Economic Stupidity
Research for Online Investors

by John Dalt

10/04/11

The market opened lower this morning,  bottomed then turned back higher…call it turn around Tuesday.  Federal Reserve Chairman Ben Bernanke appeared before the Joint Economic Committee this morning and gave us a few tidbits.  He said the economic recovery is “close to faltering…The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the contest of price stability.”  Translation…if it gets bad enough the Fed is going to print more money.

Apple (AAPL) is rolling out their fall line of new products at noon today.  Interest will be on the presentation itself.  CEO Tim Cook is expected to preside since Steve Jobs has left active management of the company.  Cook said Apple opened two new stores in China last weekend.  There were 100,000 visitors to the Shanghai store opening weekend.  They were probably just checking out the décor.  Fake iPhone 5’s appeared in China a few weeks ago.  Chinese authorities closed two copy cat Apple stores in Kunming earlier this year.  They were doing a very good business.

Apple has its hands full policing the supply chain to stop “bleed off” of its products and designs to third parties.  This is especially difficult in China where respect for intellectual property is looked on suspiciously.

The U.S. Senate is debating a bill to impose tariffs on Chinese imported goods.  This little gem is called the Currency Exchange Rate Oversight Reform Act of 2011.  On the House of Representative’s side Speaker John Boehner has expressed doubts about the bill.  It has 225 co-sponsors in the House.

The Chinese have accused U.S. lawmakers of pandering during an election cycle.  There is no doubt the Chinese manipulate the value of their currency to gain an advantage in global trade.  So does the U.S.  That was one of the benefits of QE1 and QE2, driving the value of the dollar down to make our exports more competitive.  The problem is the Chinese have tied the value of the Yuan to the dollar.

No matter how cheap the dollar got, the Yuan was cheaper.

The Chinese were letting the Yuan appreciate against the dollar until the 2008 credit crisis but then stopped until summer of 2010 when they agreed to allow small adjustments.

In 2009, the U.S. imposed a 35% tariff on tire imports from China.  China responded by placing tariffs on poultry and some automotive products imported from the U.S.  The World Trade Organization’s top court ruled the U.S. was entitled to impose the tariff in December 2010.  China lost their appeal of the decision last month.

China’s tire exports to the U.S. dropped 23.6% in 2010 and another 6% so far this year.  China’s trade mission in Geneva said “It was a protectionist measure and unsupported by the U.S. tire industry.  The safeguard measure does not reducing U.S. tire imports, but injures China’s legitimate trading interests.”

How can dumping products on your trading partners be termed “legitimate?”  This quote alone tells you all you need to know about the Chinese.  “Legitimate” is heads I win, tails you lose.

Sadly, the current administration only pursued the tire tariff because labor unions complained.  The U.S. Treasury has avoided labeling China a currency manipulator for the last three years in their annual review.  The “Exchange Rate” bill is a response to a lack of leadership by the White House.

The Administration should be agressively challenging China on a wide front for dumping merchandise and illegal copying of intellectual property.  It also gives lawmakers a recorded vote to highlight in their re-election campaigns.  I was also critical of the previous administration for not confronting the Chinese for their trade practices.

Legislators should study the Smoot-Hawley Tariff Act of 1930.  It was the same sort of populist legislation and is credited with deepening and extending the Great Depression.  At the time Henry Ford (and others) lobbied President Herbert Hoover to veto the bill calling it “economic stupidity.”

We agree with Mr. Ford but how many of our elected officials know history?  Or economics?

The market may have bounced this morning as set us up for a bear market rally.  We may be able to trade it if we are swift.  Be careful.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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