A Look at the Coming Week - March 23, 2009
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 Margaret and Bob just returned from London. Ostensibly, we were on a fact finding trip to learn more of the workings and dealings of finance on the other side of the pond. But of course, we were able to spend time visiting the many tourist sites in England. And they are terrific!
With the dollar strengthening and the pound sterling weakening, London has been struggling financially. The global stock market collapse has greatly affected the financial capital of the world. A combination of financial problems, a weak economy, a weak currency and a dearth of tourists has created an opportunity for Americans to travel to Great Britain very cheaply. We found some hotels are one third the price of three years ago and plane flights to London are as cheap as flying to Chicago. We heartily recommend you check out some of the great opportunities to travel now.
That brings me to one of our major strategies and that is hoarding cash. The opportunities of tomorrow can only be taken advantage of if one is saving. Continue to put away dollars so you can take advantage of cheaper travel, cheaper products and cheaper investment opportunities as they become available.
So how is the UK holding up in these financial times? Actually, about the same as the U.S. in many ways but different in other ways. The housing market is of real concern. One of the big scandals is mortgage payment insurance. This is insurance they buy to cover their payments in the event of layoffs (layoffs are called redundancy which is a charming P.C. way to describe being fired, axed or terminated. Gotta love their funny words!), disability or death. As it turns out the ombudsman are flooded with complaints that the insurance companies are not paying as layoffs, pardon me, redundancies escalate. Some insurance companies are denying up to 100% of claims leaving some Brits facing eviction.
They report news very differently in the financial sector. They tend to give it a "National Enquirer" type spin but the data and information seems to be spot on. They are much more vocal than we are. The front page was devoted to AIG almost every day. They are very upset with how AIG has threatened every corner of the world. And, they are protesting and making their voices known which is something most Americans have thus far avoided.
The news tends to be more real in terms of understanding financial lingo. The Wall Street Journal has been featuring stories of the Federal Reserve Board's new policy of "quantitative easing." As Chairman Ben Bernanke would have us understand, quantitative easing is when the Fed buys treasury bonds and agency debt such as that of Fannie Mae or Freddie Mac. The Bank of England has also just resorted to the same policy. The newspapers call it what it is: printing money. So there you have it. Quantitative easing is simply printing money out of thin air! |
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In one paper, the headlines screamed, "Bailout Money is Flowing Abroad." They fear that the attempt to stimulate the economy by printing money is causing money to flow out of Britain to places where there will be no benefit to UK households and businesses. One third of their government bonds (called gilts) are held by foreigners. As the bonds are purchased, the foreigners are not reinvesting which is leading to money flowing out of the UK and having exactly the wrong effect at the wrong time.
Could the same thing happen here? That is hard to say. Foreigners do, in fact, own about 50% of all our U.S. Treasury bonds which is substantially higher than the UK. Plus, the Chinese a few weeks ago said, "we hate you but there is nothing we can do." Our own money printing experiment may be just the out the Chinese need. If they start offering their huge stash of bonds for sale, we could see money flow out of the U.S. into China where they seem to be doing a good job of financial stimulus. They have a trillion of our bucks and seem anxious to stop financing our silly spending habits.
On the other hand, they may not take such drastic measures. They know that cashing in would have a terrible effect which would drive down bond values and send interest rates into the stratosphere. It could also drive down the value of our dollar which would add increased pressure on China's ability to export. When a national currency is weak then exports increase as strong currencies scramble to get good deals. Therefore a weak dollar would favor our exports and hurt imports from China.
I think we can safely say that there are still some delicate issues facing all global economies. As the printing of money escalates, distrust will follow. Distrust leads to a reversal of globalization and an increase of "protectionism." The protectionism movement is gaining strength. Basically this is a shift toward benefiting the citizens of a country. For example: auto makers in France are being asked to close down factories in other countries and keep the factories in France open. If protectionism were to take hold here it would be analogous to telling Hershey chocolates to close their Mexico factories where they are helping the Mexican economy and unemployment and re-opening their American plants which have been largely dormant for several years.
This is a huge problem. Globalization has been the impetus for worldwide growth in the past twenty years. As companies strive for greater profits they have outsourced jobs to other countries and hired cheaper migrant laborers from other less fortunate countries. Now that the global recession is in full bloom, there will be pressure on government to force companies to hire their own workers and bring down the unemployment numbers. Immigrants in Europe are being asked to go home. Spain is leading this movement. Britain has also seen protests over immigrant workers taking more of the jobs.
Trade wars (protectionism) are starting to happen here. For several years, the Mexican government has tried to get the U.S. to allow their long distance truck drivers to operate here. They did an experiment to find out if they met our standards of quality. They did. The unions then got rules passed to stop the Mexican truck drivers. And that is starting to touch off trouble. Mexico just announced they were slapping tariffs on almost 100 of our products. That means the California farmers (a group that will be severely affected) that export to Mexico will see tariffs of 10% to 45% being imposed on some of their goods which will severely hurt sales. This is what protectionism does. It restricts the free flow of trade, creates distrust and can limit the future growth of all world economies. Mexico was careful and smart. They targeted industries here that produce goods that can be purchased elsewhere. They found that they can actually put the squeeze on us without affecting their citizen's ability to obtain cheap goods.
Our trip was enlightening and a real eye-opener. In the short time that we were there, I have gathered much information that will help Vance Capital Management do a better job of managing your money. In the future, we plan to make more visits to various places. The worldwide economy is truly global and intertwined. We can only navigate these treacherous times by getting as much education as we can so we can have all the facts. Many of the facts are obscure and trifling but are part of the vast financial mosaic. As Sherlock Holmes said to Dr. Watson, "You know my method. It is founded on the observance of trifles." |
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Ta-ta for now and thanks for reading the Vance Advance.
Working for your wealth and peace of mind,
The Vance Capital Management Team |
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