**warning** this is a long post and all on macro economics. So quit now while you can…
Lately, the world economic state has felt like the end of a Risk game where one player has tipped the balance of power and steam rolls through the rest. Today, China seems to be in that position, holding most of the cards and by far the strongest table position.
I just read a compelling hedge fund writeup on the world macro economy. They make a strong case that the US Govt has lost its sovereign ability to control its economic growth and currency value to foreign creditors. They argue that china now controls the dollar’s valuation as it ties its currency to ours. When china halted its annual 14 pct planned appreciation it forced the dollar to rise and commodity prices to fall.
They raise a provocative question of whether china may be manipulating world markets.
Whether or not china has intentionally forced the dollar to appreciate and caused deflation in world commodity markets, it stands to be the massive beneficiary. With over 2 trillion dollars in surplus capital reserves china is now positioned to secure its economic and energy consuming future while the rest of the world watches helplessly.
If one agrees with the Peak Oil thesis – that oil supply growth peaked in 1972 and actual supplies peaked in 2001 – then china faces an oppty of historical proportion to corner the market on oil for decades to come.
While the new obama admin works to help the US position its economy for an alternative energy future that may be decades away, china can secure its next twenty yrs with cheap oil.
China could buy 40 billion barrels of oil at today’s prices (assuming they didn’t drive prices back up).
Course the US could have chosen to do the same if we weren’t committing that capital to shore up banks and mortgages. Which would you rather invest 2 trillion in today, bad US mortgages or oil?
If countries were stocks, china would be the highest P/E today with the strongest balance sheet, lowest cost of goods sold and broadest world markets for its goods.
The only other economic super power left, the saudi arabia, seems temporarily wounded by oil price declines.
So far both china and opec have traded through the US with both lending us the capital to keep doing business. Are we moving to a future where they trade directly with each other, oil for shoes and cars? Or like the end of the Risk game, do they count the US out and start competing with each other?
I remember in 1989 having the same feeling that the japanese had won and US was old and done. The Japanese had the more efficient manufacturing and were flush with cash. Just 10 yrs later japan was done and the US had won with IT.
It does feel ironic that at the dawn of the 21st century an american economy fueled by knowledge workers and information technology finds itself unable to compete with one fueled by low cost labor and another fueled by natural resources. The more things change the more they stay the same.
My take is that the US has a few big card sets yet to play. We will go through a long overdue correction. But we will come out stronger than before. Our people will focus on building new industries with the realization that we must produce goods and services for the rest of the world and not just for ourselves. If we want to maintain our national standard of living it will happen by creating more googles and amazons and not through real estate and stock bubbles.
Our country needs to invest now in engineers. We need to aggressively recruit them from abroad and develop them by refocusing our education.
I’m hopeful that obama as our new ceo will develop a long term strategy we can all invest in to make america win again. He should hire mckinsey to develop magic quandrants and help him define the 20 year strategy. America should look to develop the worlds great intellectual property. We should solve the hardest problems like sustainable energy. We should increase world productivity with googles and amazons. We should also develop the greatest entertainment for the world to spend all its newfound free time on (as we make everyone super productive).
We need a roadmap to exit industries we can’t compete in and trnasfer those jobs. If we stay in cars let’s double down with a winning strategy to make our cost of goods sold low and invest in world leading design and technology (as opposed to buy american ads).
If the govt is going to spend big now let’s make sure some investment goes to build not deplete our strategy oil reserves while the dollar is high and energy is (temporarily low). We can outplay china. They have inflated our currency, great. Let’s turn it into hard assets and play the coming depreciation as a country.
What I am most hoping for is that we have someone playing our side who is great at Risk:)