By Charles Payne, CEO & Principal Analyst
All day long I watch the tape and see Chinese stocks scrolling by, followed by plus signs reflecting continued excitement over the hottest economy in the world. Having temporarily dodged worries of a massive derailing caused by the bursting of its housing market Chinese stocks continue to capture the imagination of investors, especially American investors. Sure, there is a bubble article somewhere on any given day but it seems like this juggernaut could survive growing pains or even hitting a major air pocket.
They’ve climbed out of the same air pocket that sank the global economy faster and stronger than anyone else. In fact, nations that are rebounding are doing so because of their trade relationship with China. Now China is a destination for goods from its neighbors and has become Japan’s top export market. In the meantime the United States, despite the big jump in 4Q09 GDP is still struggling to find its footing let alone get off the ground. Considering the trillions spent and the sparse results the timing of this couldn’t be worse.
Of course there is a reciprocal relationship, albeit one that favors China more than America, that both nations need to continue. The big question has been which nation needs the other most. The reason China is sitting on $800.0 billion in Treasuries and $2.0 trillion in US dollars is because Americans are sucking up all their junk. But that junk allows us to watch most of the junk on TV or afford other things that increase the so-called quality of life for so many. I’ve said this before but it’s amazing how much stuff poor people have these days compared to when I was a kid. I know people that live in government housing projects driving new cars and taking ocean cruises. It’s the result of cheap imports and access to easy credit. The latter is fading in the aftermath of the economic meltdown, and reforms that will lead to lenders walking away from some communities.
So, while we go back and forth with scenarios like China dumping our debt and America leveling tariffs and taxes on Chinese imports we need to ask another question:
Do the people in America have the will to go without all those cheap goodies? Its one thing for high-minded politicians and financial experts to say lets get tough on China. I’m one of those guys saying we must draw a line in the sand because our position at this rate will become weaker not stronger. I would prefer if the administration could play hardball behind closed doors. The problem is that China is playing this out in front of the world. I’ve written about how American investment in China isn’t as important as it was a decade ago. The EU is China’s largest export market now and China has a billion hungry citizens clamoring for a piece of the action. It comes down to which nation can ask its citizens to sacrifice and wait out the collateral damage from an all out trade war. Although there remains a huge trade deficit with trade in China over the past 11 years US exports to China have outpaced imports of their goods. Over that period US exports to China are up 431% while imports from China are up 262%.
On the day America lost its 2,000 soldier in the Iraq War, opinion polls shifted swiftly to opposition. No matter where you stand on the validity of the war, if the notion is we can’t handle more than 2,000 deaths in war then we can’t exert the ultimate pressure and follow through on threats of military action. We mourn our brave men and women and hope for a day when fewer lives are at risk but there is no doubt those in charge in Iran and North Korea and other places see we might not have the will to step up to the plate. (This is why President’s Obama decision for a surge in Afghanistan was so critical not only to soldiers desperately in need of help now but in the face of belligerent world leaders determined to push the envelope.) Hence the nuclear programs and terror funding and other shenanigans never stop. So in an economic war could the American people be persuaded to take the hit? I’m not sure.
Consumer consumption is 2/3 of our economy are we going to ask people to keep spending but pay more for stuff they could get cheaper? Are we to ask Wal-Mart to suck it up and keep paying the largest work force in America even while they can’t stock their shelves? Can Americans take the pain? I’m not talking about what happens when China dumps a ton of our treasuries but what happens when prices spurt higher and soybean farmers can’t sell their crops. Right now I think Chinese citizens are rallying more around their flag than we are and that could be trouble for American businesses already over there. Right now this scenario seems highly unlikely but it’s not much ado about nothing. I just don’t see this fading into the night. It wasn’t enough that Google just retreated; the Chinese are pissed and need some kind of retribution.
Maybe all this saber rattling is to reduce the chance of America calling them out next month as currency manipulators. In the end there is only a pyrrhic victory for either side but for the Communist leaders in China this could be good enough. The last thing we want is to empower Communists leaders that are on track for a homegrown revolution based on a desire for prosperity. Even without Google it is my theory that the next revolution in China will start on the Internet but right now even young people are feeling nationalistic pride. As for a replay of the devastation from the Smooth Hawley Act where Herbert Hoover decided to go ahead with tariffs on imported goods it wouldn’t be as bad but would hurt. Despite pleas from top economists and Henry Ford a war was started in 1930 with tariffs that eventually covered more than 20,000 imported goods. More than two dozen US trading partners retaliated and as a result US imports decreased 66% and imports 61%.
The GDP was smacked down 50% and the Great Depression was off and running.
Helping Others…You Never Know
I don’t like talking about myself but something happened to me yesterday I want to share. I was looking for a parking spot in the humongous garage near my office when someone yelled out my name. I had seen this guy as I circled around trying to find a spot big enough for my SUV. I didn’t recognize him but stopped. It turns out Fernando used to come to my office about 15 years ago with a friend and I used to teach him about charting and fundamental analysis. I honestly didn’t recall him or those specific events although a lot of people used to come to my office in the early days like Grand Central Station and I always tried to help them all. He told me he has been trading the market and making a living for the past several years using the stuff I taught him.
Fernando described my office and knew all about me and even said there were a lot of haters around saying I wouldn’t make it…now that sounds about right. As he walks away and I continued my search I had a lump in my throat. It feels so good to help people in a way that they can help themselves. Trying to master the stock market is largely a thankless, what have you done for me type of job, but I love it. But I hope in my lifetime I can help people in a way they become independent from the need for charity and low self esteem. I’m not sure how deep an impact I had on Fernando, he says it’s a lot, but I know how much of an impact my encounter yesterday had on me. Its one of those moments you thank God because it makes you feel good and makes you want to do even more.
Economic Data
The Labor Department said in its weekly report Thursday that initial claims for jobless benefits fell by 14,000 to 442,000 in the week ended Mar. 20. The previous week’s level was revised to 456,000 from 457,000. The consensus was looking for a decline of 7,000. The data today reflects the annual changes the Labor Department makes; had the revisions not been made, continuing claims would have totaled 453,000 (a decline of only 3,000 and less than the 7,000 the Street was expecting). Continuing claims fell to its lowest level since December 2008, which bodes well for the economy, however, it seems to still be a far ways away from actually creating jobs.
The four week average, which smoothes out the weekly volatility, also fell to new lows, falling by 11,000 to 453,750, and represents the lowest level since September 13, 2008.
Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.
