THIS WEEK: THE BOUNCE IS BACK
The Well-Timed Strategy for Week Ending April 25, 2008
by Peter Navarro, Ph.D.
April 21, 2008

The technical bounce is definitely back after a brief GE derailment several weeks ago. Momentum, sentiment, and strength indicators all favor the long side. I don�t recommend being long this market, however, unless you have a very short term horizon and can turn on a dime. Storm clouds continue to pile high in the sky. Cash remains king.

In other notable market news, China�s Shanghai market hit a milestone of sorts, falling to half its value relative to last October�s high. While the stock market is usually a leading indicator of a country�s economy, China�s fall from bullish grace tells us little because it is due almost entirely to classic bubble bursting activity.

And what was the most bearish news of an otherwise bullish week is a significant spike in the Libor rate, which is used to adjust a lot of debt instruments, including adjustable rate mortgages. Libor spiked 20 basis points last week and this spike rippled through the bond and futures markets. To understand its bearish implications, think of a Libor hike as a tax hike on homeowners and corporate borrowers.

Special Notes on the Food Crisis

One of the few special interests that love food crises like the current one is my clan of economists. This crisis provides an absolute textbook case about how screwing around with the free market typically just makes things worse:

Consider first the effect of grain export bans. Egypt, Vietnam, and Indonesia, among others, have slapped restrictions on rice exports. Kazakhstan has halted wheat sales. Malawi has suspended sales of maize. And so it goes. Export bans drive up prices in international markets for three reasons:

Available supply in world markets is reduced

Rising prices and the fear of shortages create demand over and above what it would otherwise because governments try to buy more grain to increase stockpiles. Increased demand drives up prices further.

The ensuring panic creates �phantom demand� as traders order more than they otherwise might to insure order fulfillment in a supply constrained market.

Consider next the effect of export tariffs like in Argentina. This effectively reduces the price that farmers can get in the marketplace. Farmers plant less than they otherwise would, reducing supply. This increases price pressures.

Consider finally the effect of export restrictions on inputs into the farming process like fertilizer. China, for example, has slapped a 100% export duty on fertilizer. This reduces prices to domestic producers who will produce less. It increases fertilizer prices in world markets, which put cost-push pressures on final grain products.

Oh, and let�s not forget how subsidies to biofuels are putting upward prices pressures on everything from seeds and fertilizers to grains.

Madness, I say. Madness�.

QUICK TAKES

1. Whenever I want to read modern American literature, I don�t go for Hemingway or Faulkner. I just take in Peggy Noonan�s column that is buried deep on the back pages of the weekend WSJ. Nice little piece this week on why over half of America now doesn�t trust Hillary and what Barack is likely going to lose not because of his skin color but his inexperience. Take it all in with a grain of salt as she�s a rock-ribbed Republican. Still, she makes Ann Coulter�s purple prose look like it comes out of the Kindergarten bin.
2. And speaking of Hillary, she�s been the only candidate in either party to get it right on China � going after the People�s Republic of late on everything from human rights to currency manipulation. So it is very troubling that all she gets for her truthsaying is the resignation of one of her top China hands, UCLA political scientist Richard Baum. My guess here is that Baum was taking a lot of gas from his colleagues at UCLA�s Center for Chinese Studies, and its always hard to get an appropriately hard line from any academic operating out of such centers because of the funding imperative. It would be nice if another member of Clinton�s inner China circle, Susan Shirk, stood up for her to offset this bad press.

© 2008 Peter Navarro

“Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should and if they are trading on margin, perhaps more than they have.”-- If It’s Raining in Brazil, Buy Starbucks

Peter Navarro is a business professor at the University of California and the author of the best-selling investment book If It's Raining in Brazil, Buy Starbucks and The Well-Timed Strategy. His latest book is The Coming China Wars: Where They Will Be Fought, How They Can Be Won.

Contact Information

Peter Navarro Irvine, California USA | Email | Website | Editorial Archive