G-7 to the Rescue? Don't Bet on It

The news that the G-7 is meeting is not great news. The G-7 is Canada, France, Germany, Italy, Japan, United Kingdom, and United States of America. With the exception of Canada, Japan, and possibly Germany, none of the other countries' consumers can pull us out of this morass. For example, the average British consumer is more in debt than the American consumer, and even the German consumer is barely keeping his head above water (or did you forget all those formerly East Germans needing jobs?).

We need normally isolationist China and Russia to step in, and it's insulting to them that the G-7 is not already the G-9. WWII is long over, but the financial and political paradigms are all based on a post-WWII world. It's time to grow up and get the players with the most cash reserves and natural resources into the game. This crisis won't be over till China and Russia get officially invited to the club. Personally, I would invite Singapore and make it the G-10. With those three new players, the G-7 can exchange political capital for hard cash. Then, we can show them the advantages of being part of the club. Perhaps then, Russia might feel less inclined to continue to occupy Georgian soil and will avoid establishing a consortium of natural gas producers, which would include Iran.

Bridgewater Report from 2003

Words of doom: "At this point [2003], the U.S. makes up only 30% of the world economy but sucks up 80% of the world's savings."

Here is the link to the whole report (PDF file):

http://www.rapp.org/wp-content/112203-bridgewater.pdf

(copyright belongs to Bridgewater)

HTML version here:

Bridgewater 2003 Report

(copyright belongs to Bridgewater)

Nassim Nicholas Taleb

From Conde Nast's Portfolio.com comes a fantastic interview with Nassim Nicholas Taleb :

http://www.portfolio.com/views/columns/the-world-according-to/2008/08/14/Interview-With-Nassim-Nicholas-Taleb

Here is one excerpt:

The structure of uncertainty in the world is vastly greater than we think. So let's stop playing the narrative fallacy. Take economics, for example. How many economists figured out that when people go to the store to buy products from China, they're raising the price of oil at the pump? How many people thought of that? They raise the price at the pump just by going there.

Interesting fellow, this Mr. Taleb. His book, The Black Swan, received rave reviews, and I liked it but wouldn't necessarily recommend it over Wheelan's Naked Economics, Malkiel's A Random Walk Down Wall Street, or Greider's Secrets of the Temple.

Random Thoughts

With GE reporting decent earnings and no corresponding effect on the overall market, I have only three thoughts in my head:

1. The beatings will continue until morale improves.

2. The market can stay irrational longer than you can stay solvent.

3. Omnia munda mundis. (All things are pure to the pure in heart.)

I'm not sure why the last one popped in my head, but perhaps it's my subconscious asking for divine intervention. After today's buying, my retirement accounts are now fully invested. From December 7, 2007 until today, my retirement accounts have decreased 22.6%. The S&P 500 has fallen 42.8% during the same time period. My retirement accounts need to increase 29% to get back to December 2007 levels (a decline of 1% in your portfolio requires more than 1% to get it back to the pre-existing level--it's counter-intuitive, but true). I would say today is the bottom, but I've been wrong before.

Debt Clock

The national debt has become so large, the debt clock can't keep up:

http://www.mlive.com/flintjournal/voices/index.ssf/2008/10/and_the_debt_clock_says_time_t.html

You have to love the title: What time is it? "Time to kiss your future goodbye."

I Was Wrong

My September 18, 2008 call of capitulation was wrong. See call after the jump:

http://willworkforjustice.blogspot.com/2008/09/capitulation-is-hereagain-good-times-to.html

But today, on October 9, 2008, I feel like I called the bottom only a few weeks too early--which isn't a capital crime. Here is my take on the current situation, which I posted on Barry Ritholz's website:

It all depends on GE and Google. That's it--the double G's will determine whether we make or lose money. No other real catalyst on the horizon--interest rates have been cut, and money pumped in, so both the money supply and interest rates have been manipulated. After HP's positive earnings, I am feeling sanguine, despite the blood on the streets.

I bought a commodity fund for my 401k today, T Rowe Price's New Era fund. Being relatively young, I am a buyer at these levels. I just wish I had more gunpowder. My Roth IRA is already fully invested.

What the Japanese Stock Market Tells Us

Remember the Japanese and their banking problems? Japan is much different from the U.S., but this chart does not bode well for the U.S. stock market. Japan currently has the world's third largest GDP (on a purchasing power parity basis). Check out this article:

http://news.bbc.co.uk/1/hi/special_report/1997/asian_economic_woes/34500.stm

The Japanese economy was growing at a headlong rate, and companies were expanding and investing as never before.

The trouble was that much of this investment was being financed by an extraordinary boom in property and share prices. Property and shares were used as security for huge bank loans - and when the property markets and stock markets suddenly crashed at the beginning of the nineties the whole spiral of borrowing, asset price inflation and investment came to a full stop.

And despite many government initiatives to kick start demand, Japan's economy has remained fairly stagnant for the last six years. The stock market has been flat too, making it difficult for companies...to make profits.

Sound familiar? Defensive investors know that consumers will always need health care and consumer staples (e.g., Unilever products); however, investors looking for more than a 5 to 7% annual return are evaluating other options. After all, the key to getting high returns is determining the next high growth economic area and/or product.

U.S. companies realized earlier than most Americans that their growth would rely on non-U.S. countries. As a result, most major companies have shifted their emphasis overseas while lobbying for fewer trade restrictions. Now that the American consumer appears to be down and out, the question is whether the world economy can finally gain traction without the U.S. The most obvious way this decoupling will occur is if the American dollar is devalued, creating incentives for other countries to buy American products. If a Chinese yuan buys quite a bit of American goods, the Chinese consumer will feel flush and may start spending more, allowing the world economy to have more than one major source of income. A similar scenario can also play out with the Indian and Brazilian consumers. In fact, non-U.S. citizens must spend more in order to maintain economic stability.

Once you realize how small the American population is--only 5% of the world population--it's fairly easy to see that the most growth will come from abroad. As a result, trade restrictions will harm U.S. companies and their ability to expand and get their products into the hands of other countries' consumers. American companies that fail to achieve high growth rates will lay off workers in order to become more efficient. Thus, improving the job market means helping American companies gain more consumers, which means giving them more access to non-U.S. consumers. To achieve easy access to the international market, we have to negotiate with other countries and have fewer restrictions to encourage a free flow of ideas, money, and traffic. As much as we may hate to admit it, reducing trade restrictions and devaluing the American dollar may actually stabilize the world economy in the long run.

At the end of the day, what choice do we have, really? The American consumer is tapped out. Other countries' consumers must step up to the plate, and we need to encourage them to do so. In an era where the world economy requires more trust between countries, the latest failure of the Doha Development Round is an ominous portent. Thankfully, the failure of governments is not determinative.

The American corporations that succeed will be the ones who understand that the American consumer is but one small slice of a very large worldwide pie. In an era of cynicism, skepticism, and security fears, we must regain our confidence and look to maximize our international footprint through trade and superior products. The "Post-American world" can no longer be an amorphous, distant concept if we are to succeed--Americans must begin to see the world as one large marketplace in which they have the advantage because of their greater access to technology (Google, Yahoo, eBay, Intel, etc. all made in the U.S.A.); the world's common language (English); an above average health care system (better health means more productivity); and entrepreneurship (it can take less than a week to set up a small business in California--for fun, compare that time with India and its small business rules/red tape).

I never thought I would advocate a weaker domestic currency, but sad times create sad consequences. The time has come to work harder and re-gain our stature in the world. When the non-U.S. buyers come, America must welcome them with open arms and the American attitude formerly known as optimistic. America is down, but as long as we have immigrants arriving and hoping for a better future, you cannot count America out. For better or worse, we are still the world's major repository for dreams. That's why I don't see a Japan-style economic morass happening in America--Japan is getting older and has never liked immigration. As long as we stay away from protectionism and encourage responsible immigration, we will do just fine.