Greetings!
This week began with seemingly disturbing news that the United States was imposing special duties on Chinese tires. This set-off investors contemplating having to add a possible trade dispute between the U.S. and China to the multitude of other economic issues affecting the Market.
This week's decision by President Obama had the market worried this rift could open the door to a host of trade complaints against Chinese products, creating tensions as the U.S. and other Western nations gather at G20 meetings later this month where they are expected to seek the support of the world's third-largest economy (i.e. China) in their efforts to bolster the economic recovery.
China's response to Obama's tariffs on tires was to launch anti-dumping investigations into imports of U.S. chicken products and vehicles. In addition, China filed a World Trade Organization (WTO) complaint over the tariff on tires. So there you have it, Quid pro Quo! Two economic partners who need each other arguing in public.
The obvious worry in the Market is two-fold; 1) that the US is arguing with its biggest lender, and 2) given the dicey nature of this economic recovery, such bickering and posturing could trigger a downward spiral in the Market. According to WTO rules, China's complaint regarding the tariffs now sets in motion a 60-day process in which the two sides must try to resolve the issues via negotiation. If that fails, China can then request that a WTO panel investigate and rule on the complaint.
So what is behind the tariffs? It appears that President Obama is trying to appease the US auto industry as they have long complained about cheap Chinese tire imports affecting their ability to maintain jobs. So on the one hand a segment of American consumers arguably benefit by buying tires at lower prices at a time when many are out of work, while on the other hand, some of those who are out of work want to blame cheap imports from China for their job loss.
This is but one slice of the issues surrounding what we have previously written about in this newsletter in discussing the symbiotic relationship called "Chi-America;" a phrase coined by Harvard economics professor Nial Ferguson. The United States is the world's largest economy. China is the world's third-largest economy. This issue of tires follows other previous and ongoing issues over other goods like steel, auto parts, poultry, movies and music. Obama's decision raised tariffs for three years, while the United Steelworkers brought their complaints to the fore back in April claiming more than 5,000 tire workers lost jobs due to cheap tires imported from China.
Other retailers like Wal-Mart who rely on cheap goods to grow their sales, don't like the tariffs. They feel this will set a bad precedent for other ailing industries in the U.S. to now ask that their jobs be protected from other imports affecting their industries. And so the vicious cycle goes on. Who is to say that cheap clothing from China like flip flops and shirts are not also affecting job losses?
In case you didn't know, this symbiotic U.S./China relationship garnered $409 billion in trade last year alone. This is coupled with U.S. debt to China of close to $776 billion. What this relationship has involved over the past decade is the U.S. borrowing money from China by selling Treasuries, and then filtering this money down to the consumer where the consumer then goes to Wal-Mart and Target and buys oodles of cheap goods made in China. Without China's heavy purchasing of U.S. Treasuries over the past decade who knows how much earlier we would have experienced an economic recession?
In other news, Mr. Joseph Stiglitz, Nobel Prize- winning economist, this week said the U.S. has failed to fix the underlying problems of its banking system post the collapse of Lehman Brothers. He is quoted as saying, "In the U.S. and many other countries, the too-big-to-fail banks have become even bigger...The problems are worse than they were in 2007 before the crisis." His views seem to echo those of Paul Volcker, once Chairman of the Federal Reserve, who advised President Obama and his administration to curtail the increasing size of banks.
It seems that we are not the only ones preaching that Big Banks have outlived their usefulness in
America. The fact of the matter is that the continued existence of Bank of America, Chase, Citi, and the like pose a continued threat to the U.S. economy as they control large sums of money but have no discernable interest in the health and vitality of the American economy. Their only concern is profits.
Point of fact that since the demise of Lehman which then resulted in the Treasury Department spending billions to shore up the financial system, Bank of America's assets have grown and the worst of them all, Citigroup, still remains intact. Around the world, much the same can be said where in the U.K. the stalwart Lloyds Banking Group is now 43 percent owned by the government and in world of France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis. I for one cannot understand what the fascination is with BIG BANKS. Maybe I am forgetting here the power money plays in politics, and what money can buy in terms of votes.
Again, point in fact, even Mr. Stiglitz warns that the U.S. government is wary of challenging the political clout of the financial industry and that he hopes the Group of 20 leaders in their meetings this month will persuade the U.S. into tougher action. Don't hold your breath on this one Mr. Stiglitz. While the U.S. may be a wounded economic animal, it still wags the tail of world politics and finance.
It is not enough that renowned economists are reinforcing our own convictions about big banks. Mr. Richard Bernstein, CEO of Richard Bernstein Capital Management LLC in New York and former chief investment strategist for Merrill Lynch, recently said that despite a year having passed, policymakers have yet to learn the lesson of the Lehman bankruptcy. He went to say that rather than break up institutions like Bank of America and Citigroup, the U.S. has given them billions of dollars in tax incentives and loan guarantees that enabled them to grow even bigger.
Mr. Bernstein bemoans the fact that the government is relying on the wisdom of bankers and government overseers to protect the public; arguably the same people who created the mess that led to Lehman's bankruptcy and yet were unable to foresee its consequences.
Finally, Mr. Bernstein warns, that
"Designating certain institutions as too big to fail, and not having a thorough regulatory process to match, practically invites another catastrophe."
Amen Messrs. Bernstein and Stiglitz! Here, you are preaching to the choir.
Have a pleasant weekend!
