This story and more in Tudor’s latest letter to investors.
Our extraordinary times offer extraordinary opportunities, but as with most opportunities, there will be winners and losers.
Economies in the developed world find themselves with unemployment levels not seen since the Great Depression. The response from respective governments has been massive fiscal stimulus in conjunction with monetary easing. And now many of these governments, having exhausted all fiscal stimulus measures that are politically feasible, are about to embark on another round of quantitative easing. The Bank of England, the Bank of Japan and the US Federal Reserve have implemented, or are considering implementing, significant rounds of government securities purchases.
Will these measures actually succeed in lowering the chronically high levels of unemployment? Or are the unemployment problems of these countries so structural in nature that these policies will have only limited impact?
We’ve enlisted modeling and forecasting firm Macroeconomic Advisers, LLC to assist with answers to these questions. But, first, a story: About ten years ago I had an acute case of plantar fasciitis in the left foot, a condition in which the fascia, or the covering right beneath the skin, had become highly inflamed. I asked Pete Egoscue (egoscue.com), a renowned postural specialist but one without medical training, to take a look at my foot. Pete had, after all, healed a number of people I knew, including my wife. Because Pete was self-taught, I was a skeptic— as any good trader would be.
Pete said that he did not need to look at my foot because my foot was not the problem— a response that suggested I was dealing with a quack. But I was patient and continued to listen. He proceeded to explain that the pain in my left foot was the consequence of a structural, postural deficiency in my hip alignment. My right hip was rotated in such a fashion as to make the left side of my body do all the work and bear all the weight, culminating in the inflammation of my left foot. “The pain you feel in your left foot is just the symptom,” Pete said. “If you treat it symptomatically and ignore the structural issue, you will never solve the problem.” I did not immediately grasp the full meaning of his words, but I followed his prescription,and in a few days the pain was gone. Some time later I realized that those words were probably the wisest I have ever heard from any human being, and that they apply to more than just the human body.
The developed world, and the United States in particular, is suffering an economic malaise the likes of which we’ve seen only rarely in the last 100 years. Policy makers are searching for solutions, but they are too focused on the painful symptoms of unemployment to see the misshapen structure causing it. In so doing, they are presenting some of the more wonderful trading opportunities in quite some time: winners and losers.
The root cause of the unemployment woes is quite obvious. In the United States alone, in the last two decades, nearly six million jobs in manufacturing have been lost overseas. This equates to nearly four percentage points of the
current 9.7% US unemployment rate. As importantly, the migration of these jobs contributed to the most unsustainable economic imbalance in the world today—China’s persistent bilateral trade surplus with the United States. During the last decade, China accumulated almost $1.4 trillion of US debt and at least $2.3 trillion in global assets. These figures could grow to $3.8 trillion and $7 trillion, respectively, over the next decade if the current renminbi/US dollar (RMB/USD) exchange rate continues to be artificially suppressed from appreciating.One entity owning this much debt of one debtor, let alone a foreign government, creates too much risk concentration, and has possibly repressed volatility for debtor and creditor alike. The risk may seem manageable now, but who knows what the nature and temperament of the Chinese and American leaders will be in ten years? Isn’t it possible that either side could weaponize financial imbalances to the detriment of domestic and global stability?
How did we get here? On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. After 15 years of impressive productivity gains relative to its trading partners,
though, it now resists the smallest appreciation. (The IMF implies the RMB could be as much as 30% undervalued taking 2000 as a base, but absolute purchasing power parity would argue that undervaluation is even greater—
possibly as much as 60%.) Clearly, there is a direct correlation between the six million manufacturing jobs lost in the US and the close to twelve million manufacturing jobs gained in China over the last two decades. Robert E. Scott, a
Senior International Economist and Director of International Programs at the Economic Policy Institute, estimates that the growing trade deficit with China, a partial consequence of the undervalued RMB, cost the US 2.4 million jobs
between 2001 and 2008 alone, the equivalent of 1.6% of the current unemployment rate.As someone who has traded foreign exchange since 1980, I believe the RMB/USD rate is currently the single most important of all exchange rates. It not only drives the largest foreign trade relationship in the world, it also drives
virtually every other exchange rate globally. Dozens of other emerging market countries suppress their exchange rate against the US dollar because the RMB is effectively pegged to the dollar. And what is remarkable is the lack of any
concrete policy initiative in the US to change this. For several years, the US Treasury has threatened to name China as a currency manipulator 2 but has always found a basis for avoidance. Even if Treasury cited China, it would just set in motion more negotiations that would likely go nowhere. The lone serious attempt to impose a cost on China’s distortion of global financial markets this year was congressional action on the Currency Reform for Fair Trade Act, known as the Ryan Bill, which would allow US companies to file complaints against China’s currency policies with the Commerce Department, and would empower the Department to levy tariffs and countervailing duties on imports from China.The Ryan Bill passed in the House of Representatives a few weeks ago by a vote of 348 to 79 but is stalled in the Senate. It drew immediate ire from the Chamber of Commerce as well as from eight former US Trade Representatives to China. But it was the very advocacy of the Chamber of Commerce and those Trade Representatives that led us to our current trade deficit. As Einstein said, “Problems cannot be solved by the same level of thinking that created them.”
That so many Americans continue to accept this suppression of a variety of exchange rates against the dollar is probably a function of the fact that for so long this suppression provided benefits such as cheap goods and cheap credit. In addition, for a while, manufacturing jobs seemed to be replaced by jobs in the service economy and construction industry without any economic disruption or any rise in the unemployment rate. However, the bursting of the credit bubble exposed the true structural decay that had occurred in the US economy. But, like zombies, many Americans still cling to the naive belief that we can return to the good times of the 90s and the earlier part of this decade, unable or unwilling to recognize that those high times were a debt-driven anomaly.
This delusion is fueled by a myriad of financial pundits who warn about the dangers of disrupting free trade. They are quick to point out that the Ryan Bill is contrary to rules of the World Trade Organization. Incredibly, in the WTO’s rules of governance, there is not one reference in any of its documents to the underlying bilateral exchange rate between two countries when trying to reconcile trade differences. It is like trying to referee a World Cup match with a
soccer ball that only the players can see. In the case of a controlled or manipulated exchange rate, it is patently unfair if the currency of one partner is grossly misaligned, as the RMB/USD rate is.Any serious attempt to address the structural imbalance is met with a chorus of boos from financial industry pundits who rail against “protectionism.” In discussions involving the Ryan Bill, these pundits have few qualms with lobbing into the mix, like grenades, those most dangerous of words: “Trade War.” They often invoke the specter of Smoot-Hawley, the infamous US tariff act that triggered a trade war in which American exports and imports were slashed by half, leading a number of economists to argue that its passage contributed significantly to the Great Depression. But what they fail to see, or neglect to acknowledge, is that in modern times there never has been free trade with China; the US has already been in a trade war for nearly two decades; and it is the only time in this nation’s history it surrendered without ever firing a shot.
The United States lost six million jobs, indebted itself to China by $1.4 trillion, and received in return a host of consumer goods, many of which now reside in landfills across the country.
“Trade War” is a very dangerous phrase. Clearly, China and the US are commercial competitors and not enemies. There is no reason for “combat” in any sense of the term. The Chinese have set the RMB/USD peg artificially low
because they believed it was necessary in order to shift from an agrarian to an industrial-based economy. The United States also protected its nascent industrial sector when it did the same thing in the 19th century. Developing a significant export-oriented manufacturing base was part of an ambitious plan to relocate hundreds of millions of rural Chinese to cities where they could obtain manufacturing jobs and pursue a better life. It worked. China’s coasts now burst with export-dependent factories and cities. But now and going forward, China’s export strategy is completely unsustainable. In the intermediate term, much less the long term, it is becoming clear that the main buyer of China’s exports—the United States—can no longer foot the bill. A much better policy would be finding the right balance between domestic demand and exports through a stronger currency. Brazil did this brilliantly between 2005 and 2007. Their currency appreciated 34% against the dollar yet the economy grew 2% more than the prior
three years and above what was thought previously to be the speed limit. The incoming Chinese administration of 2012 will be forced to contend with a population that has been relocated and retrained for jobs that may one day
disappear, much as they did in the United States, all because China engaged in a futile attempt to avoid an inevitable re-equilibration of exchange rates. After all, one way or the other, the real US and Chinese exchange rate will find equilibrium– either through nominal movement or through relative inflation rates.Just as the Chinese elite have become dangerously wed to an unsustainable export-driven manufacturing model, the US elite have become indifferent to mercantilist assaults on the global trade framework. In mid-September, when the Bank of Japan intervened to suppress the value of the yen against the dollar, there was no response from America’s political, financial and media leaders. While these interventions might have been understandable six years ago, when Japan’s economy was relatively less well off than that of the United States, they are far from necessary today: Japan has an unemployment rate that is half that of the United States and it still runs a trade surplus. Nonetheless, Japan intervened to protect its export industry, and the United States, incomprehensibly, responded with not even a whimper, let alone a bang.
Guess those fellas in Stockholm picked the wrong Paul…move over NYT!
Is this Paul Krugman?
Clearly not – this was cogent.
when you owe your counterparty 100 million, it owns you. when you owe your counterparty 100 billion, you own it.
too long… you had me at “winners and losers.”
TDJ for President
Can you post the letter?
what do you think all those words under the headline are?
can you read?
So, in his personal anecdote he used a ‘band-aid’ fix to address his plantar fasciitis – he never addressed the structural issue. Strangely, I’m sure this is how it will play out on the big stage too.
…and it’s not a criticism on PTJ, he could tell me 2 + 71 = 5 and I’d believe him.
(cue a slew of analysts/quants from various rating agencies, government-owned insurance companies, and failed investment banks)
I don’t think they’re as concerned with the money they lent us as you might think. Ask yourself this: what happens to the income stream from those bonds when they revalue their currency?
Listen Folks, there are 2 things I live by:
1) I don’t fuck with the devil.
2) And I don’t trust China.
Jesus Christ of Latter Day Saints the simple fact is that a trade war simply increases the volatility of the two currencies!! And the only reason we are able to sustain such massive amounts of debt is because our currency is held in reserve by foreign countries, mainly Saudi Arabia, and a whole host of other unstable mother fuckers.
You want to fix the U.S. fiscal issues start sending in top 20 hottest HF managers to negotiate Yuan appreciation to the undersexed, orange chicken-consuming, Chinese Reserve.
And all this time I thought the reason we were able to sustain such massive amounts of debt was our aircraft carriers.
You want to fix the U.S. fiscal issues just blow the crap out of everyone and then offer them a loan to rebuild everything. Priced in dollars, naturally.
Some hobag gave me some Plantar Fasciitis, but a shot of penecillin cleared it right up
~Tiger
Ah yes the NKI is leaving behind only a legacy of poverty, misery, and bloodshed all over the world. We are faithfully following in the footsteps of Great Britain, Spain, and Portugal — trying to “civilize” the world by brute force — and like them, we shall only reap death and grief from our imperial hubris.
What happens to the hundreds of manufacturers in China that are well connected but have an operating margin that barely squeezes by now? Prime Minister Wen made it clear about a month ago that if they revalue they risk tens of millions of unemployed [and the rich guys who own those factories arent going to be happy either].
the real trick is to have all other industrial countries destroy themselves, like the Europeans did in 39-45. Then move in, rebuild while letting fat, lazy american barbarians work in detroit factories for 70/hour pressing buttons.
A small piece of the letter?
Agreed, considerations of the money we owe them are tangential.
Well-written and well-thought out as always by Paul, who loves these personal anecdotal analogies (I remember during LTCM, he talked about getting his foot caught in a motor boat, and not knowing he was injured until the girls he was with looked at him with horror).
Only one problem: a unilateral USDRMB revaluation to rational levels ain’t gonna happen. The US is drunk on cheap Chinese goods and cheap Chinese credit. So, my esteemed mentor, what is Plan B?
We don’t have any fiscal issues; there is simply no such thing as the U.S. Federal government running out of money, nor is the Federal government operationally dependent on borrowing from China or anyone else. U.S. states, individuals, and companies can indeed become insolvent, but U.S. government checks will never bounce. Yes, large Federal deficits that push the economy beyond the point of full employment can lead to inflation or currency devaluation, but not bankruptcy and not bounced checks. In fact, I will pay someone $25 million if they can prove me wrong about this.
If it would help I can explain it to you in a football analogy…
and you know this isn’t the entire letter, how?
a game of tariff chicken/trade war could burn Wen and those factory workers/owners as badly, if not worse. recall when the Bush administration blinked on the ’02 steel tariffs in the face of a largely unified tariff front from (mostly developed) global economies. the real question is practicality– how would the US/EU actually get on the same page today?
domestically, a game of trade strong-arm would fly well given the current politcal climate. probably at least 2/3 of the nation wishes we were an autarky. convincing the other country of your irrationality can be a powerful weapon in a trade war.
zero hedge posts entire letter, no mention of DB, until the very bottom in tiny font they give a hat tip to one of their readers, “Richard,” who sent them the letter from “Deal Breaker”
Other than that I have no concerns.
http://www.zerohedge.com/article/deep-thoughts-paul-tudor-jones-sino-us-relationship
by the first line, lehman quant
is that their way of saying we are all dicks?
Be very careful mess wit a china..that is all!
More like Bear Risk Officer
Don’t forget the Romans, Chinese, Moors, Vandals, Mongols, etc… white guilt, thy name is Options Trader. Either you believe in your own shit or you get killed by someone else who does. We’re human after all.
I don’t, but given the way it was broken up by Bess, the fact that PTJ said he would discuss the answers later and then didn’t, all suggests to me that there is more to this than what is given above.
When you get things artificially cheap, are you supposed to complain?
China is essentially dumping their goods on our market. Maybe that’s the angle we need to take and simply erect some tariffs. But when TVs go up 50% in price….
The NKI is the old killing it, literally.
Your type of whining deserves carpet recess. The font size used to mention Dealbreaker is the same size as the rest of the post, ass, and it follows the same hat tipping standard as all other tips of the hat on the site.
How does this affect my local Chinese food supply?
RC – can you explain it with a “dancing with the stars” analogy please?
If China wants to send us iPhones in exchange for pieces of paper (bonds), why is that bad for us? At some point, they will cash them in and buy things from us and we will have a trade surplus with them. If they want to send us 1000 iPhones now and get the equivalent of 900 back later, that’s a dumb move by them. We should be thanking them, not criticizing them.
Well obviously in the medium term the Chinese would be better of with an economic system that uses its citizens as consumers instead of labor inputs but just like American politicians couldnt see beyond the 2 year election cycle the Commies cant either…
But the things they buy are companies, real estate and land. Things that actually have value, unlike iphones.
all i got from that letter was that the Quack was better than the Doctor …. that about explains why funds cant beat dart throwing monkey ..
yes, WH, defend your leader at all costs!
@ass– the point is ZH would like to pass it off as though they got the PTJ letter, when we all know that is not the case, only given the bare minimum of credit at the last possible second. (oh, and no one gives a fuck what your “hat tipping standards” are.)
so he is suggesting we bomb China? I’m in.
This smacks of the Regan-era hysteria about the Japanese buying the US.
Unfortunately, I am not going to add anything beyond this to the dialogue because I am effectively being paid $70/hr to push buttons. why stretch myself?
Again, if we would rather have iPhones than companies/real estate/land, that is our choice to make. We use our dollars to buy iPhones and they use those dollars to buy companies/real estate/land from us (as well as Treasurys). If you think we are better off buying companies/real estate/land, then we are free to do so.
Again, if we would rather have iPhones than companies/real estate/land, that is our choice to make. We use our dollars to buy iPhones and they use those dollars to buy companies/real estate/land from us (as well as Treasurys). If you think we are better off buying companies/real estate/land, then we are free to do so.
Finally someone hit the real issue right on the money.
Too bad our government really works for those large corporations.
I hope your ready To feel the massive drop in our standard of living that has yet to come.
america’s materialism and greed killed it … why should china have to pay for that?
Not our aircraft carriers, our submarines.
Becuase China financed it. They are the bondholder who financed a business model that didn’t work. They need to take the pain. They knew the risks.
As Einstein said, “Problems cannot be solved by the same level of thinking that created them.”
Well, if “Eistein” said it, it must be true.
Bottom line: Free trade? No such thing. Someone always holds an advantage that the business community will, by its nature, try to exploit for its benefit – the “masses” be damned.
If one country has cheap labor, lax environment/labor laws, a corrupt government/political structure and/or unprotected resources, business will exploit it.
This will result in a trade imbalance. Tarriffs are no longer the weapon of choice. Tarriffs have been “discredited” in this new world order of “free trade.”
The Obama/Bernanke approaches of stimulus and monetary manipulation will fall short and will be discredited in the process.
“Free trade” is now a brand name. It sounds like it is “fair” trade, but there is nothing “fair” about lax labor/environmental/resource protection laws.
Eventually the masses will understand it. But by then they will be enslaved and powerless to move against the business interests.
Indeed, and in the 1920s, the Weimar Republic never had any fiscal issues either. No cheques they wrote ever bounced.
Sometimes, bouncing cheques are a better option than the alternatives.
And yet, it’s Dec 16th, 2011 and the USA is still merrily traveling down the same stream that got us here in this economic fiasco of a depression [sic]. Chuck Schumer is about the only politician as of yet who has expressed his opinion openly and correctly about our ‘free trade’ policies. Most others keep claiming how they are just doing what the majority of economists tell them to do, even though there is a difference of opinion on this subject and these same people’s expert opinion (like Greenspan’s checks and balance system of derivatives) got us here in the first place!!
I don’t blame China for realizing and acting on the US’s stupidity. After all, isn’t that what “capitalism” is really about? Funny how the USA hasn’t practices real capitalism for 40 years. The problem is the party that starts to solve our trade deficit problems (doing the right thing) will get blamed for the fiasco that has ensued. When the politicians who did the wrong thing 30 or 40 years ago, even though they have been warned repeatedly what a bad idea it was, will scapegoat the solution as inherently not theirs.
If you could be born again would choose to be a different sex to what you are?
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