Chinese imports blocking California's ports

The Christian Science Monitor notes that Chinese exports to the US have grown so fast they can't get them through California's ports. The CSM tries to take a positive, passive-protectionist angle on this story.

Okay, so the goose gets stuffed more slowly; but it'll still be cooked. Meanwhile, what does this imply for investment in port facilities?

Buffett to buy Zurich insurance group?

Warren Buffett is holding $46 bn in cash and was recently reported to be speculating in a foreign currency. He has also been saying he's like to buy a big company, perhaps in insurance. Zurich Financial Services rose 3.2 percent and is valued at $45 bn - see Bloomberg.

That currency hedge wouldn't happen to be Swiss francs, would it?

China can afford a dollar drop

Further to our last, Chuck Butler in The Daily Reckoning points out that China's trade balance with America doubled last month, and the Renminbi has already risen 8% against the dollar since de-pegging 2 years ago.

The exchange rate could alter far more before China lost its pricing edge - just Google up the phrase "China price". Besides, Western industry is getting to the point where it couldn't take up the slack. We have a shortage of skilled labour, and even our factories are being shipped abroad.

China's US trade surplus was slightly over $16 bn in April - oddly enough, just about the same as the increase in Federal Reserve credit.

Deficit up or dollar down?

China View quotes the Bush administration's plan to clear the budget deficit by 2012, but Reuters on 1st May quoted the Levy Economic Institute as saying this is unlikely, "barring a massive -- and unlikely -- further depreciation of the dollar".

Maybe that's the key, though. The Institute's April 2007 Strategic Analysis observes that a drop in the dollar leads to a nearly-equal increase in exports:

"Since the price elasticity of demand for U.S. exports is, by our reckoning, around 0.9, we expect quite a large positive response of export volumes to dollar depreciation."
However, the Congressional Budget Office's assumptions also imply a continuing increase in private borrowing, whereas the Institute expects the American consumer to cut back spending instead. If US household debt stabilises, the Institute's model deduces lower US economic output and a long period of higher unemployment, thus shrinking tax revenues. In that case, instead of being cancelled by 2012, the budget deficit increases.

A possible alternative government policy is depreciation of the dollar. Here is what the Institute says about that:

"... it would be quite unsafe to rely on this as an adjustment mechanism. First, we would have to be looking at a depreciation in the region of perhaps 30 percent, compared with the dollar’s most recent peak in 2002, and it might become impossible to ignore the inflationary consequences of such a great fall in value.

"Second, all of the econometrics indicate that there are long lags between changes in the exchange rate and consequential changes in real exports and imports, which will make it difficult to synchronize the rise in net export demand with the fall in domestic demand.

"Third, currency depreciation can no longer be regarded as a straightforward policy instrument, particularly if major surplus countries like China and Japan remain determined not to let their currencies appreciate."
Unlike the Institute, Warren Buffett, David Tice and Peter Schiff all seem to expect a major dollar drop. With inflationary consequences and, as in the second paragraph quoted above, economic dislocation.

But the third paragraph gives us more to think about. Is the Far East more concerned to maintain its trading advantage with the USA, or to preserve its capital while it builds up demand closer to home? There is already speculation about alternatives to the dollar as the world's reserve currency; I understand that foreign governments are building up their gold hoards; and I wonder whether the Federal Reserve is making contingency plans to issue loads more dollars to buy Treasury bonds if they are dumped by international holders?

Marc Faber's investments

According to the International Herald Tribune's 2 May article here, "[Marc] Faber owns mining stocks, which he declined to name, as well as gold, rare metals and agricultural land".

Faber's firm manages $300 million. Maybe we should learn from this bear.

Dow to fall 50%?

Read The Mogambo Guru's (Richard Daughty - pictured left) latest rave. His insane-cackling style manages to make the news seem funny. I'll put it baldly: Federal Reserve credit rose $16 bn last month, and David Tice at Prudent Bear is predicting a Dow slide before the end of the year, ultimately heading for a total drop of over 50%.

In an interview here, David says he'd thought the bear market started in 2001 or 2002. Once again, the analysis is that it's a bear market masked by inflation.

Book Review: "Crash Proof" by Peter Schiff

Peter Schiff, the principal author, is a broker-dealer and president of Euro Pacific Capital. John Downes is editor of the investment newsletter "Beating the Dow".

"Crash Proof" is something of a job application, since if you accept Mr Schiff's recommendations you will be looking for the kind of services he advertises. In my opinion, he does well at the interview: the book is good enough to re-read. It is clear, concise and authoritative.

In the last three chapters, he explains how to protect your wealth - but you don't have to be very wealthy to use his ideas. I'll give the main tips at the end of this article.

He starts with where we are now, and how we got here. The US has a huge capital account surplus, which sounds good until you know that it's another way of saying Americans owe a fortune to foreigners. The government has encouraged money and credit in the economy to increase, so we think we're well-off; but the country has shifted from producing goods and services to consuming them, and paying for it all by borrowing. One day, it's got to be paid back - with interest.

There's no panic right now, because the government, Wall Street and the news media are failing us. They downplay the trade and budget deficits; fudge figures on inflation, productivity and GDP; and quote the consumer's confidence back at him, instead of telling him the truth: you can't spend your way out of debt.

Mr Schiff is a monetarist. For him, an increase in cash and credit is inflation; price rises are merely the effects. These price changes give misleading signals to producers, so they make too much of the wrong stuff and go broke. So inflation causes cycles of boom-and-bust. The US dollar was once backed by gold, but now there is no such restraint on the Federal Reserve, which Schiff terms "an engine of perpetual inflation". Money is simply created at will - the dollar is a "fiat currency".

The greenback hasn't yet had its bluff called; one reason is that it is still used as the world's international trading currency. But it could be replaced, for example by the Euro. In that event, trillions of dollars would come home and the real extent of inflation would be revealed. Import prices would rise, and although the weaker dollar would make exports more competitive, US industry has shrunk and couldn't take full advantage of increased foreign demand, so domestic costs would rise as well. Belts would tighten and non-essential services would be hit. You could get hyperinflation and an economic slump at the same time.

"In the perspective of previous bear markets, notably those of the 1930s and the 1970s, the prospects look even worse. Economic conditions now are as bad as or worse than what existed then." (p. 114)
The implication for US investors? Schiff estimates (p. 95) the Dow ought to drop 30% from its end-2006 valuation (David Tice at Prudent Bear recently predicted a 50% fall - see next posting above), and a weaker dollar will magnify the loss.

Where does he suggest we invest? Here's some pointers:

Negatives

1. Avoid debt, unless you plan to use the money to make a profit in some way.
2. Get out of the dollar, and out of US stocks.
3. Be wary of Treasury Inflation Protected Securities (TIPS) - the government defines inflation, but it's also the borrower. Schiff says it's like "trusting the fox to guard the henhouse".
4. Think twice about investing in bonds: "[it is] my belief that all governments that issue fiat currency will inflate".
5. Avoid mutual funds, because they add a layer of costs.

Positives

10 - 30% of portfolio: gold, and maybe also silver.

Of this, maybe 20 - 50% should be in bullion, some in your direct possession, some held elsewhere. E.g. Krugerrands and pre-1968 US silver coin; Perth Mint Certificates; GoldMoney.com (banking in gold).

Other investments in gold could include gold Exchange Traded Funds (potential risk: false auditing); gold futures (risk: the firm may buy on margin; also, counterparty risk); gold mining stocks (risk: potential future speculative bubble).

Rest of portfolio: non-US stocks - purchased through a broker (e.g. Mr Schiff!)

This is where the broker would make specific recommendations to the client. In general terms, the author recommends a portfolio of non-US shares, maybe 10 -20 in all, in an assortment of companies, sectors, markets and currencies. He likes conservative, high-dividend stocks (a key principle of the Dogs of the Dow - see John Downes) in developed markets - e.g. Canada, Australia, New Zealand. In the shorter term, he thinks the UK and Europe should do better than the US; in the long run, Asia.

As to favoured sectors: power, commercial real estate, commodities and natural resources (much of this seems to chime with what we have learned about Marc Faber - see second posting above).

This book is not only an investor's survival guide, but a layman's economic primer. It is well worth reading.

Crash Proof, by Peter D. Schiff with John Downes; pub. John Wiley & Sons, Inc; Hoboken, New Jersey, USA 2007

If you wish to purchase this book, the author gives this link.