Beggar Thy Neighbour Again!

Smoot Hawley was a law signed in 1930 at the beginning of the last Great Depression that enacted tariffs on many imported goods. Historians and I'm sure contemporaries argued that this precipitated protectionist policies around the world and contributed to the severity and length of the depression because of reduced trade.

Yesterday the US Congress passed the Obama stimulus bill as reported in the Washington Post.

The stimulus bill passed by the House last night contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package.

A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Proponents of expanding the "Buy American" provisions enacted during the Great Depression, including steel and iron manufacturers and labor unions, argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas.

The article continues:

"There is no company that is going to benefit more from the stimulus package than Caterpillar, but I am telling you that by embracing Buy American you are undermining our ability to export U.S. produced products overseas," said Bill Lane, government affairs director for Caterpillar in Washington. More than half of Caterpillar's sales -- including big-ticket items like construction cranes and land movers -- are sold overseas.

"Any student of history will tell you that one of the most significant mistakes of the 1930s is when the U.S. embraced protectionism," Lane said. "It had a cascading effect that ground world trade almost to a halt, and turned a one-year recession into the Great Depression."

Is this history re-visited? Tariffs in general increase the price for customers. If you only focus on certain industries or groups of course tariffs can be good, but in general most people are worse off for it. Just like bailing out bad banks or bad car companies, tariffs are bad economics that on whole is worse for society.

Speaking about bailouts, now that we're on the verge of another round of bank bailouts, I think the British may have the scheme of something workable. Although I'll be labelled a liquidationist for saying that the bad banks should be allowed to fail, and bad debt needs to be defaulted on, I truly believe that this is the quickest path to a real recovery. For sure there will be economic sorrow for the thousands of lost jobs and the wealth destruction, but the alternative of serial bailouts leaves just more debt and less trust in the system.

I believe the Brits have virtually nationalized the Royal Bank of Scotland and own 70% of the bank. If the gov't is to backstop the debt of a bank then taxpayers should benefit from the upside if any. Conversely, the Dutch gov't bought $40 B of bad mortgage backed securities off of ING's books this week in return for nothing! No change in management, no new oversight, no government ownership. Talk about socializing losses and privatizing profits! Why are gov'ts so meek?

No, I believe short of liquidating the bad businesses (as a real free market would have it), the government should do the opposite of a free market solution, and that is to nationalize them. Throw the bankers out, and install new management. If these institutions are so vital, that they can't be allowed to fail then, let the government run it.

Gold at $900

Gold briefly touched $900 and gold stocks have rallied significantly from their Nov. lows. In fact the gold stocks have led the price of bullion over the last two months.

I've also noticed that US Treasuries have backed off especially at the longer end. TBT is up 10%+ over its recent lows.

I read the following at Agora Financial's website.

Traders are also taking note that hedge fund manager David Einhorn is going long gold. “Our guess is that if the chairman of the Fed is determined to debase the currency,” Einhorn says, “he will succeed. Our instinct is that gold will do well either way: Deflation will lead to further steps to debase the currency, while inflation speaks for itself.”

Now I know inflation is probably a ways off still until we work off some of the debt deflation, but if the Fed is determined enough, they can create any amount of inflation they want. Gold has held up well over the last year against most asset classes except US treasuries and this speaks to its role as a currency. The chart of the British pound vs. the $US over the last 6 months is astonishing. Who would have thought that the London financiers would be on the brink of several bank nationalizations? I took note that gold has hit a high in Euros as well as the British pound today.

The global race to the currency bottom is on! Beggar thy neighbour. Even the Bank of Canada is getting in on the act and decreased interest rates in an attempt to jawbone the loonie down. Imagine 1% interest rates! Isn't ultra-low interest rates what started this whole credit mess? If a little of something is good more is better! If I was a little more confident that bad inflation was in the cards, I would re-mortgage the house and leverage up to buy some real assets and some more gold! Problem is deflation seems as likely as inflation at this point.

Obama Rally?

I've been waiting for a rally in the markets for some time now, and I'm beginning to think I missed it. From the Nov. lows to the Dec high was a move of about 25%. Energy stocks rallied about 33% in that time period. Was this the bounce that I was waiting for? I must admit that I was looking for a general market rally going into the new year after tax loss season, as well as with the lead up to the presidential inauguration. Now that we're on the eve of Obama's ascension, I believe there won't be any further significant rally! The bad news continues to worsen and now the European banks are blowing up real good.

The amount of money going to failed banks like BAC, Citi, AIG are sickening - money that could be used to take care of the unemployed and homeless!

Gold as a store of value versus currencies is looking like the safest bet. Most countries are getting hit hard with unemployment and trade. The recipe seems the same the world over - deficit spending, and gov't handouts to banks. Can protectionism and competitive devaluations of currencies be far behind?

I'm still looking at other infrastructure companies that should benefit with the various stimulus plans floating around. I'm keeping an eye on ABB, the maker of electrical infrastructure.

Something I picked up recently was Claymore's TSX Preferred Share index. Symbol CPD. It pays a dividend around 6% and holds mostly canadian bank preferred shares. I've been toying around with buying some CIBC preferred because they were the first Cdn bank to get hit by the subprime and they issued equity early during the credit crisis when they still could. I decided I didn't know about other skeletons in the banks' vaults so I took the index route. What's the downside of owning Cdn preferreds? Does the future of Cdn banks include a gov't bailout? If their dividends go, the common shares go first.

Having cash is probably the safest during this deflationary shakeout. (I consider gold as good as cash by the way!)