Archive for November 2009

The path towards protectionism is open

November 26, 2009

The worldwide downturn is not yet over, however US companies show strenght. Also investing has slowly started. A good sample is Texas Instruments in Richardson, Texas.  Another sign about corporate moves can be seen in NCR returning back to the USA with manufacturing. It is good to remember even Jeff  Immelt’s talk about keeping manufacturing in the US – to have jobs and a strong middle class that can consume.  So far so good – if  the jobmarket improves during 2010 or at latest in 2011, the inland market will start to grow again.

Despite of these slight positive notes there are still plenty of issues that make the life complicated. The amount of US dollars printed during this year has increased at least 4 fold like stated in prior comments. The value against other currencies hasn’t dropped in relation to that but much less. This means that someone is hoarding dollars like never before. Let’s assume that Japan, China, and OPEC-countries are holding those dollars now. The pressure to correct exchange rates is increasing. It is expected that China will revaluate its currency RMB during 2010 around 6%. That is not what US expects but anyhow something. The thing is that some Chinese banks need to downgrade their assets at the same time or get the dollars exchanged to stable currencies like Euro prior to the devaluation. This is likely because China’s revaluation will go against USD only. Another alternative is that Chinese companies will increasingly fast acquire lots of assets in foreign locations and pay them with USD prior to the revaluation of RMB. My prediction is that China will continue, also after the revaluation of RMB, investing in US assets and buying natural resources, land and companies around the whole world. That means that sellers of those assets will at the end of the day have dollars in they hands which less value. So, the wise man doesn’t sell assets against USD  outside of the USA.

The US must however keep on printing dollars in order to ease exports, reduce imports, improve cost competitiveness, pay debts, and balance out the trade deficit.  I have already discussed earlier the risk and effects on inflation and interest rates, so I disrecard them here. All these things make the USA an attractive location for manufacturing again. The USA is a growing nation with all resources and knowhow. So, what will happen? If and when the USA can handle energy question through nuclear, wind, water, coal, gas, oil, solar and hydrogen, it can start to live more independently from the world than today. It is essential for the USA to get Canada, Mexico and some South-American countries to form a single currency and free trade zone – to enlarge the NAFTA. I furthermore expect that the USA will start to withdraw its military presence (requiring the EU to step up), repatriate corporations and attract investments in a big way.

When the external value of USD drops enough this game can begin. It causes a situation where the worldtrade and material flows will get changed. Many projections of the future must get revised drastically. My assumption is that the world will see three major blogs – Asia, Europe, and Americas. There are also some other areas which are dealing with these, but it is not yet clear whether they can remain neutral. Mainly they could be the oil producing countries. Asian and European countries cannot keep up exporting to the USA when the value of USD drops enough. The US will boom through repatriating companies and foreign companies investing in the US. That generates jobs and increases consumption – the GDP will grow nicely. With a growing population this will be a huge success story. In turn, jobs are lost in Asia and Europe. The competition gets so hard and tough that the EU must start to protect its industry and common market by setting up custom duties or some kind of sanctions, fees or charges. This will lead to a situation where China and the USA will retaliate and do the same.  My vision is the end of global free trade.  There are only a few things that can be done by corporations: to get established in every geographical area, and to focus only on one georaphical area or a specialty niche.  There are certainly other options as well, but not in a big way.

The banking and monetary system will face a hit that must get discussed separately. My advise: get special knowledge and knowhow that is valuable in all conditons.  Study, learn, get assets, and stay debt free.