Archived Messages from Robert J Stupple, President of Step Stone Financial

Good conversations make for good friends. Good friends make for great conversations!

Thoughts are fine, but the true question is "What is your thought process?" On this page I spell out my thoughts, and the reasons for those thoughts on a specific topic. I invite your feedback on the opinions expressed. (Please use the email form at the bottom of this page to reply.)

Random thoughts Occasional Soapboxes.

Ladies and Gentlemen, the recession is over. Congratulations and thanks be!
We’ve made it through another bust cycle. This one was tougher than many others and it has brought about changes. This is only fair, because this last one was brought about by changes, some of the biggest changes that we’ve seen since the Second World War.

Our biggest change is China. I remember back in 1998 when Ed Yardeni said that we hadn’t seen an opportunity like China since the Louisiana Purchase expanded America by more than double its previous size. China is quadruple our population! To put this into a perspective keep in mind that in China, families have but 1 child per couple, which means that the percentage of their population that is working age is higher than ours with our 2.8 average children per couple.

China is a huge market and a huge labor force (no news here). China owns a whole lot of US debt, but not as much as one might think. Estimates are that China holds $1Trillion in US debt. Which seems like a lot, until one sees that Chinese Millionaires/Billionaires (at latest count, in 2008 they were 415,000 of the world’s 10,000,000 in 2009 There were 64 of the world’s 1,011 Billionaires on the Mainland, another 25 live in Hong Kong) have somewhere in the neighborhood of $7Trillion in assets (the estimate is based on the report that between India and Chinas M/Billionaire populations there are over $9Trillion, eighty percent of these people are in China.) not including residence and consumer goods (Lambos, and the like). The regions rich hold liquid assets of an average $4 Million, that comes to $1.67 T. This is interesting in that China has a MUCH more “confiscatory” history than the US ever did.

Further, the government of China is a MUCH more paranoid government than ours. Ours tends to be a carrier when it comes to paranoia, what with “Threat Levels” and TSA “screenings” and “Duck and Cover” exercises and the myriad other times they scared the public into action. But at the same time our government is ridiculously open to criticism, ridiculously willing to let any group assemble. And rightfully so, that First Amendment says a whole big mouthful! See what it says here.

In China, protestors don’t have these rights. You won’t see the “Chinese Supreme Court” saying that Chinese companies have the right to say whatever they want about the election of government officials, anonymously or otherwise! The wealthiest man in China owns a soft drink company. Don’t think he doesn’t know each and every day, that ultimate power lies with the Chinese government, and if they say that the factories now belong to The State, there’s nothing he can do about it.

China has a long history of rebellion. From 1851 through 1949 the country was at near constant war with itself (which made it easier for countries like Japan and England to successfully invade the country). The Communists took over in 1949 but then the real work of consolidating power was only started! Less than 50 years later a new revolution occurred as Hong Kong was added back into the “property” of Mainland China. While it is true that they are getting scarcer, for many years, this country was run by people who had lived through “The Great Depression” and their experience during that time influenced the way they behaved through out their lives (I think we all know at least “of” people like this). Similarly, in today’s world we have people whose economics were forged in the crucible of the inflationary 1970’s. In China, the country is still filled with people who lived through “The Cultural” if not the Communist revolution(s).

What the Chinese do NOT have today is a first hand history of how rich people are supposed to act. It’s been a long time since there were flagrant class distinctions on the mainland. It will be interesting to see what these people actually do with their wealth. We know that there is spending, and gambling going on, that’s pretty much why Dubai is being built out as an international resort.

But a Trillion dollars is enough of an encouragement for the Chinese to want the Renminbi to stay pegged to the US$ (or to trade as close to it as is possible).

Why is this important to us (in terms of this discussion)? Because that attachment of the Yuan/$ makes it very difficult for us to get up off the recession floor.

Generally speaking, when an economy goes into a recession, the countries unemployment rolls rise. Fortunately, people aren’t starving to death (as would happen without the so called “Safety Net”) but their spending is curtailed, dramatically. Now, assuming that the economy had been humming along before the recession, the value of the dollar would normally have been very high versus other currencies in that foreign investment in US assets would be high, and foreign investments can only be made in US dollars. (This goes back to the very basic “Supply and Demand” equation. If Jean Luc wants to buy property in America, he must first convert his Euros into Dollars, to do this he must sell euros and buy dollars. When there are many people doing this same thing, there are more sellers of Euros than buyers, and so the price goes down, and at the same time there are more buyers than sellers of US dollars and so the price of them goes up.) And with a strong dollar, foreign goods are cheaper in the USA, as compared with domestic goods here.

This, in and of itself is a reason for the layoffs. Imagine you make a widget here and sell it for a dollar and they make a comparable widget in Germany. If the dollar is strong, then I can use my dollar and buy a German widget for (say) 50 cents. I can sell it in the US for (say) 75 cents including the cost of transporting it. I’m going to outsell you because my item costs less. You are going to need to cut back on production.

What is supposed to happen is that when you cut back on production and the economy slips into recession, then your employee stops buying the German widget. The foreign investors stop buying US Dollars and so even if supply stays static the price drops because the demand has gone away. The dollar drops to a point where the German Widget now costs $1.50 US. Now your factory is selling all the widgets it can make, you hire your workers back and things start to “rehum” after the reset of the equilibrium of the currencies and the prices between the US and its trading partners.

But what happened here is the Yuan/$ tie up essentially meant that China was like an “Enterprise Zone” of the USA. As our economy drops and our currency drops their products don’t get more expensive relative to us. There isn’t a time where it is more expensive to import their widget than it is to make a widget here (well there is one way, but we’ll get to that later). And so when we are trying to get up, we have the weight of the entire Chinese capital wealth on our shoulders.

We have an entire other economy, not subject to our interest rate policies and our taxation which is taking advantage of the “Full faith and Credit” of our currency (BTW, that’s what our taxes buy, “The Full Faith and Credit of The United States Of America” the most secure promise of ANY contract on the face of this planet!). It is not “fair” (as if “fair” has anything to do with it) to you and I that they are able to get this without paying for it! And not just any other economy, an economy where the top .04% of the population own 7 times our total indebtedness to their nation in personal wealth!