Attack of the Rubber Chickens

If there was one thing we could point to in the Great Depression that almost ensured the
economic recession collapsed further into an extended and deepening depression, it was the imposition of a wave of protectionist tariff barriers that effectively killed off global trade for the next few years.

This catastrophe was essentially caused by the passing of the ‘Luddite’ and disastrous ‘Smoot-Hawley Tariff Act’ signed into law on June 17, 1930. This raised U.S. tariffs on over 20,000 imported goods to record levels. The not unsurprising retaliatory tariffs by the U.S. trading partners reduced American exports and imports by more than half, and thus became one of the primary reasons for the severity of the Great Depression. In fact in the 4 years to January 1933 world trade fell by 66% - compare the ‘plug hole’ graphs for this period as against today below:

Until now when it came to free trade, I had been quite encouraged by the more responsible attitude of the politicians and leaders around the globe. Obviously the Doha round of WTO (World Trade Organisation) talks have been dragging on for years without any clear progress or agreement. However, given the global recession it could have been much easier for posturing populist politicians to have retreated behind the argument of imposing trade barriers to wave their national flag in front of gullible voters - but so far there have been few signs of such rhetoric. There has inevitably been a certain amount of whingeing and some tariff barriers have in fact been raised. The EU, often guilty in this area, has imposed extra tariffs on Vietnamese footwear, and also raised subsidies on various dairy products, but on the whole has generally resisted calls for further protection.

Even in the US, despite calls for protection during the election, the Obama administration has rejected such actions - that is until now. Only last week we found that the US authorities had imposed a 35% tariff on Chinese made tyres, and not unsurprisingly the Chinese reaction has been swift and the authorities are threatening to retaliate with a slapping of extra duties on US chickens and certain car parts. So are we about to see the start of the Rubber Chicken Trade War? (I must express my ignorance and slight surprise that US chickens were a significant US export to China - something you would normally associate with an emerging economy - or may be a submerging economy?).

Thus the G20 meeting in Pittsburgh this week must be especially aware of these moves and I hope it will be highlighted to them as a dangerous path to follow. The main point of that meeting is that you have those with surpluses sitting down with the deficit holders, and what they must be reminded of is that they need each other - not as chums but as tangible trading partners to start to get the recycling of cash and trade as well as to start to increase the sluggish velocity of the global economy again. We must have a strong commitment from them to avoid protectionism.

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Phew what a blinder. Barclays are at it again. Last week’s announcement of the restructuring of their riskier assets and subprime debt into a new company, Podium, took many by surprise. In days gone by this would have been called a Special Investment Vehicle or SIV, but that term has now been demonised for their part in the financial chicanery of the past few years.

To the outside world this does look like cosmetic rearranging of their balance sheet - and to an extent it is. What Barclays are doing is moving some ‘niffy’ stuff from their own loan book to that of the new company along with a huge loan to keep it afloat. It doesn’t mean that the debts have gone away but now they are no longer in the ‘front window’ of their balance sheet /loan book and replaced by a nice clean looking facility to the new company. So the smelly stuff is still around but now well off shore and with a huge financial seal stamped on it - thus no longer in Barclays name, and replaced by a simple facility to a new holding company. Does any of this sound vaguely familiar?

Gold fever is back. You only have to look at those dreadful adverts to realise that people are about to be scammed in some way. I am fascinated by the references to ‘unwanted gold’ and ‘broken jewellery’ that apparently we can just send off in the post and they will send us back the money straight away.

Hmmm, well to start with what exactly is ‘unwanted gold’? Of course you want it unless
someone is willing buy it because it can be valuable. Also broken jewellery - how many people have broken earrings and necklaces? Surely don’t people ever repair them? Or is your first thought to stuff them in an envelope and post them off to heavens knows where. Yes and this brings me on to the final point on this madness - the postal system.
On what basis would you post jewellery and lumps of gold through the post especially in the UK? Given that deliveries by the Royal Mail in the UK are somewhat peripatetic and unreliable to say the least, it would seem to be counter-intuitive to despatch your worldly goods into a system where it has an almost certain chance of being delayed and a lesser chance of even being left in a gutter. Are we really that stupid?

Gold has been reaching near record levels and inevitably the cry goes up from those promoting it that we should all be piling in. Yes it is a perfectly valid asset class and has been a good solid asset hedge in nervous times however, before we all turn into gold bugs recent movements can be down as much to a fall in the US $ as to any rising demand. Many nations including Italy, Mexico and Singapore as well as the IMF are all looking to sell significant amounts of reserves in 2010. This may counter some increase in Chinese Gold reserves, and is by no means going to be a one way street.

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And finally... who says high flying salaries in financial services are a thing of the past? I note that the Chief Executive of Blackstone Group, Stephen Schwarzman, was paid a shade over $702million last year. The recession can be tough for some!

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And one more... with the German election due, I note that apparently on the 20th anniversary of its collapse on November 9, 1989, one in seven Germans want the Berlin Wall back because they feel they were better off when the country was divided.

The survey found that many westerners are bitter about higher taxes to pay for rebuilding the formerly communist east, where some 1.2 trillion Euros ($1,762 billion) worth of state funds has been transferred in the last 20 years.

Eastern Germans are unhappy about income levels that are on average only 80 percent of western levels and that due to higher unemployment depopulation is decimating parts of the east, where the population has declined by about 2 million since 1990.

So that was a great success then. They can blame David Hasselhoff.

Have a good week.

Justin A Urquart Stewart
Director
Seven Investment Management Limited

For previous editions of our Weekly Update, please click here

This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.