174. "The World is Curved" Highlights

"The World is Curved - Hidden Dangers to the Global Economy" by David Smick provides some interesting facts and thoughts. Let me list just a few from the first half of his book re globalization:

• Always remember, lack of confidence is the major cause of market downturns
• Keep an eye on the dollars pouring into Treasuries for this suggests the market's liquidity is drying up which is usually followed by nobody trusting anybody else, the halt of lending, and higher interest rates.
  
• The 2007-2008 subprime crisis was not because the size of the subprime was unknown, but an issue of not knowing where the toxic waste (securitization) was.
• Today's world is different with workers not obediently following official rules and chasing opportunities by constantly reinventing careers. Thus, seniority is of no concern and neither are pensions forcing today's workers to self-invest when they generally lack the skills or discipline to do so. All this leads to a weak security in a fast-paced global economy.
• Globalization has been a wealth generation machine
• Beware: China is an aging society and consumption will be dampened affecting the global economy. Because of their control of population limiting parents to one child, by 2045 as many as 1 in 3 Chinese will be retired. When labor declines faster than the population, the economy will suffer. Fewer exports will not only severely harm China's economy, but drive prices and interest up in the U.S.
• Invest in Europe because their trade with the U.S. is less than 10% and therefore would seem unaffected by U.S. declines in consumption? Nope. The degrees of financial integration with the U.S. is high as evidenced by the subprime crisis.
• Whereas in the past trade drove capital flows; today, capital flows drive trade. Because of the modernization of currency and trading systems, capital moves instantaneously around the world allowing, for example, wealthy countries and their sovereign funds to snap up any resource in an unbelievably short period of time. Case in point: China is buying up commodities like tin, zinc, gold, iron ore to the quantity of one third the world's annual supplies. They tried to totally corner the iron ore market driving steel prices through the roof. Russia, Dubai, and the Saudis are also following suit.
  
• China and Japan together hold significant number of dollars, while China continuously adds Euros and gold to their reserves. Could the dollar collapse because of this? We believe they realize they would be shooting themselves in the foot to dump all their dollars. Now there's something good. However, the stockpiling of Euros is driving that currency higher. We all know by now that a strong currency hurts exports. Europe is going to have to change something soon, such as drop interest rates and flood the market with more Euros. A secondary consideration re Europe is that a country like Germany with great manufacturing capabilities and products runs with the same Euro as countries like Italy which are quite inferior to Germany's strength. So, is a "world" currency like the Euro spanning many countries a solution at all?
• The best scenario seems to be a stable dollar; don't worry too much about slight dips or strengths. This stability in all currencies is desirable.
• How to prevent a U.S. meltdown? Politicians need to avoid protectionism and anything else that would discourage foreign investments in the U.S.; foreign headquartered companies employ much of our workforce AND even greater capital produced from the products produced. In other words, don't bite the hand that feeds you.
• Why do the Chinese have so much capital to hoard the commodities and invest in foreign real estate and businesses? They SAVE. Why? They have no social security nor welfare -- they must save on their own. And, it's the Communist party that controls the financial systems down to the value of the Yuan and setting interest rates -- they do not have a modern financial system that can flow synchronously with other world powers. Even the Chinese leader has no control over the party of elites.
• Fact is their economy has been exploding. Another fact is that a lot of the hype is distorted by the undervalued Yuan and reasonable interest rates which will bite them in the end. It's the major cities, particularly the coastal cities, that have been given the advantage of modernization. However, they cannot afford to let everybody move into the cities and have controls to keep them out. One strategy is to put most of the males in the military, not to defend against foreign attacks, but to control domestic problems. The masses in the rural environments have been causing unrest for years because they are not been given the opportunities of those in the middle class/elite cities. Some believe that an economy growth rate below 7.5%, wow the U.S. would like that, would cause great unemployment -- they having been growing at 9%+. Now, wouldn't that cause a few problems there and in the rest of the world that depends on cheap products from China!
• Keep an eye on China's inflation rate! It isn't low now, yet their undervalue yuan and reasonable interest rates they may be sending out a very distorted picture. A jump in their inflation will catapult America's inflation.
• Let me reiterate the demographics issues with both China and Japan: They are both becoming an aging society. The U.S.is too, but much less than these two. Aging societies SAVE and SPEND LESS. Harry Dent has written several books in the past decade predicting the U.S. economy problems coming next year and 2011 because the peak of the boomers will retire. His last book, which I didn't find too enlightening in respect to his previous books, foresees a Depression in the future. If America could be hurt as Mr. Dent suggests by it's aging population, how will the world be affects by China and Japan? We are still some time off from the major impact of their aging, but be prepared.
• Another comment by Mr. Smick related to the poor estimation of requirements done by the Chinese. Hence, the over stockpiling of commodities. Consider the dumping of excess on the market too.
• Lastly, understand the "power-brokers" that highly influence the global market: (1) investors of oil-producing nations, (2) Asian Central Banks and sovereign funds presently hoarding Euros and Gold in addition to Dollars, (3) hedge funds, and, even (4) private equity firms.
  

Mr. Smick's book is packed with details and explanations, but in a very readable way. This book should be on your reading list.