I consider a recent article titled ‘IMF bombshell: Age of America nears end‘ – reading time 5 minutes – to be a ‘must read’.  The article is written by Brett Arends of Marketwatch.  The byline of the article is ‘Commentary: China’s economy will surpass the U.S. in 2016′,  The article says “The rise of China, and the relative decline of America, is the biggest story of our time”.  If ‘our time’ is defined to mean the past few years and the next ten years, I agree with this statement – see commentary on the U.S. net trade deficits in Wednesday’s e-mail.

Mr. Arends discusses some of the fundamental differences between the policies of China and those of the U.S., concerns of other Asian nations as to how China’s policies may affect them, and importantly says the International Monetary Fund analysis looked beyond comparing China and the U.S. based on exchange rates to comparing them based on ‘purchasing power parities’ (‘PPP’).  The reason this is important is that after the article was published the IMF responded to it (as set out at the end of the article) by confirming its report, but at the same time challenging Mr. Arends interpretation of the data based on PPP.  In its response Mr. Arends reports that the IMF said that using market exchange rates the U.S. currently is 130% larger than China, and would still be 70% larger in 2016.

From my perspective, if things continue down the road the world economy strikes me as being on, it isn’t a matter of whether China will overtake the U.S. as the world’s largest economy, but when.  Curiously, the year 2016 cited by Mr. Arends is the same year that has been predicted for some time now to be the year that over 50% of the population of the continental U.S. will speak Spanish as their first language.  I first heard that statistic in 2002 at a golf charity event.  I didn’t believe what I was told, and at the time checked it out with about six people I knew who I thought would have a sense of that demographic.  They confirmed it, and as best I know that particular forecast hasn’t changed much.

Again, Mr. Arend’s article is one I strongly suggest you take the time to read – for its content, and to observe and reflect on what I think is good job of objective reporting.  China’s continued progress will affect the world population in many ways – not all of which are in my view predictable.  An old and I think relevant saying:  ‘To be forewarned is to be forearmed’.

Beware of ‘nonsense on the Internet’ and other forms of media.  As I have said in many previous e-mails:  “Don’t be taken in by the headlines, the devil is in the detail”.

In the past few days I had occasion to review a report on a well known Internet site which was headlined “Expert says …”.  The expert is a person I have some knowledge of.  Said expert expansively expressed opinions on the coming prices, not trend prices, of two commodities in circumstances I can tell you I wouldn’t ‘take that ‘expert’s’ opinion to the bank’.  This is not to deride this particular ‘expert’, but simple to again suggest you not rely on anyone’s commentary and advice (mine included) without carefully and fulsomely reviewing their background experience.

For over 40 years I have been recognized in Canada as an expert in business valuation.  I just took my dogs for a walk.  My dogs behave based on the way they have been trained.  My dogs respond to me ‘in the moment’, not because they think of me as business valuation expert – and that is the way it should be.  My message – don’t get taken in by ‘expert’ hyperbole, whether expressed on the Internet or any other form of media, and don’t think every view expressed by an ‘expert’ is ‘on the money’.  Here are some suggestions:

·               listen to each ‘expert’ carefully and decide just how ‘expert’ you really think they are with respect to what they are then speaking or writing about;

·               challenge expert opinions and views based on your own experience – and don’t undersell your ability to do that;

·               in my experience the best ‘experts’ are those who know they don’t know everything about any given topic, and hence hedge their comments and opinions – they are not arrogant in their presentations, and don’t come across to you as ‘know it alls’.  Real ‘experts’ tend to see both the upside and downside to things – and nothing in life I know about is without risk; and,

·               don’t be taken in by headlines, and don’t rely on the content without carefully reviewing the credentials of the commentators.  Think less of articles whose contents are not fully supportive of the article’s headline.

Simply put, beware the advice of those whose credentials don’t stand up to ‘devil in the detail’ scrutiny. In this regard, read experience, not degrees, and definitely don’t pay attention to degrees in enthusiasm and repetitiveness.

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On Wednesday morning Fed Chair Bernanke held a Press Conference.   You can watch 11 minutes of that 60 minute Press Conference here, and I suggest you do that if you are an investor in equities, physical gold, or physical silver.

The price of physical gold immediately jumped following that Press Conference, and this morning is above U.S.$1,540 per ounce as I write this 48 hours later.  Mr. Bernanke continues to say the Fed believes U.S. non-durable inflationary pressures to be ‘transitory’, but seems never to given an explanation as to why.  It strikes me that the Gold price likely is headed ‘north’ at the moment based on market expectation of increasing inflation, and continued erosion in the U.S.$ exchange rate.  Everything else going on in the world was broadly known prior to Mr. Bernanke’s speech 48 hours ago (or at least I don’t know of anything), and one would think all those ‘other things’ should have been factored into gold’s price by the time he spoke.

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Many people think the root cause of the current U.S. economic problems is the sub-mortgage debacle.  I certainly think that is a major contributor both to those problems,  and to the timing of them.  However, I believe (and have believed since 2005 when I first started to seriously study the U.S. and its evolving place in the world economic order) that what is happening now would have happened eventually absent the sub-prime crisis – albeit many years from now.  This is because I think an earlier principal driver in America’s economic malaise has to do with U.S. Federal Administrations dating back to 1971 (when President Nixon renounced Bretton Woods), and latterly dating back to 1990 and earlier when those Administrations embraced the concept of globalization – and hence indirectly the resultant movement of U.S. manufacturing jobs to ‘low wage’ countries.  In simplistic terms as I see things, globalization has had the effect of eliminating U.S. manufacturing jobs, while at the same time up to 2007 maintaining (or improving in many cases) the U.S. Main Street standard of living while concurrently keeping CPI inflation low.  I believe measurements – and I think particularly important ones – of this manufacturing job replacement activity and U.S. dependence on imported oil are the U.S. monthly and cumulative net trade deficits.  I have believed for some time that the U.S. net trade deficit is a significantly important monitor of the ongoing standing of the U.S. economy in the world order.  I continue to believe that.

Each month the U.S. Government publishes the U.S. net trade deficit for the second prior month.  On April 26 as I write this commentary, the latest month net trade deficit numbers that have been published are for February, 2011.  The U.S. net trade deficit is the number derived by netting the typically positive (and comparatively small) U.S. ‘services trade surplus’ with the much larger U.S. negative ‘products trade deficit’.  The ‘products trade deficit’ includes imported oil, so if the oil price goes up, typically so too does the U.S. net trade deficit.  Currently, the U.S. net trade deficit runs at about U.S.$45 billion per month.  Importantly, the U.S. has not had an annual net trade surplus since 1975.

The following chart shows the monthly U.S. net trade deficit for each of the twelve months ended February, 2011.

Frankly, I can’t think of two more interesting (and I think comparatively little focused on) charts than the two that follow.  The first shows the annual U.S. net trade deficit from 1990 to 2010.  The second shows the buildup of the cumulative U.S. net trade deficit from 1973, two years after Nixon renounced the Bretton Woods International Monetary System and gold as securitization for the U.S.$.  If you have any interest at all in economic history, I suggest you watch a 4 minute video of that portion of a 1971 Richard Nixon speech where he made that announcement, and where he discussed how the changes he was announcing would protect American industry.  I believe what you will watch and listen to is a 4 minute ‘turning point’ in U.S. history.

You might want to review and carefully think about the likely implications implied by these two charts, particularly the second one that shows the build in the U.S. Cumulative Net Trade Deficit from 1973 (when there wasn’t one) to December 31, 2010.  Note that it took 26 years to the end of 1999 for the cumulative net trade deficit to reach U.S.$1.98 trillion, and that it quadrupled to U.S.$7.98 trillion in the 11 years ended 2010.  At +/- U.S.$45 billion per month, the U.S. cumulative net trade deficit currently continues to climb at a rate of in excess of U.S.$500 billion per annum – seemingly with no end in sight.

So what do these charts say to me.  First as I see things they clearly show how the balance of world economic power has shifted, and continues to shift, away from the U.S. – particularly after 1999.  Because I don’t see manufacturing jobs returning to the U.S. in a meaningful way, and because I see the U.S. as a net importer of oil for the foreseeable future, I don’t see the U.S. net trade deficits reversing and turning positive going forward.  For me, assuming everything else equal, this means the U.S. economy weakens each month against the economies of its principal trading partners.  Of course, everything else isn’t equal, as the U.S. goes significantly further into debt each passing day in the aftermath of its ongoing net trade deficits, U.S. manufacturing job losses, and the 2008 financial crisis – promulgated in part by the U.S. ongoing sub-prime mortgage debacle.

So where does all this end.  I see things, nowhere good for any developed country overburdened with debt – including the one whose fiat currency for the time being at least continues to be looked at as the world’s benchmark (reserve) currency.  Ah, but to be able to return to that fateful 1971 evening and watch the American Dream being played out on the ‘Leave it to Beaver’ television show – instead of watching President Nixon renounce Bretton Woods.

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