Looking For The Trigger

An article from our friend Jack Crooks:

Jack Crooks

Black Swan Capital LLC


Our favorite comparison is that of China now to America in 1929. China still refuses to give up on exports and has subsidized its export sector to push that stuff out as fast as possible i.e. the goal is to force some of the brunt of the domestic pain onto its trading partners (and knowing a transition to more domestic demand will not be easy). This is precisely what the US did in 1929 to its trading partners as the major export/manufacturing power then.

US trading partners didn't like it when the US back in 1929 decided to subsidize production instead of do all it could to ramp up domestic consumption; and China's trading partners don't like what China is doing now—the same thing. And when you consider the magnitude of the decline in global trade now, relative to 1929, you begin to realize just how much pain the export driven economies are taking—at least those that have not had the wherewithal to force feed the equivalent of almost half their total GDP into the economy, as China has.

The chart below was sent to us by a friend. The maroon line on the chart is the US export decline from Oct. 1929 thru June 1930.

Notice that the relative export declines in Japan (blue) and China (green) are worse in this cycle than the US in '29. Germany is represented by the black line, and the US today is the red line. But what is so interesting, and here is the rub, declines today in exports are primarily market-driven i.e. we do not yet have the specter of a trade war looming, as was the case in 1929-1930 and consummated with the signing of the Smooth-Hawley Tariff Act of 1930.

So, if China continues to push out extremely low priced subsidized final goods—already hurting its Asian-block competitors badly—Western nations will likely respond with tariffs in this economic and political environment. Already Europe has accused China of dumping steel pipe onto the market and has levied 24% anti-dumping duties. India isn't exactly happy with some of the goods crossing its borders of late. And the big swing from capital to labor environment in the US suggests we will likely see more of the Buy America theme catch hold.

None of this may come to pass if there is a rebound in global demand. But if there isn't, we think stocks in bubble-licious China, and everywhere else, are way ahead of themselves. And if that's true, watch out for yet another major US dollar risk bid higher that will once again make it clear this game is about global capital flow and nothing else.


Given the Japanese market's reaction to their latest GDP numbers, it seems to reinforce the deflationary argument. Exports have plunged and to date are not recovering. The danger is the development of a trade war unlike any we have seen in 3 generations. This would trigger another downward economic wave. As I pointed out in the post http://whatisthatwhistlingsound.blogspot.com/2009/04/wwww-recession.html back in April, the socialist state that does not believe their actions have consequences (as Newton stated: for every action there is an equal and opposite reaction) is in for a rude awakening.