“What if the crisis of 2008 represents something much more fundamental than a deep recession?” he asks.

So he’s just now figuring this out.  Well, when the family fortune you marry into shrinks from $3.6 billion to a mere $25 million, I guess it’s natural to start wondering such things.

But since it’s Tom Friedman we’re talking about, it’s also natural to reach the wrong conclusions.

We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese …

We can’t do this anymore.

Yeah, I know — I too had to read it a couple of times so I could follow the logic, such as it is.

Is Friedman saying the whole globalization model as he’s portrayed it for the last couple of decades is falling apart?  Not that he would admit that, of course — “We’ve always been at war with Eastasia!”

Note too how he writes with the conviction of the converted.  I suppose if the family fortune you marry into has shrunk by more than 99 percent, and that family fortune is based on shopping malls , and you’re already of a world-improving mentality, it’s natural to adopt an outlook that meshes the worst of consumer-culture contempt and climate-change hysteria.

It is also natural in light of those circumstances to be utterly blind to the real causes of the crisis.  He writes about China’s purchase of Treasuries as if it were a phenomenon in isolation.  There’s zero acknowledgment that what we face is a debt crisis — a crisis of excess credit fomented by the Federal Reserve that metastasized through the financial system and then the wider economy.

Friedman actually quotes an expert who says, “We have not generated real wealth,” without realizing what’s actually happened in the 20 years he’s been extolling the virtues of globalization (as he defines it):  The art of money-shuffling was elevated above the craft of producing real goods that people can use.

No matter.  Friedman speaks for the Davos crowd he’s hung out with the whole time that’s managed to screw things up so royally.  And their message now is:  Suck it up.  Learn to live with less.

You know, I think most people are probably able to figure that out without Tom Friedman’s help.  But he’s bound and determined to help anyway.

Source: The Conviction of the Converted

Where trade flourishes, business is good. But trade does not always flourish. The linked forces of globalization move in fits and starts.

The authors of Power and Plenty, a new book on trade over the last thousand years, tell us as much. “If anything,” they write, “history suggests that globalization is a fragile and easily reversible process.”

One of the looming threats in 2009 is the reversal in trade flows and increasing barriers to trade.

For the first time since 1982, The World Bank predicts global trade volumes will shrink in 2009. Undoubtedly, global trade enjoyed a boom over the last two decades or so. The global slump, though, is taking a bite out of that happy ride. Already, through November, exports from China, Taiwan, Chile and South Korea plunged by 20% or more.

The falloff in trade is worrisome enough as a globe-trotting investor. In the last several years, companies with operations overseas did much better than those confined to North America. In 2008, though, that wasn’t true. According to Bespoke Investment Group, stocks of companies that booked more than 50% of their revenues abroad fell 46% on average in 2008, versus a drop of 38% for those with no international revenue.

But there are signs that things could get much worse. Because like tea leaves steeping in a pot of hot water, the longer the economic slump persists, the more likely political trouble is to brew. The rise of barriers to trade is a particularly bitter brew of political trouble.

Already, a number of countries have taken actions to close their markets or protect domestic industry. Consider:

- Indonesia – new restrictions on over 500 goods as well as new fees for imports
- Russia – new tariffs on imported cars, poultry and pork
- France – a new state fund to protect French companies from foreign takeovers
- Argentina and Brazil – new tariffs on imported wine, leather goods, peaches and more
- India – a new 20% duty on imported soybean oils.

And then there is the U.S. bailout of the automakers, seen as an unfair subsidy by foreign competitors. This is only a partial list involving some of the bigger economies. However you view these moves politically, there is a good reason we should keep an eye on these things: They will affect how you invest.

For example, Russia is Europe’s largest car market. But now there is a tax on foreign cars of as much as 35%. Moscow wants to protect its automakers. The Russian people are poorer because of it. But as an investor, your favorite automaker, which may have had a nice business selling cars in Russia, may now find it tough going.

Moscow also put high imports on poultry and pork. Russia is the largest market for U.S. poultry. If you own a chicken producer, this is not good news. Your potential profits in a big foreign market are cut, and such tariffs could result in excess poultry staying in the U.S., leading to falling prices and lower profits at home.

All of these kinds of moves tend to happen when economies weaken. They can also bring about nasty trade wars.

In 1930, America passed the Smoot-Hawley Tariff Act. It raised tariffs on a number of imported goods. As the authors of Power and Plenty contend: “It triggered a wave of tariff increases.” By 1931, “average tariffs on foodstuffs had risen 53% in France, 59.5% in Austria, 66% in Italy, 75% in Yugoslavia, more than 80% in Czechoslovakia, Germany, Romania and Spain and to more than 100% in Bulgaria, Finland and Poland.”

These were hard to unwind. It took decades to reverse these anti-trade policies. They certainly didn’t help resolve the Great Depression.

I don’t think it is a coincidence that global trade expanded nearly fourfold since 1990, during a time when the average tariff fell from 26% to 8.8% by 2007.

A reversal of that trend spells bad things for investors. So far, we’re OK. Most of our companies sell goods that other countries can’t get enough of – things like fertilizers, road-building machines and power equipment. In many foreign countries, there is little domestic supply. China, for instance, it is trying to keep fertilizers in, not out. In fact, the Chinese have made it easier to import goods such as potash.

Still, it’s something to watch.

Source: Globalization Halt!

Yesterday, we were full of doubts…

But today, we’re not so sure…

Ah, that’s the trouble with growing older. You lose your dreams and youth. You lose your bearings too. We had lunch in the House of Lords yesterday, with our old friend Lord Rees-Mogg, who turns 80 next month. But more on that in a moment…let’s first turn to the financial news.

Today’s big headline concerns Fed chief Ben Bernanke. According the Financial Times, he broke with long standing tradition in order to express himself on the dollar yesterday. Alas, the fall of the greenback has “contributed to the unwelcome rise in import prices and consumer-price inflation,” he said to an international banker’s forum.

The headman at the Fed may want a stronger dollar…or a weaker one; it’s usually not his place to say so. That’s what the Treasury Secretary is for. Henry Paulson, of course, says the same thing; the United States wants a strong dollar. But nobody believes him. Investors seemed to take Mr. Bernanke more seriously.

Stock market investors sold shares and drove the Dow down 101 points. Over in the oil market, the black goo sank $3.45. And gold, too, was sold on the news…it sank $11 to $885.

But let’s think about this. What could the Fed do to protect the dollar? Easy…it could raise interest rates. But if the Fed wanted to protect the dollar, why has it waited so long? The greenback has lost about half its value since 2000, why didn’t it try to protect it sooner?

Ah, dear reader…the plot has become a bit confused. Let’s see if we can remember it.

In the 15-year period known as the “Great Moderation” central banks could increase their supplies of money 2, 3, 5 times as fast as GDP growth. Normally, this would cause inflation. But it didn’t, because globalized markets…along with a few other key trends…we’re holding consumer prices down. So, the inflationary money went into asset bubbles…dotcoms, houses, and the financial industry.

But after the housing/finance bubble popped last year, consumer prices rose – even while the world economy softened. All of a sudden, the world seemed to be spinning in the wrong direction. Instead of holding down prices in the United States and Europe, China was increasing them. China’s domestic inflation is running at more than 8%. And she’s exporting her inflation to the rest of the world. Import prices from China into the United States are now rising at 4% per year…after falling about 1% each year during most of the 21st century. As for imports from the rest of Asia, they were falling in price as recently as the first half of ‘07. Now, they’re going up by 4.3% per year.

And even as demand for basic commodities slows in the developed world, demand from the emerging markets makes them more expensive. Ai yi yi…globalization is no longer a force for good…but a force for evil! Now, earnings and housing prices fall in the United States, for example – while Americans are forced to compete with Asians for food, fuel and jobs too.

House prices in America are still falling. Foreclosures continue to rise – especially in places such as Las Vegas, which has the distinction of being the “mortgage fraud capital of the world.” And now comes word that people are not only abandoning their houses – but their pets too. Yes, the Society for the Prevention of Cruelty to Animals says that owners are leaving their dogs and cats behind. And pet food banks, operated by the SPCA, are said to have people lined up down the block to get free food for their pets.

Meanwhile, Winnebago says it has had to put its Iowa plant in neutral. The company makes luxury land barges, which have been a big hit with Americans for many years, allowing retirees to take to the open road whenever the mood strikes them. Problem is, motor homes are expensive to buy…and now, with gasoline over $4 a gallon, extremely expensive to operate. In real terms, gasoline is higher than it has ever been in the United States…considerably higher than the $3 it hit (in today’s money) in 1981.

On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts. But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

Of course, we can’t tell you what the name of the firm is here – but Dan will in his new special report…along with advice on how to pile up as much as 200% gains, as this firm pays the piper for its massive mistakes. Clink on the link below:

Money-Tripling Gains on the Next Wave of Wipeouts and Write-downs Ahead

The feds’ response to this situation – so far – has been to cut rates, bail out financial firms, and hand out money (rebate checks). This inflation (along with robust demand from the emerging markets) has made itself felt, mainly, where the feds didn’t want it – in oil, gold and commodity prices.

This week’s news told us that good times are over. “For the time being, at least,” said the Governor of the Bank of England, “the ‘nice’ decade is behind us.”

Of course, just because an economist or a central banker says something, it doesn’t make it so. And when a central banker who is also an economist says something, it should be treated with the skepticism of an airline schedule.

“I am obviously biased, but I find it sad to conclude that the role of serious economists in financial institutions is very limited today,” said Han de Jong, Chief Economist at ABN Amro Bank to the Financial Times on February 21, 2008. ” We are little more than clowns, whose purpose is to entertain clients….”

Mr. de Jong is too modest. Economists are essential to the financial industry. They distract the customers while the boys on the sales desks pick their pockets.

We say that not in contempt but admiration; the role of the financial industry – like the contemporary art market or like Las Vegas – is to separate the punters from their money. Economists help them get the job done.

This they did in the last two decades with a variety of gaudy theories. It didn’t seem to matter that the theories were contradictory and absurd. On the one hand, prices were said to move randomly – permitting them to ‘model’ risk and sell extravagant securities. On the other hand, private equity experts and fund managers pretended to know which way the ‘random’ movements would go; they claimed to be able to produce “alpha” – above market returns – on a such a regular basis they could charge “2 and 20″ for it.

But while economists are usually wrong about things, the burden of the present essay is that Mr. King is right this time.

Last week, we argued that ‘alpha’ was a mountebank. The financial industry doesn’t often add much value, we pointed out. Instead, fair winds and convenient tides are what usually get investors’ little barks where they want them to go. Most of the results investors get depend upon setting sail at the right hour, from the right place, in other words, not in having a Wall Street hotshot at the tiller. Put an alpha-seeking whiz-kid out in a storm and he’ll sink along with everyone else.

In the 20-year period ’83 to ’03, for example, the price of oil barely moved. Sheep could graze peacefully in the Mideast, confident of being undisturbed. Now, everywhere they go, someone’s setting up an oil rig. The latest figures show oil exploration up 400% since 2000.

Almost a whole generation of investors got nothing from that greasy sector. Then, all of a sudden, in the following 5 years the roughnecks suddenly had money in their pockets and the wind at their backs.

Likewise, in America, you could have held residential housing for 100 years – from 1896 to 1996. You would have gotten nothing for your trouble but leaky roofs and cracked paint; prices rose only as much as consumer prices. Then, the next ten years, a tide of easy credit rushed into the residential real estate market; prices rose 70% in real terms.

Behind both these booms is a story too long to tell here. But the moral of it is simple enough. The average investor makes far more by accident than by fund manager. And here we venture a guess: of all the times and places in which a US investor might hope to get a decent return on his money, this is not one of them.

But the beauty of capitalism is that people get what they’ve got coming – not matter what they think. NICE is an acronym for “non-inflationary consistent expansion,” according to Mr. King. It is his way of describing what other economists called the “great moderation,” a period so agreeable that they gave themselves credit for it. Macro economists believed they had finally mastered the art of central banking – so perfectly manipulating the credit cycle as to produce growth without causing the consumer price inflation that typically accompanies it.

If economic wizards were really responsible for the Great Moderation, it would be reasonable to think they could keep it going. Alas, they can no more sustain it than they can claim credit for it. What really happened, over the last 25 years, was a unique series of events and trends that now seem to have run their course. Labor rates fell as millions of new workers entered the modern economy. Now, even in China and India, salaries are rising fast. Logistical expenses declined as computers and just-in-time inventory systems were put in place; now inventories (and associated costs) are rising again. Outsourcing, globalization, deregulation, capitalization, securitization – all these trends helped keep prices down; now, all seem to have played themselves out, gone into reverse, or backfired.

Finally, the cost of money has fallen for the last 27 years. Sometimes it fell naturally. Sometimes it fell unnaturally, even grotesquely – such as when Alan Greenspan lent the Fed’s money at below the inflation rate for more than a year. Normally, cheaper money creates boom-like conditions. But normally, it comes at a cost: consumer prices soon begin to rise. As the economy “heats up,” the domino of labor costs falls over; workers are in demand so they ask for more money. Then, that domino knocks over consumer price stability; prices rise. Then, a whole line of dominos topples over. Bond investors run for cover, for example, forcing up interest rates. Then, the economy “cools down,” as the cost of money increases.

That was what was so nice about the ‘nice’ years. The dominos wouldn’t budge. Thanks to so many things working so hard to keep prices down, the normal process of self-correction broke down. As demand for labor increased, new, cheaper workers were found overseas. And even though the supply of dollars increased twice as fast as GDP, the domino with the CPI on it stayed right where it was.

Alas, those happy days are over. The Great Moderation is finished. This week, oil rose over $130 a barrel. T. Boone Pickens said it would hit $150 this year. And America’s core producer price index registered its biggest increase in 17 years.

Of course, the real level of consumer price inflation is probably far higher than the official numbers. The raw data suggest price increases closer to 10% per year than the 4% the US Department of Labor confesses. But the economists have their ways of making the numbers say whatever they want. In March, for example, the consumer price index was “seasonally adjusted” from 0.9% down to 0.3%. In April, wouldn’t you know it, another seasonal adjustment took the number from 0.6% down to 0.2%. We don’t know what the real number should be; no one does. But Mervyn King is right; the season has changed.

Source: Not So NICE Anymore