Thursday, May 31, 2007

Globalisation and economic depression - some strategies

China has its problems. Monsters and Critics, quoting UPI, says that 3.5 million jobs could go if the yuan appreciates much more against the dollar. But if it doesn't, the trade imbalance continues and the economy and stockmarket carry on overheating. So China too is between a rock and a hard place.

In the long run and given free global trade, surely low-wage economies will take work from the higher-wage ones, until we reach equilibrium. It's the rate of change that makes it messy. For people like the Chinese, they have to work out how to take over our manufacturing capacity without bankrupting their biggest customers; for the West, how to lose all this work and wealth and remain democracies.

Richard Duncan thinks it can't be done without some original form of intervention - he suggests a steadily rising minimum wage, to give the worker in the developing economies enough money to take over the job of buying things, a job that we in the West thought was ours for life.

But the implication for us seems clear - we must become poorer. The winners among us will be those who are able to extract capital out of their possessions and preserve it. Marc Faber says that there are bubbles everywhere - property, shares, commodities - but I guess that in a deflationary world there must be something that will increase in value relative to most other things.

Cash seems obvious - the deflation of the Thirties was such that in the UK we had the Geddes Axe, actually cutting the wages of public servants to maintain a steady relationship between money and things (UPDATE: I got Geddes wrong - see HERE - sorry). So public servants who had accumulated savings would have done well - if they had saved. For many others, it was unemployment and poverty. To get an idea of the process and consequences, read "Twopence to cross the Mersey" by Helen Forrester, a real-life story about the economic descent of her middle-class family, which had (typically) lived on credit before the Crash.

Some fear that our governments will shudder at the thought of repeating that period and will try to buy their way out of the jam by printing money, in which case we could go from deflation to hyperinflation, and this is where the gold-bugs raise their voices.

On this analysis, I should think the strategy is clear. First, get out of/avoid debt. Then, live simply, and if possible convert unnecessary assets to cash - which you may partly invest in whatever you think will hold its value. And look for the steadiest job you can find?

Wednesday, May 30, 2007

China's stockmarket begins to cool

The Chinese market dropped 6.8% today; not much compared to its rise this year, but it's seen as the start of a necessary correction - Mark Mobius of Templeton regards a potential 30% loss as healthy! However, The Daily FX think it may also trigger a similar bearishness on the Dow, and if it does, this will impact on the carry trade. It has already caused a drop on gold futures today. Everyone seems a bit jumpy.

ABOUT THE BEARS

Here are some blogs, websites and e-newsletters that usually take a bear view:

Contrary Investor is from a group of institutional investment managers and analysts. Parts of this site are charged.

The Contrarian Investors' Journal appears well-informed and readying us for a crash.

The Daily Reckoning A free, bearish/contrarian newsletter published by Bill Bonner and Addison Wiggin. Hosts columns and comments from many bears. See also sister publication, The Daily Reckoning Australia, and the Daily Reckoning blog.

Richard Daughty aka The Mogambo Guru. Financial adviser and fervent monetarist. Chief Operating Officer (COO) of Smith Consultant Group. A regular contributor to The Daily Reckoning. Style very breezy/gonzo/slapstick, but the substance is serious and he quotes many sources in his tirades.

Marc Faber Swiss-born, Hong Kong-based investment manager. His firm manages $300 million. Parts of his site are charged. Look at his Resources section for guides to further reading.

Financial Sense is a site run by investment adviser Jim Puplava, featuring editorials by many others.

GoldenBar is by Ed Bugos, a stockbroker and investment adviser who retired after 12 years in the industry. His is one of many "gold-bug" sites, and offers comment on the markets and economics.

iTulip is a successful contrarian site with many links and a history of warning investors about market bubbles.

Michael Panzner Author of "Financial Armageddon" - see Book Reviews page. A five-star bear who warns of dangers to the financial system. Very active in promoting his message. Has 25 years' experience in investment, and has worked for a number of major banks.

Safe Haven is a site for the cautious investor. If you click on "about SafeHaven" you will see useful recommendations for further reading.

Puru Saxena Owns Hong Kong-based investment advice firm. 10 years in the industry. Publishes financial newsletter "Money Matters" (annual fee).

Peter Schiff Author of "Crash Proof" with John Downes - see Book Reviews page. President of brokerage firm Euro Pacific Capital.

Mark Skousen - libertarian, economist and (currently) bear.

David Tice David manages a couple of mutual funds and heads a team that publishes Prudent Bear, a respected website. This calls itself "the one-stop shop for the bear case".

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Tuesday, May 29, 2007

INTRODUCTION

A growing number of experts say that US trade and budget deficits, together with an unprecedented increase in the US money supply, have destabilised the world financial system.

This site looks for ideas to protect your wealth. It's not personal financial advice (a highly regulated activity), but I feel it's important to spread the word and discuss the issues. If you agree, please let others know about "Bearwatch".

The Book Reviews page is a good starting point (sidebar). Each title links to a review and summary.

The main page shows recent news and articles. You can also now automatically get updates by email (sidebar). To search for specific words or phrases, you may prefer the "Search this blog" tool - it's more comprehensive than the labels list.

Follow the Bears (sidebar) provides links to selected sites so you can track up-to-date comment from these bears.

Back to main page

Further reading for the serious investor

For those who wish to develop into active investors, may I direct you to the resources section of Marc Faber's website? This part is free and recommends newspapers, books and weblinks.

Gold to resume its rise?

Adrian Ash and Richard Daughty are bullish on gold again. Adrian expects the downturn in the US housing market to turn investors bearish; Richard relates the recent price-dawdling of gold to Spain's decision to sell a lot of it on the market to restock their foreign currency reserves.

Monday, May 28, 2007

Interview: "The Dollar Crisis" by Richard Duncan

While I am finishing Richard Duncan's book, please see here for an interview in which the author explains his analysis and proposed solutions. This man is no Chicken Little - he's worked for the International Monetary Fund and the World Bank. The problems he describes are very real and very important.

As I understand it, America is like a gourmet and the Far East is his favourite cafe. With the party of friends he brings, he is by far its most important customer - but he pays for the meals in IOUs. He's been such good business that the cafe has borrowed from the bank to build an extension and hire extra staff.

But some start to worry that America won't be able to settle the now-enormous bill. What to do? If he pays up, he runs out of money and stops visiting the restaurant. America will go on a diet of bread and water and the cafe will go bust. On the other hand, if the restaurant accepts that his IOUs are worthless, it's bust anyway.

One solution is to look for new customers before the crisis hits, so the cafe can keep going. And another is to outlaw IOUs - if you haven't got the cash, you don't get the meal.

So Mr Duncan proposes:

(a) a global minimum wage, so poorer people around the world can have the money to buy the goods and services the Far East is geared up to provide.

(b) a global bank, to oversee financial balances between countries and prevent these credit problems recurring.

Meanwhile, America must face a much lower standard of living for a long time, until he's out of the hole he dug for himself. And maybe he'll be allowed a discount on his debt (i.e. inflation). The cafe is going to suffer a loss; the question is whether the business can find a way to survive it.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

America's inflation causes China's inflation

A thoughtful article by Thomas Brewton yesterday here explains that US inflation is also causing inflation in China. While America sheds jobs and lives on credit, the Chinese economy is becoming overheated. When the pop comes, the result may well be bankruptcies and unemployment in both countries, as well as in others. Richard Duncan's book "The Dollar Crisis" explains the mechanisms in detail.

If the yuan is allowed to appreciate against the dollar gradually, Chinese business will start to suffer, but starting now may mean less pain overall. The USA will also undergo painful - and politically unpopular - adjustments. Can the crisis be managed without a crash?

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Interview: "The Dollar Crisis" by Richard Duncan

While I am finishing Richard Duncan's book, please see here for an interview in which the author explains his analysis and proposed solutions. This man is no Chicken Little - he's worked for the International Monetary Fund and the World Bank. The problems he describes are very real and very important.

As I understand it, America is like a gourmet and the Far East is his favourite cafe. With the party of friends he brings, he is by far its most important customer - but he pays for the meals in IOUs. He's been such good business that the cafe has borrowed from the bank to build an extension and hire extra staff.

But some start to worry that America won't be able to settle the now-enormous bill. What to do? If he pays up, he runs out of money and stops visiting the restaurant. America will go on a diet of bread and water and the cafe will go bust. On the other hand, if the restaurant accepts that his IOUs are worthless, it's bust anyway.

One solution is to look for new customers before the crisis hits, so the cafe can keep going. And another is to outlaw IOUs - if you haven't got the cash, you don't get the meal.

So Mr Duncan proposes:

(a) a global minimum wage, so poorer people around the world can have the money to buy the goods and services the Far East is geared up to provide.

(b) a global bank, to oversee financial balances between countries and prevent these credit problems recurring.

Meanwhile, America must face a much lower standard of living for a long time, until he's out of the hole he dug for himself. And maybe he'll be allowed a discount on his debt (i.e. inflation). The cafe is going to suffer a loss; the question is whether the business can find a way to survive it.

America's inflation causes China's inflation

A thoughtful article by Thomas Brewton yesterday here explains that US inflation is also causing inflation in China. While America sheds jobs and lives on credit, the Chinese economy is becoming overheated. When the pop comes, the result may well be bankruptcies and unemployment in both countries, as well as in others. Richard Duncan's book "The Dollar Crisis" explains the mechanisms in detail.

If the yuan is allowed to appreciate against the dollar gradually, Chinese business will start to suffer, but starting now may mean less pain overall. The USA will also undergo painful - and politically unpopular - adjustments. Can the crisis be managed without a crash?

Saturday, May 26, 2007

US Immigration Bill may also hit talented immigrants, extended families

New immigration rules may cause problems for highly skilled immigrants as this article in today's Washington Post explains. (Spotted via Free Internet Press - thanks.)

The proposed Bill seems to draw a line under the past, but is much tougher on future immigration. This raises the issue of fairness: for example, the amnesty would cover some 3 million resident "illegals" from India (see here) but make entry more difficult for "legitimate" Green Card holders' relations.

The Christian Science Monitor gives good coverage to the debate - see their article here and also the linked articles below it.

And if you wish to see the draft text of the Bill itself - all 326 pages of it - click here.

I guess that the difficulties of a bill like this arise from a conflict of objectives. If the US education system provided all the skilled workers America needs, the US could be simpler and firmer on immigration.

Instead, senior figures like Alan Greenspan voice support for easier immigration as a quick economic fix, ignoring the implications for the future. Why, that's almost like printing money now and leaving tomorrow's inflation for others to handle.

Friday, May 25, 2007

US immigration and the poor (continued)

Altough immigration can keep down the living standards of poorer workers, it's not possible to undo what has happened so far, as this source reports:

President Bush defended the bill as a comprehensive approach that will fix what most Americans believe is a broken immigration system through which millions of illegal immigrants have entered the United States.

"If anybody advocates trying to dig out 12 million people who have been in our society for a while, you know, it's sending a signal to the American people that's just not real," Mr Bush said.

US poor getting poorer

Following my earlier comments on Alan Greenspan's enthusiasm for immigration, yesterday's Daily Reckoning gives Martin Hutchinson's view:

"The immigration bill brought forward and apparently likely to pass demonstrates an unattractive new political trend in the United States: the end of the classless society for which the U.S. has been famous [...] the rich really are getting richer in the US...the poor really are getting poorer [...]

The economic effect of large amounts of unskilled immigrant labour is very clear: it drives wage rates down to rock bottom levels [...] for the lower classes, it is hell...Instead of the well-paid factory jobs their fathers had, making physical products in which they could take pride, they are now reduced to competing with infinite numbers of illegal immigrants for personal service, retail and construction jobs that have not been mechanised or out-sourced.

Theoretically, they could get more education and turn themselves into brain surgeons or computer-aided designers; in practice, these possibilities merely make them mourn that they hadn't paid more attention in math class. Thus the social gulf grows ever wider."

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

US poor getting poorer

Following my earlier comments on Alan Greenspan's enthusiasm for immigration, yesterday's Daily Reckoning gives Martin Hutchinson's view:

"The immigration bill brought forward and apparently likely to pass demonstrates an unattractive new political trend in the United States: the end of the classless society for which the U.S. has been famous [...] the rich really are getting richer in the US...the poor really are getting poorer [...]

The economic effect of large amounts of unskilled immigrant labour is very clear: it drives wage rates down to rock bottom levels [...] for the lower classes, it is hell...Instead of the well-paid factory jobs their fathers had, making physical products in which they could take pride, they are now reduced to competing with infinite numbers of illegal immigrants for personal service, retail and construction jobs that have not been mechanised or out-sourced.

Theoretically, they could get more education and turn themselves into brain surgeons or computer-aided designers; in practice, these possibilities merely make them mourn that they hadn't paid more attention in math class. Thus the social gulf grows ever wider."

Thursday, May 24, 2007

Small progress in US-China talks

The Strategic Economic Dialogue talks have concluded, to be resumed in another 6 months. Judging from Business Week's report, not much was gained by the US; but then, China is negotiating from a position of considerable strength. She's only doing what we would do in her place. Interesting that there were extra talks afterwards.

But America's indebtedness is also a challenge for China and the rest of the world, in a different way. Richard Duncan's book makes it clear that making too much money in international trade is perhaps as big a problem as losing it. More about this soon.

Wednesday, May 23, 2007

What a bear!

I am reading Richard Duncan's book "The Dollar Crisis" and plan to review it in detail here soon.
Meanwhile, searching for information on him, I stumbled across a different, but similarly-named author, Richard C. Duncan, who propounds what he calls "Olduvai Theory". This is a real spine-tingler. It looks at the history of world energy consumption per capita and concludes that we passed the peak a generation ago. He says industrial society is a unique and unrepeatable period, has a life-span of some 100 years, and will decline fast, starting in 2008. I hope he's wrong, but it gives us a terrific motive to look after the world much more carefully.

But instead of concentrating on the fear, which is how journalists sell their papers, let's look at the themes this throws up: increasing world population and everyone's aspiration for a higher standard of living. So there are very powerful driving forces pushing up the demand for food, water, land, metals, and energy sources. This is why the Daily Reckoning says commodities are an asset class that will dominate investment for the next 15 years.

More on Intellectual Property Rights in China

Have a look at this business guide from the US Department of Commerce, for companies wishing to protect their IPR in China. Each country runs by its own rules, together with such international undertakings as it is willing to give; and China's approach to this subject is by no means unique; but it gives one pause for thought. Here's a couple of tasters:

On average, 20 percent of all consumer products in the Chinese market are counterfeit. If a product sells, it is likely to be illegally duplicated...

There are several factors that undermine enforcement measures, including China’s reliance on administrative instead of criminal measures to combat IPR infringements...

Patents: China follows a first to file system for patents, which means patents are granted to those that file first even if the filers are not the original inventors...

Trademarks: China has a ‘first-to register’ system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third party...

Copyright: Unlike the patent and trademark protection, copyrighted works do not require registration for protection...

As I said in an earlier post, there may be more to argue about on the first two headings. Yes, there is some system of investigation and redress, but it doesn't necessarily have the rigour and powerful enforcement that Americans would expect in the USA.

Wu Yi lays it on the line

Chinese Vice Premier Wu Yi said in her opening statement yesterday, "We should not easily blame the other side for our own domestic problems. [...] Confrontation does no good at all to problem-solving."

Tough, but true, and tough. The press weren't in on the whole two-day session, but this kind of sets the tone, don't you think?

China and Intellectual Property Rights

One of the issues on the agenda at the Strategic Economic Dialogue between the US and China is action against copyright theft - see the CNN article from last week for a discussion of the problem.

But China is not only acquiring the custom and capital (even the factories) of the West: she is also very keen to catch up on know-how. The arguments at the moment may be about pirated music and videos, but I wonder whether industrial patents and designs may become a bone of contention in the future. I can't think it is safe for the West to watch its physical production processes migrate abroad, consoling itself with the thought of licensing the use of its inventions.

More on Intellectual Property Rights in China

Have a look at this business guide from the US Department of Commerce, for companies wishing to protect their IPR in China. Each country runs by its own rules, together with such international undertakings as it is willing to give; and China's approach to this subject is by no means unique; but it gives one pause for thought. Here's a couple of tasters:

On average, 20 percent of all consumer products in the Chinese market are counterfeit. If a product sells, it is likely to be illegally duplicated...

There are several factors that undermine enforcement measures, including China’s reliance on administrative instead of criminal measures to combat IPR infringements...

Patents: China follows a first to file system for patents, which means patents are granted to those that file first even if the filers are not the original inventors...

Trademarks: China has a ‘first-to register’ system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third party...

Copyright: Unlike the patent and trademark protection, copyrighted works do not require registration for protection...

As I said in an earlier post, there may be more to argue about on the first two headings. Yes, there is some system of investigation and redress, but it doesn't necessarily have the rigour and powerful enforcement that Americans would expect in the USA.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.