Monday’s Trading – 11/1/2010

The last time the market rallied into an Election Day ended in tears. Remember November 4, 2008? In the week before the election, the SPX rallied 150 points. It topped out on the 4th, rolled over, and made new lows:

Of course, there is a big difference this time: the economy is expanding while it was contracting sharply two years ago.

After an extensive campaign of browbeating that I began back in January, I was eventually able to shut down the “Mutual Fund Monday” propaganda on CNBC’s “Fast Money” show. However, while the mutual-fund industry is not reporting “new money in” yet, the respectable jump in the futures Sunday night could be a sign that retail investors are finally coming back into stocks. (Some research firms have already reported inflows, but I doubt that they have better data than the ICI which is only reporting a large reduction in outflows so far.) Nevertheless, I wouldn’t be surprised to see the ICI data turn positive soon, and can’t really continue to keep my boot on CNBC’s neck.

So, if the masses are coming in, are they being sucked in by the Tea Party “Miracle” just like they were by “The Messiah” back in 2008? Or is the market just continuing to advance along with earnings and the economy? After all, even a feeble expansion can produce fat profits given our “modern” sweatshop production system. Speaking of which…

In this superb Australian video, you can see the Chinese workers (mostly women) who are sacrificing their health handling the toxic chemicals that shave a few cents off of the price of your iPad. And you can also see the dictatorial face of the Chinese communist regime. Whether or not the villagers in the video have a legitimate case, those officials were trying to discover who they should persecute when they asked the journalist who told him about the village. Can you imagine the officials in your town doing that? Not if you live in a civilized nation. The arms embargo that the European Union slapped on China after Tienanmen Square still strikes me as a good idea. There ain’t nothin’ warm and fuzzy about the regime in Beijing.

In his “Stop Trading” segment on CNBC Friday afternoon, Jim Cramer raved like a lunatic about the “genius” of Corporate America and all the fantastic profits it is producing. But really, now smart do you have to be to pack up a factory, load it onto a Kansas City Southern train, ship it down to Mexico, re-assemble it, and then staff it with workers making a tenth, or less, than your previous employees? Genius schmenius.

It’s Time to Punch China in the Face

On October 16th, I recommended the punch-in-the-face strategy:

“Personally, I would just punch China directly in the face rather than spray the whole world with QE2 monetary shrapnel as the Obama Administration’s ‘dirty bomb’ strategy is doing right now.”

But Jim Rodgers disagrees. At the 2:21 mark of the video below he says:

“Any time you bash somebody in the face, they’re gunna say, wait a minute, I’ve got to protect my face, I’ve got to protect myself. So, sitting here and hitting the Chinese over the head is not going to do much good. It’s just going to make things worse. I would stay out of the way if I were the US in this case.

“Stay out of the way?” Are you kidding me? Rodgers acts like it’s none of our business. What about our quarter-trillion dollar trade deficit with China, Mr. Rodgers? Is that our business?

If you keep watching the video, you will see that Rodgers is one of those globalists who warns of the dire consequences of protectionism – but only American protectionism. When the Chinese do it, it’s just fine, and none of our business.

Note to Rodgers: China’s currency peg is a protectionist blanket that automatically raises the prices for all US exports to China. Stop apologizing for it.

In July 1994, the Clinton Administration cited China as a currency manipulator. That was only six months after Beijing adopted the peg. We have been diplomatically expressing our displeasure for 16 years. That’s why we have to punch them in the face. Rodgers would have us kowtow for another 16 years, “bow-tie” style.

We also need to punish China for their rare-earth mineral embargo, which was extremely rude behavior here in our globalist utopia. So, I have come up with a clever punishment: a naval blockade of Iran.

Now that the Democrats are poised to lose control of Congress, President Obama will have to turn to the foreign-policy arena to do “presidential stuff”. George Friedman thinks that Iran presents the best way for Obama to score political points, and Iran is a top supplier of oil to China.

So, a naval blockade of Iran would pinch China’s energy supplies, and Obama could act as if it were an unintended consequence. If the tankers bound for Japan were somehow able to sneak through the blockade, then a message would be sent to China: You may want to reconsider your commitment to living by the mercantilist sword because we have swords of our own.

I Lecture Jeremy Grantham

Last week, fund manager Jeremy Grantham’s investor-letter titled “Night of the Living Fed” made a splash in the financial media. However, I have assigned a grade of “F” to his paper.

Grantham’s argument may be summarized as follows: “The Fed blows up destructive asset bubbles because they are stupid.”

But is it that simple? One of the Fed’s mandates is to strive for “maximum employment”. But was it the Fed that “fast tracked” NAFTA through Congress? Did the Fed award “most favored nation” status to China? Did the Fed import millions of immigrants? Did the Fed export 42,000 factories and millions of manufacturing jobs?

No, it did not. But the Fed has a mandate from Congress to deal with the fallout.

In 16 pages of extensive Fed criticism, Grantham never even mentioned The Conundrum. By this omission, he is asserting that mass-scale Chinese bond purchases had nothing to do with causing the housing bubble. And so, his neglect of this “800-pound gorilla in the room” consigns his work to the “gratuitous Fed bashing” category.

Grantham barely even mentions the trade and immigration policies that have forced 41 million Americans onto food stamps.

Note to Grantham: Your Fed-bashing is not helping.

Grantham also unbelievably blames the snowballing trade war with China on the Fed. From page 11:

“And all of this stems from the Fed and the failed idea that it can or should interfere with employment levels by interfering with asset prices.”

Preposterous! Maybe Grantham believes that we should just accept these “employment levels”? Just lay back and take it? Grantham also doesn’t even mention our gigantic trade deficit with China. Does he really think that our trade relationship with China is sustainable?

The Fed had nothing to do with the policies that have delivered us into this state of affairs. The Fed also does not have the power to reverse said policies. And the Fed’s tools are obviously not very effective in dealing with the fallout. Of course, when the nation follows simultaneous policies of de-industrialization and mass immigration, there is no solution.

The Fed is not the cause of our problems, and people like Grantham who make it the whipping boy, contribute to the decline of this nation by deflecting attention from the real causes.

I Lecture Paul Tudor Jones

Two weeks ago I unleashed a “China Trade War” meme swarm. And I’m happy to see those memes propagated through this letter by legendary investor Paul Tudor Jones.

For example, on October 16th, I wrote:

“China began this trade war when they devalued their currency and pegged it to the dollar in 1994. They have been winning the war handily ever since.”

A few days later, Mr. Jones wrote:

“On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. …the US has already been in a trade war for nearly two decades; and it is the only time in this nation’s history it surrendered without ever firing a shot.”

There are many more such instances of meme propagation, but I won’t belabor the point. And Mr. Jones did indeed strengthen the swarm by adding not only gravitas, but by adding value with additional facts. For example, his point about Brazil is very important. The Chinese act all hysterical when we ask them to relinquish the peg, but the Brazilians let the real appreciate by 34% against the dollar, and there was no calamity.

Now, there is very little to quibble with in Jone’s piece. His grade for the paper is an “A”. It would have been an “A+”, but he only touched very briefly, and lightly upon the role of multinational corporations.

In the quote above, Jones says that we: “surrendered without ever firing a shot.” But both the George H.W. Bush and Bill Clinton administrations cited China as a currency manipulator right at the beginning of this trade war. So, we were trying to fight, but there is no doubt that the multinationals brought pressure to bear and are, in fact, responsible for the peg being maintained all these years. After all, there are stupendous profits from mass-scale sweat-shop operations at stake.

The next assignment for Mr. Jones is to extend his argument by encompassing the “international labor arbitrage” being practice by multinational corporations.

And one last point about Mr. Jones’ final two sentences:

“Japan has an unemployment rate that is half that of the United States and it still runs a trade surplus. Nonetheless, Japan intervened to protect its export industry, and the United States, incomprehensibly, responded with not even a whimper, let alone a bang.”

We do indeed need to address all of our trade deficits, but if you recall, the Japanese were reacting to China purchasing a large number of JGB’s under the guise of diversifying her reserves. In reality, it was an attack to drive up the yen and take share from Japanese exporters.

We are not the only target of China’s mercantilist aggression.

And then there is the geopolitics of China trying to steal islands from Japan and her other neighbors in the Pacific Ocean. There was the fishing-boat dust-up with Japan. Then the rare-earth mineral embargo, which can be considered a military threat to us since so many of our high-tech weapons rely upon them. And when you consider that Japan has been a US ally for 65 years, and the Chinese communists have never been a political ally (except for a brief period during World War 2), it makes sense to cut the Japanese some slack.

If we need to reduce our trade deficit with Japan after dealing with the Chinese, then it would be appropriate to go about it in a diplomatic manner as we did with the Plaza Accord. The Chinese have said that they will resist a similar agreement, so it is they who are making this ugly.

Note: If you can get a copy of the 1987 PBS film: “TRADER: The Documentary”, you can see Jones predicting the 1987 crash. He and his partner used an analog between the 1920s bull market and the 1980s bull to make the prediction. You can also see him day-trading futures and currencies, shouting into the phone at floor-traders, putting on his lucky sneakers, using Elliot Wave Theory, etc. If you are a trader, you will love it.

Note: Jones brought up the subject of “weaponizing financial imbalances”. I have been meaning to post something about that and will try to get it out soon.