The rising risk of a global trade war

Michael Pettis, whom some of you may remember as head of Bear Stearns Asset Management emerging market debt product and who is now a professor of finance in Peking, warned in today’s FT of the growing risk of a trade war. He fears that if the big exporters like China, Germany and Japan don’t increase imports and consumption, then the trade deficit countries like the US, Spain, Italy and Greece will react with import controls. “Other economies must absorb a large share of the European shock – or the US will be forced into tariffs and import quotas.”

This reminded me of the conversation I had with the CIO of a Boston-based institutional money manager on Friday. He talked about the rising force of “localization,” by which people look after their interests on the local level rather than on a broader one. Also, at a recent talk in Cambridge, MA, Nassim Nicholas Taleb, who focuses on fragility, noted that the most efficient system is not necessarily the most robust. For example, because the power grid in New England is very reliable, no one has emergency generators, so a power cutoff would be far more disruptive here than one in Baghdad, where people and businesses have localized their power supplies.

This increasing local focus makes trade restrictions more attractive because they lead to more robust if less efficient societies.

WikiDicki

On August 23, 2010 the Financial Times reported that Julian Assange of WikiLeaks had been charged with two counts of molestation and rape based on complaints by two Swedish women during the Australian’s visit to Sweden last week. The charges were withdrawn a few hours later, probably because the women reversed their claims, which I take it to mean that they groped him, which is plausible.

The end of majorities?

The recent Australian election resulted in a parliament with no majority party for the first time in sixty years. Iraq has no majority party or coalition. Italy’s ruling coalition appears to have broken up. The UK likewise has no majority party, and it looks like President Obama’s party will lose its majority in at least one of the two houses in November. Fragmentation reduces governments’ ability to make bold policy moves.

Pork belly shortage

Last week we received a package of farm produce, jams, and salsa from my brother’s place in Iowa. The tomatoes were wrapped in an August 15 edition of the Des Moines Register. The headline of the business section read “Pork belly shortage adds $1 to price of bacon.” Des Moines Cold Storage normally has 10 to 20 million pounds in inventory but now is down to 300,000. Exports are up 27% yoy. Iowa is the nation’s biggest hog producer, with an annual slaughter of 30 million head. Iowa also is the nation’s biggest consumer of bib overalls. Maybe this shortage is one reason so many workers are having trouble bringing home the bacon.

“US proves call centre match for India over hire costs” FT August 18, 2010

Indian call center provider Genpact says it will triple its US employee count from 1,500 today over the next two years. Wipro says half of its 110,000 strong workforce will be non-Indian in two years, from the present 39%.

US workers and executives are now cheap on a global basis in some areas.

Annals of the Great Recession, The Pine Street Inn, Boston

Debbie and I had an interesting experience yesterday. Our church is one of the supporters of the Pine Street Inn in Boston, a private philanthropy that serves about 1000 homeless people in Boston daily through its various programs and facilities. The main building is quite imposing; it is the former headquarters of the Boston Fire Department and was built in 1892 modeled on an Italian Renaissance palace in Siena.

Once each month, our church prepares the evening meal. It is cooked in the church kitchen by a team of volunteers. Debbie and I picked up the meal, as well as another volunteer Jim, in our leafy suburb and drove into Boston. (I have never done this before but one of the church ladies broke her wrist and I was pressed into service at the last minute.)

The Pine Street Inn has two sections, one for men and one for women. The “guests” arrive in the evening for dinner, then go upstairs for showers, and then spend the night. In the morning they leave, mostly to return in the evening. We served the women dinner yesterday. I might add that the facility was immaculately clean.

I had been expecting to encounter people who were somehow impaired, either physically or mentally, and some were. But mostly I encountered people whom the English used to quaintly call “distressed gentlefolk,” that is to say, people superficially like us. Some women looked as if they had come directly from the affluent suburbs. They were clean, properly dressed, polite and well-spoken. When we left, we received many “thank you’s.”

Troubling. The Great Recession is reducing some people not unlike us to indigence. This is an offense to the natural order.

"The gathering storm"

Yesterday, George Will wrote a column “In Netanyahu, Israel has its own Churchill.” (IBD, Aug. 12, 2010, p. A11) He pointed out that Netanyahu has two pictures in this office, one of Theodor Herzl and one of Winston Churchill. “Netanyahu,” Will writes, “his focus firmly on Iran, honors Churchill because he did not flinch from facts about gathering storms.”

About a year ago, I wrote an essay for Euromoney entitled “The hedgehog and the fox,” harkening back to Sir Isaiah Berlin’s theory that there are two types of personalities, that of the fox, who knows many things, and that of the hedgehog, who knows one big thing. Netanyahu and Ahmadinejad are hedgehogs and Obama is a fox. The one big thing Netanyahu knows is that Iran must be stopped before it has effective nuclear weapons and Ahmadinejad knows he has to have them. Assume, therefore, a 50/50 chance that Israel will attack Iran within the next year and that the US will intervene to reopen the Straits of Hormuz after Iran closes them. How should this possibility affect one’s investment policy?