This Week: Secular Stagnation

Market Pulse

Two weeks ago, I indicated that I had gone into a full, risk neutral hedge on my call options portfolio. This, of course, was equivalent to a call to cash in light of weakening market conditions. Since that time, the market has continued to deteriorate technically, and this technical deterioration clearly reflects uncertainties over economic fundamentals. This call to hedge or cash remains in play.

The reality is that the Chinese economy is one of the few economies that continues to grow robustly. Part of this growth is due to a massive fiscal stimulus that has been implemented much more efficiently than the US version. However, part of this Chinese growth is a continuation of its mercantilist exploitation of the rest of the world to drive its exports. The Chinese recovery is ultimately unsustainable if it continues to beggar the economies of the US and Europe.

What is particularly galling about the Chinese economic approach is its continued attack on the US dollar. Comments by top Chinese government officials calling for the dollar to step down as the reserve currency are just so much drivel when one considers that the weakness of the dollar has in large part been driven by China's currency manipulation. History may well teach us down the road that China's continued attack on the dollar was, in fact, a conscious strategy to undermine the US economy and financial system, and in this way ultimately take over the number one spot in the world in both of those positions.

That neither the Obama administration nor the Federal Reserve seems to have a clue of China's intent is all the more troublesome. Memo to Barack: We cannot spend our way out of this crisis. We need a manufacturing base, and we can't have a manufacturing base if we continue to allow the Chinese to engage in mercantilist and protectionist policies that continue to destroy our manufacturing base.

It's useful to remind readers here is that the concerns I expressed during the presidential campaign about Barack Obama was that he was a really smart guy but he had no economics training and his top economic adviser was a micro-economist not a macro guy. This problem is playing out in full now. Obama seems dazzled by the brilliance of Larry Summers when the reality of Larry Summers is that all he is is a rabid Keynesian who doesn't know how to do anything other than stimulate the demand side of the economy while the supply side of the economy withers and dies. Meanwhile, Treasury Secretary Timothy Geithner is no more than a competent bureaucrat when in this time of crisis what is needed is someone with extraordinary skills. Of course, the third part of that brain trust is Ben Bernanke and loyal readers will know how I feel about that dollar-debasing idiot. So many smart people making so many dumb choices -- it boggles the mind.

From an investor's point of view, what this situation all adds up to is a secular downtrend in both the American economy and the stock market, particularly when movements in the stock market are discounted for devaluations of the dollar. It's puzzling why the brief bullish cyclical upturns to which we are treated on occasion continue to provide us with some hope that a longer-term economic recovery is around the corner.