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The quiet before the storm

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April 20, 2010 – Comments (31) | RELATED TICKERS: ARLP , ORAN

How does the US earn the quality of life their citizens enjoy?

Are they producing more value?  Or printing more value?

Are they exporting high value goods out of the country?  Or exporting paper bills?

If we accept that some deviation from reality exists in the consumption vs. production balance in the US, then how is allowed to exist?

Is it possible that all policy making parties benefit from this misalignment?  The US politicians benefit because they are able to satisfy their consumption addicted constituents and will get re-elected for another term.  The Asian politicians benefit because a lower standard of living for their population ensures low cost of production and continued industry growth.  This "act" requires all parties to pretend together that the act is in fact reality.

So how does it all come tumbling down?  In my opinion, the average Chinese individual will learn of this imbalance and demand fair compensation for the value he creates.  On this day, he will recognize that for all the value they send to the US they only get paper in return.  The U.S. will be hit by massive inflation and exports will drop dramatically from China.   

Is this good for us Americans who enjoy the imbalance?  In the short term no.  But in the long term it is.  Jobs that were outsourced to China will now be cost effective to do in the US.  US based production will have to start up again, and instead of a nation of consumers we will change back into a nation of producers.

In my opinion, it is the tight control that the Chinese government exercises over the communication channels in China that have held back this storm.  But I don't think any one would argue that this policy is long term sustainable (with all the new forms of communication emerging). 

So let’s say that you partly agree with my reasoning, how do you prepare?

I am not exactly sure what the answer to this question is...  But I think it's something like:

Own things you would normally rent or lease.  (lock in low interest rates)

Invest in yourself (no one can take that from you)

Diversify your assets (have investment exposure across multiple sectors and countries)

Be a producer (learn job skills that allow you produce, not just shuffle paper)

Live within your means (don't develop a lifestyle that is inconsistent with reality)

Foodstorage (I have to say that since I am Mormon)

Outside of that I am unsure.  I don't think the secret is in buying silver, or bullets, or learning wilderness skills or anything like that. 

This has been something I have been wrestling with in the back of my mind for a few months now.  I would appreciate any thoughts or criticism to my logic.

31 Comments – Post Your Own

#1) On April 20, 2010 at 6:04 PM, Tacomatight (73.78) wrote:

 "how do you prepare?"

Alstry

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#2) On April 20, 2010 at 6:26 PM, TigerPack1 (97.21) wrote:

I don't have any good answers either.  Higher levels of cash and gold, and greater frequency of prayer for the nation and the planet seem to be in order.

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#3) On April 20, 2010 at 6:28 PM, anticitrade (99.65) wrote:

The mistake that Alstry (and other bears) make is that they under-estimate the amount of time that the global economy can remain irrational.  I don't think you can time this.  I actually suspect it will be 5-10 years before it all hits the fan. 

Additionally, I don't think shorting the market will work either.  Since inflation will also make bears wrong (unless they used the value they got from shorting to buy inflation resistent goods).

I knew writing this post that I ran the risk of being compared to Alstry.

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#4) On April 20, 2010 at 6:34 PM, Option1307 (29.84) wrote:

You're asking perfectly logical questions, while maybe slightly far-fetched in somw areas, it never hurts to be thinking out side the box.

I don't have an answer for yet, but I'll think it over tonight.

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#5) On April 20, 2010 at 6:46 PM, Momentum21 (74.35) wrote:

Preparing ourselves for outcomes that we cannot predict seems counterproductive. Most of us here are trapped in a bias of some sort...on a variety of levels we have a vested interest in hanging on (literally and figuratively).

We won't be the ones to solve the problem. In 2013 the biggest class of college grads ever will hit the streets. They have nothing to lose...no vested interest...an agenda of their own.

We should worry less about the mess being left behind and more about keeping up and having open mind. They might decide not take our gold and trinkets of advice in their world.

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#6) On April 20, 2010 at 7:26 PM, cashkid79 (93.64) wrote:

Gotta understand to learn and move forward ... progress is based on the reference point of now and/or the past, otherwise how can you possibly even call it progress ... which gets interesting, because like Bravo's post on spirituality, sentiment is that everything contributes to this map called the marketplace, EVERYTHING - and personally, spirituality is like a reference point in itself as well so ... 

Regarding vested interests, to think college grads hitting the streets will have none is ridiculous in that the world still revolves around money and paychecks and jobs ...

Key is having generation bridges to pass on 'trinkets of advice' and life lessons ... that and knowing history doesn't hurt, and for that matter, finance too (not a vested interest, haha)

Liprie, Timothy P 

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#7) On April 20, 2010 at 7:33 PM, Momentum21 (74.35) wrote:

cashkid79 (86.08) - We raised those kids, so that is the map. Our vested interest is the problem...theirs will be the solution.  

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#8) On April 20, 2010 at 7:35 PM, Varchild2008 (85.74) wrote:

My advice.... buy CHOCOLATE!!!   it tastes good if you are not alergic to it.

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#9) On April 20, 2010 at 7:47 PM, brickcityman (< 20) wrote:

I have often assumed that once China got too expensive we would transition to another "emerging" market for sourcing cheap goods.  The world has an abundant supply of cheap labor, we will just have to compete with more and more people for access to it.

 

Restarting work here (in the US), does not seem feasible to me...  Too much has been allowed to atrophy in order to ramp up production in any reasonable time frame, and our great business leadership have been trained to react with pavlovian efficiency to seek out foreign sources.  Furthermore our social/political establishment has evolved to become a hinderance to it as well.

 

This does not mean we would maintain our standard of living, it will continue to erode.  Just that Chinese ascendency will be met by a search for "A new China".

 

Now there is one point I would make that could undermine my argument.  It has long been my view that the way America became great was through continued "in-sourcing" of cheap labor.  We had waves and waves of immigrants who were willing to work cheap for a chance to climb the ladder.  Each generation was hostile the newer ones, but it never prevented cheap labor.  Now though we are ever more hostile and to a certain extent we may have removed the motivation of quality cheap labor...  If a disruption in our chinese relationship were to improve this, then perhaps the pendulum could swing back the other way...

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#10) On April 20, 2010 at 8:37 PM, cashkid79 (93.64) wrote:

I need a wife, then kids, haha ... not for political reasons either ... any ideas on best place for that ??

Regarding foreign sourcing and job production, an article I wrote for class shows what we have done historically and what the effects were on the foreign and domestic economies involved and implications when viewed from different trade theories as it applies to the information technology markets HERE.

Liprie, Timothy P

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#11) On April 20, 2010 at 8:45 PM, cashkid79 (93.64) wrote:

In what I would say is a great global business textbook for school is something that goes over the issues of labor, sourcing, and globalization ...

Connect a few dots and these are the facts and numbers behind outsourcing IT and what the effects were (written for class and posted HERE.)

Liprie, Timothy P

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#12) On April 20, 2010 at 11:19 PM, ChrisGraley (29.87) wrote:

I expect some liberal "inflation is good!" posts coming your way anticitrade.

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#13) On April 20, 2010 at 11:54 PM, skeptic86 (91.86) wrote:

in my opinion trying to predict macro events isnt a good way to invest. there are too many moving parts. i think the best you can do is invest in things that make sense at a reasonable price and hope managment has an answer to the dynamic macro enviorment.

living within your means and investing in youself is a failsafe strategy.

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#14) On April 21, 2010 at 12:17 AM, NOTvuffett (< 20) wrote:

skeptic86,

another way to think about it is that some players have a disproportionate effect on the market, china hiccups and commodities go down.  i keep the macro events in view but play these short term anomolies

 

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#15) On April 21, 2010 at 1:08 AM, uclayoda87 (29.32) wrote:

When the Yuan replaces the US dollar as the world reserve currency, the world goods that had been coming into the US, propping up our standard of living, will end.  Not having a currency capable of buying enough foreign goods, we will have to rely on domestic production to meet our needs.  Fortunately, the abundance of natural resources in the US and a population that is left with few other options will lead to the rebirth of small businesses and a massive down sizing of government and taxes.  Our standard of living will decrease in the short-term, but in time we will find out that we are capable of creating the wealth that we had lost and hopefully this time not squander it away in another social experiment.  To prepare for that day, the items that you listed above are a good start.  From an investment point of view, it may be worth following the investments of China, since they will likely become the main winners when the US dollar dies.  I have felt that Canadian miners, metals and stable non-financial companies with homes outside the US would offer some protection as opposed to the US bond market or even an S&P 500 index fund.

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#16) On April 21, 2010 at 7:01 AM, TMFBabo (100.00) wrote:

I agree with a lot of uclayoda87's views.  I believe that the US dollar will lose its status as the reserve currency and only then will the US government start to learn fiscal responsibility.  I also believe that countries with very high standards of living will see wages and standards of living fall a bit (or at least plateau) while growing countries with lower wages such as China will eventually see higher wages and higher cost of living.  I believe the imbalances cannot last forever and they'll tend to move closer together, even if they never equalize.

What do you do about it? That's a good question.  I guess that's a combination of personal finance and investment savvy.  A very general approach to wealth building is as follows:
1. Earn a decent salary and receive a pretty decent annualized rate of salary increases
2. Spend less than you earn
3. Earn a good rate of return on your excess cash

Investment in yourself is very important as well: I agree about increasing your skills.  I've also started to warm up to diversification across many asset classes. 

An imminent storm isn't necessary for these skills and steps to be valuable.  We should probably follow many of the suggestions listed in the blog and comments anyway, regardless of future events.

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#17) On April 21, 2010 at 8:36 AM, anticitrade (99.65) wrote:

I think one principle is clear.  Your method of preperation for an ecoonomic adjustment should be beneficial with or without the correction.  A whole basement full of ammo, seeds, and silver has limited value unless things get apocolyptic.

I would also add that it may make sense to work for a company with a global footprint.  This will give you a valuable set of skills and may provide additional job security.

In other news, based on the success of the rumblinliquidation portfolio (ranked 99.55 with only buying an initial set of 200 stocks and then watching), I have decided to incorporate it into my standard model.  If our website upgrade goes well, these updated results will be available in a little over a month at anticitrade.com.

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#18) On April 21, 2010 at 10:10 AM, USNHR (32.77) wrote:

 I believe that the US dollar will lose its status as the reserve currency and only then will the US government start to learn fiscal responsibility.

Like Greece learned fiscal responsibility?

 We will never learn fiscal responsibility, once the American people let the government spend more than it made the first time... we entered into a death spiral.

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#19) On April 21, 2010 at 10:18 AM, TigerPack1 (97.21) wrote:

I like the liquid kind also...  If you can honestly identify cheap asset plays in combination with cheap earnings/cash flow selections, you can create a nicely balanced and blended stock portfolio approach.

-TigerPack

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#20) On April 21, 2010 at 10:20 AM, TigerPack1 (97.21) wrote:

http://caps.fool.com/player/rumblinantliquid.aspx

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#21) On April 21, 2010 at 1:39 PM, cashkid79 (93.64) wrote:

TP, like that, I think you get into problems once you hit around 500 stocks unless you start re-picking them based on timed events (for CAPS anyhow)

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#22) On April 21, 2010 at 2:27 PM, dwot (65.40) wrote:

"The mistake that Alstry (and other bears) make is that they under-estimate the amount of time that the global economy can remain irrational.  I don't think you can time this.  I actually suspect it will be 5-10 years before it all hits the fan. "

No one can predict how long the market will be irrational.  I am very early every time...  It goes to having strong math and analytical skills.  The other thing that constantly puts a wrench into the truth is the market manipulation by the Fed which ultimately is further delaying problems and ultimately making them much worse.

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#23) On April 21, 2010 at 2:47 PM, RonChapmanJr (56.66) wrote:

"A whole basement full of ammo, seeds, and silver has limited value unless things get apocolyptic."

This isn't necessarily true.  Stocking up on food wins out when you factor in that food prices will continue to rise.  Buying in bulk when items are on sale will save more than most realize.  Ammo will store a long, long time and I can also sell it for more later (again, inflation).  Gold/silver is not as obvious of a winner, but I don't think having that as a safety net is a bad thing.  Preparation can simply be an effort to maintain your lifestyle in the face of a crazy situation.

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#24) On April 21, 2010 at 8:40 PM, sbvtkle (< 20) wrote:

I am buying houses in China. Win Win situation. Any new real money trade recently? Anticitrade. Do you like PFE at this price level?

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#25) On April 21, 2010 at 9:15 PM, anticitrade (99.65) wrote:

Buying houses in China is something I was actually thinking of earlier today.  Not a bad decision if you have a feasible way of managing your properties.  How difficult was it to buy real estate in China?

I just ran PFE on my model and it conservitavely prices it 16.7 (which only allows for a 1% gain)...  IF you like big pharma I would recommend looking at either NVS or ABT.  NVS I value at about $80/ share for a gain of 50% and ABT I value at about $74 for about 42% gain.  The DCFs for both these companies are pretty solid.  (I don't own either of these companies presently).

I recently purchased QXM (a real gamble with downward trending quarterly results but strong upward annual momentum..  Earnings release on May 10th I think...)  I also bought KS, ARLP and FTE this week.  While I think I am most optimistic about KS, it is not necessarily the highest current recommendation by my system.

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#26) On April 21, 2010 at 11:49 PM, sbvtkle (< 20) wrote:

I have people who manage the properties for me in China. Manage a real estate in china is way easier than here. We collect one year rent in commercial estate and 3 month for household rental in advance after signed lease. No need to pay property tax or other fee. Only pay sale tax during the transcation. I am trying to catch the opportunity that our government tries to push the currency in China. BTW, Thanks for your pick, I will do some research on your picks.  I always follow your pick very closely.

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#27) On April 22, 2010 at 5:39 PM, peterod (84.32) wrote:

I agree with USNHR... basically the usual way to get out of all this is inflate the currency.  The average folk doesn't understand how it will affect them and its alot easier to do than fire government workers... In the long run its the poor that will be affected by all of this as people who invest there excess holdings will have a chance to do much better over time but your fixed social security payment in 2050 will be pretty much worthless.....

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#28) On April 23, 2010 at 10:46 AM, cashkid79 (93.64) wrote:

SSI is not something most are worried about on here at this point I hope ;)  Inflate it, kinda have to anyway ... at some point ... but that's all up to those gov workers, right?

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#29) On April 23, 2010 at 3:59 PM, peterod (84.32) wrote:

Not worried about SSI but here is the thing....If the have nots can't get by because of the economy etc. , This usually leads to instability.  Roits, wars, etc.  I think in a way maybe this is why the super rich are mostly democrats...  If your extremely rich you don't want the whole town coming after you when things go down the tubes so lets just make everybody happy enough to survive and get by and everthing else will be OK...:)  We'll just keep inflating then until we can't no more...then what?  

I personally like the idea of investing in asian assets, getting back to the original question...

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#30) On April 23, 2010 at 5:22 PM, fewl10 (< 20) wrote:

+1 b/c I too am a mormon.  Go BYU, maybe the football won't stink this time

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#31) On April 26, 2010 at 10:01 AM, anticitrade (99.65) wrote:

Looks like ARLP is panning out nicely today.  Despite it's 8% rise today, I currently plan on holding it until it reaches about 66$/share.

 

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