Wednesday, February 4, 2009

World Fate in the Hand of Morons

Sell Everything? Protectionist Nightmare Might be On The Way

The news flow regarding world trade is going from bad to downright frightening, we all know trade credit is collapsing but that is just icing on the cake, the real ‘hammer’ will be laid by politicians. The ‘Buy American’ provision looks like to be on its way, while that provision says it can be removed if it violates language in existing trade agreements that is not the point, the point is that human nature has not changed, the temptations for politicians are still there and for now they seem to be respecting pre-credit bubble burst agreements however its just doesn’t look likely they will contain their visible hand from messing world trade.

There is little reason to believe US and world politicians are more disciplined today than they were in the past, spending as a percentage of GDP has been ballooning for decades and it only looks like it will continue. Hypocrisy is still widespread as tax fraudsters are running for office by the leaps and bounds. Free trade has been a consensus among economists for a really long time, Hoover got a letter signed by 1028 economists begging him to not go forward with Smooth Hawley, its likely he knew his measures would be damaging, however the temptations of politicians of trying to buy votes to stay in power were too great and he started a world trade war. We probably have the greatest risk of a world trade war now than we ever did since the depression, the risks are clearly on the downside as the future is depending on politicians who usually don’t posses a pristine track record. The G7 said no protectionism, then the individual countries proceeded to pass a number of tariffs and barriers to trade

It will be absolutely crucial to see how this ‘Buy American’ provision moves forward, could congress and the administration move in with this and simply ignore language from NAFTA and therefore give ‘reasons’ for Mexico and Canada to strike back? The consequences of such event could be apocalyptic as it would send a message to the entire world that the leader in worldwide trade thinks ballot boxes and special interests are more important than keeping their word, at that point all you can do is to sell everything, short the stock market, buy DEEP out of the money puts in the stock market as the consequences of such events tend to be underpriced by the market

The Chinese and Europe are also two to watch. The Chinese have been called currency manipulators and they were not pleased, verbal trade war has already began. We are not in what it seems to be a mining field where politicians will use each other mistakes and actions to justify their own lunacies. The Austrian Economist portfolio will not be in play in the case of protectionist hell, the Great Depression Portfolio(long gold, short stocks, long SPY puts, long treasuries, long select commodities, short select commodities) will be the name of the game.

At this point the outlook for world trade is not entirely clear but the news flow points that the same process is happening, in the beginning it’s the denial that protectionism is even taking place. Joe Biden downplayed the ‘Buy American’ provision, they want to tell us everything is fine and they are not that crazy. Except they are.

Even if the US is ‘different’ because their leaders are more aware of the consequences of trade wars(an not entirely resonable assumption), we are talking about dozens of countries, some led by nutcases, if you are an optimist, are you really that confident that the worst recession since WW2 wont lead dozens of leaders to do their usual lunacies because this time is different? The last time I checked Adam Smith was being ripped left and right in discussions

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