Investing In A Structurally Unbalanced World

1. US Net Exports Have to Pick Up — Since 1992 the US has been registering ever larger current account and net export deficits. (Net exports are the major item in the current account.) At the same time other so-called developing countries, notably China in recent years, have registered massive current account and net export surpluses. This trend was only partially reversed by the cyclical fall off in US imports during the Great Recession in 2008. These massive current account and trade deficits have to be financed and this financing has resulted in equally massive dollar reserve holdings by China and other so-called developing countries. They also are also consistent with the view that American manufacturing jobs have suffered from this process.

Simple economic theory would suggest that capital intensive developed countries like the United States run current account surpluses with the relatively less capital intensive developing world. Developing labor intensive countries like China would run current account deficits. Admittedly this simple picture is complicated by the role the dollar plays as the world’s international currency. The United States needs to provide dollars to the world (something it has done with unbridled enthusiasm.)

Still on a structural basis one would expect that this trend of large US current account and net export deficits cannot go on forever. One might expect that the economic signals-including a cheaper dollar against the countries of East Asia– would favor US exports. My forecast would be that US companies that have an international scope and are able to access capital will fare relatively well in the coming years (assuming no major global recession). Moreover US has an expertise in technology. Approaching this from a macro top down perspective, I would conclude that larger companies with comfortable cash positions, global brand names and preferably technology niches would be well positioned as this necessary structural change in the global economic order unfolds.

2. Buy Gold, Sell Treasuries — The international monetary and domestic banking systems will continue to provide an inflationary global bias. In issue after issue of The Dismal Optimist I have argued that the global and domestic financial systems are inherently inflationary and dysfunctional and lack automatic invest in brics currency  mechanisms to correct imbalances. Thus China can hold down the value of the renmimbi by buying dollars thereby inflating Chinese high powered money supply, increasing Chinese holdings of US dollar assets and lowering US interest rates. Thus the Federal Reserve can get away with reckless printing of US high powered money, aka QEII, and finance the burgeoning US government debt.


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