chart of the dollar.

Last week I mentioned that Spain declared their financial crisis was over. This week Moody's reduced the ratings on their bonds, expressing concern about their ability to cut government spending in a time when their unemployment was over 20%. So just at a time when Spain wants to reduce their government spending and deficit, their interest payments on their bonds are going to go up. Meanwhile, an anonymous chart is circulating on Wall Street using government figures from Germany, Italy, UK, Spain comparing change in GDP to change in unemployment. The result is that Spain has had their unemployment triple, but reported GDP hardly changed at all. The conclusion is that Spain is cooking their books, things there are far worse than the Government is reporting. However, Spain and Ireland recently sold enough bonds to keep their governments running until next spring, so the entire problem is back under the carpet for a few more months.

24% of homes sold in Q2 were foreclosures. If we keep on at this rate, the foreclosures should be cleared in a bit more than 2 years. Presuming there are no more foreclosures. Or layoffs. Or trade wars.

Dell has announced they will expand their operations in China with an investment of over $100 billion. They will be closing their last large U.S. manufacturing facility; approximately 900 jobs will be lost. China's wages are going up, they only allow foreigners to own 49% of any business, and tariffs are only going up. I'm just stunned at this: what on earth is Dell thinking?

The United States has lost approximately 42,400 factories since 2001. Most of those factories were fairly large, about 75 percent of those factories employed over 500 people when they were still in operation. The total job loss for these factories is 5.5 million. Our manufacturing employment is now about the same as 1949; meanwhile our population has doubled.

MIT and Carnegie-Mellon just finished a study where they found that sometimes groups exhibit more intelligence at problem solving than any of the individuals in the group. The group's ability to solve problems was related to the social sensitivity of members of the group; groups with several women out-performed groups with fewer women. Neither the average intelligence nor the maximum intelligence of members of the group proved a good predictor of performance. Conversation being more evenly distributed among all the members was a good predictor of performance. The group's performance was lowered if a few members of the group were more intelligent and dominated discussions. So, we've all known for centuries that women get together over coffee and solve neighborhood and community problems; now it turns out this is the way they perform best. "Search all the parks in all your cities, you'll find no statues of committees." Perhaps we need some statues of the Coffee Klatch. Lest we take this conclusion too far, I point out that no group was ever going to write the 9th symphony, paint the ceiling of the Sistine Chapel, develop General Relativity, or break 10 seconds in the 100 meter dash. There is still room in the world for outstanding individual performances. However, this study may have strong implications for solving management, marketing, and product production problems.

Last week I mentioned that I got a computer for my new office manager, Vanessa. This is what it looks like. 23" flat monitor. The computer is the little black box attached to the back of the monitor labeled "Lenova." It's just a little bigger than a paper-back book, and comes with a bracket to piggy-back on a monitor. All you see from the front is monitor, keyboard, mouse, speakers. The speakers were $30. Total price, $405. Lenova was IBM's partner when they moved production to China - you're not allowed to own a company in China, you can only own 49% with a Chinese partner owning 51%. IBM sold their portion back to the Chinese a few years ago.

Lenova computer piggy backed on AOC 23" monitor, Logitech speakers, Front view

Lenova computer piggy backed on AOC 23" monitor, Logitech speakers, Rear view

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