Mish's Global Economic Trend Analysis

Does Economic Patriotism Work?
China and Vietnam Engage in Ship-Ramming and Water-Cannon Fighting in South China Sea
US Dollar Action, Treasuries, and Other Curious Things; Motto to Live By

Posted: 07 May 2014 05:54 PM PDT

A recent poll in France shows 59% of those surveyed for "Les Echos" consider economic patriotism "effective redress for the French economy." Only 38% disagree.

This no doubt will please Arnaud Montebourg, the Minister of Economy and Productive Recovery and singer of "Made in France".

I have commented on Montebourg numerous times before.

Here's a notable image from Made in France: Montebourg Ridiculed in Text and Pictures; France Goes After "Red Bull" Energy Drinks to Finance Social Security.

Above: Montebourg advertises "Made in France" while holding Moulinex blenders and wearing classical "marinière" shirts.

Economic Patriotism Cannot Succeed

Economic patriotism as championed by Montebourg cannot possibly work.

Every country wants to increase exports. But how can every country do that if they all engage in economic patriotism?

On an individual basis, does it make sense to buy crappy cars just because they are "made in America"?

Of course it doesn't. And in that regard, US cars finally got better for two reasons:

Unions made concessions and as a result US cars became more cost competitive.
Consumers buying foreign-made cars forced GM and Ford to build better cars if they wanted to improve sales.

If you really want to do something to increase the quality of goods and services, then buy the best-value "whatever".

Competition, not phony patriotism, provides the desired result. In the long run, individuals making the most cost-effective solutions for themselves will ultimately do what is best for the country as a whole.

If governments correctly acted the same way, Davis-Bacon, forced collective bargaining, and other idiotic measures would be scrapped in a second.

Given that public unions increase costs while adding negative value and effectively robbing taxpayers, one could easily argue that the true patriotic thing would be to get rid of them.

For further discussion, scroll past the ads and consider what I have written about Davis Bacon.

Also consider the Message from FDR in BART Holds San Francisco Hostage; Best Way to Deal With Public Unions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

China and Vietnam Engage in Ship-Ramming and Water-Cannon Fighting in South China Sea

Posted: 07 May 2014 12:34 PM PDT

With most eyes on Ukraine-Russia and China-Japan battles, let's shift the spotlight to the new global hotspot, an intensifying feud between China, Vietnam, and the Philippines in the South China Sea.

The Financial Times reports Chinese and Vietnamese Vessels Face Off in South China Sea.

Tensions in the South China Sea escalated dramatically on Wednesday after Vietnam said Chinese ships rammed its vessels near the Paracel Islands and the Philippines detained a Chinese fishing boat and crew.

China and Vietnam have traded rhetoric in recent days after China moved an oil rig near the disputed islands. But the situation turned into a confrontation on Wednesday when the Chinese vessels fired water cannons at Vietnamese ships.

Vietnam's foreign ministry accused China of deliberating ramming its ships and said several sailors were injured in the clash.

China has territorial disputes with many neighbours, but particularly with Vietnam and the Philippines who have been the most willing to push back. On Wednesday, the Philippines detained a Chinese fishing vessel and crew that were reportedly fishing for endangered sea turtles.

The incidents come just weeks after US President Barack Obama toured Asia as part of his "pivot" to the region aimed at countering the rise of China. The US on Tuesday called the decision to move the oil rig "provocative and unhelpful".

Earlier this week, Vietnam told China to stop the "illegal" drilling. But Yang Jiechi, China's top foreign policy official, told his counterpart in Hanoi on Tuesday that "Vietnamese harassment . . . has severely violated China's sovereignty".

The clashes on Wednesday appear to be the most serious between the countries in years. In 1974, China went to war with the Republic of Vietnam over the Paracels – called the Xisha in Chinese – and regained control over the islands. China is also embroiled in disputes with Manila over the Spratly Islands – which it calls the Nansha – and with Tokyo over contested islands in the East China Sea.

US Response

OK so what is the US going to do about this? Defend Vietnam? Give warships to Manila or the Philippines? Start WWIII by attacking China and Russia?

If your answer is to do something (other than have Obama yap his head off about red lines in the sand), then be prepared to answer two more questions: At what expense? How are we going to pay for it?

The US public is tired of war actions and associated expenses, as it should be. We have too many problems at home to be engaged in virtually every dispute on the planet.

Isn't it time to have a rational discussion on what it means to be the world's policeman, including the true associated costs?

Addendum:

Reader Michael commented "The US hasn't proposed ANY actions to stop the conflict between China, Vietnam, the Philippines or Japan (all of which have maritime territorial disputes) other than make vacuous comments to the effect of let's all calm down now. There is no need to get in a big huff about US actions or policy when the US hasn't actually done anything."

Michael is wrong. The Guardian reports "Obama says US will defend Japan in island dispute with China"

Here is a pertinent snip: "Our commitment to Japan's security is absolute and article five [of the security treaty] covers all territories under Japan's administration, including the Senkaku islands," Obama said during a joint press conference with Abe.

The US is willing to make an "absolute commitment" to defend the Senkaku islands!? At what cost? Sure seems like a reasonable question.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

US Dollar Action, Treasuries, and Other Curious Things; Motto to Live By

Posted: 07 May 2014 10:31 AM PDT

Has anyone noticed the slow decay in the US dollar? If not, here it is in pictures.

US Dollar Index Weekly Chart

click on chart for sharper image

As shown above, the US dollar slid from 85 to 79 since July 2013. Looking back a bit further, the US dollar has been range-bound between 89 and 72 since April of 2010

A monthly chart shows the dollar has been range-bound between 71 and 89 since 2008. Going back even further, the dollar has been range-bound between 92 and 71 since 2004.

Thus, there is nothing unusual about the dollar index at 79 where it sits now, except for the silence and other peculiarities.

Silence is Telling

Typically, every time the dollar declines, dollar bears and hyperinflationists come out of the woodwork chanting the death of the dollar.

Today I hear curious silence. And that's not all.

Consensus opinion says the Fed will continue tapering then start hiking. In theory, that should be dollar supportive. But it hasn't been.

Market reaction to the jobs report last Friday was also curious. +288,000 jobs should have been dollar supportive. It wasn't. Of course, the internals of the jobs report were horrific (see Nonfarm Payrolls +288,000, Unemployment Rate Drops to 6.3%; Household Survey Employment -73,000, Labor Force -806,000) but there was not even an initial reaction.

Mario Draghi and the ECB have been talking about QE and negative interest rates in Europe. In theory, that should be euro negative, thus dollar positive. It hasn't been.

Why? Perhaps the market thinks the ECB is all talk and no action.

Here is a chart that I commented on at the Wine Country Conference.

Yield Curve Since 2000

Consensus opinion says the economy is getting stronger. The Fed relays that message as well.

But if the economy was getting stronger, then why is the yield on the long bond sinking?

The 30-year long bond yield is currently 3.38% down from 3.95% at the beginning of the year.

Reflections on Beliefs

A friend of mine who is no longer with us, had a saying that crossed my mind while contemplating the above charts: "If the market doesn't believe it, why should I?"

In this case, the treasury market acts more like a recession is on the way than the recovery will strengthen.
The dollar acts as if the Fed will not hike as quickly as people think.

I believe the treasury and currency markets have this correct. In other words, those markets do not not believe consensus opinions. And if consensus opinion is wrong, treasury bears (at the long end), and dollar bulls in general may wish to reconsider the implications.

Motto to Live By?

Does that make "If the market doesn't believe it, why should I?" a motto to live by?

Careful!

The answer is "it depends". Do you really want to buy the S&P here just because it looks like it will not go down?

If you are a day-trader (and my friend was), your only concern is what the market thinks at the present. Nothing else matters.

However, it's not a good motto to live by for a value investor with a long-term horizon. Value investors living by that rule would eventually be doing some rather curious things like buying into market tops.

The big problem for value investors is "value mirage" in down markets. What appears to be a "value" may not be, for reasons not yet visible. This happened to numerous financial stocks in the 2008 downturn.

If the market is not acting like one thinks it should, it's useful to ask "why?"

Know and Trade Your Time Horizon

Day traders get into serious trouble when trades become investments.

Conversely, value investors get into trouble when they start mo-mo trading because everyone else is buying the dip and winning.

Recent capitulation of prior permabears-turned-bulls shows some investors have thrown in the towel. History suggests it's not likely to end well for those changing styles or major beliefs now.

By the way, Pater Tenebrarum at Acting Man pinged me with this thought yesterday: "There was an 84% bullish consensus on the dollar in the Merrill fund manager survey in July. Such extremes in currency sentiment tend to lead to moves in the opposite direction that can last up to a decade."

Fundamentally, I see no reason to be bullish on the dollar now, unless one really believes the Fed will taper-to-zero then hike. Since I don't, the fundamentals and the technical action in the dollar are in alignment.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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