The rich man’s wealth is his strong city, and as a high wall in his own conceit.
– Proverbs 18:11
POITOU, FRANCE – “Render unto Caesar” is how we began yesterday’s note. Today, we dig deeper to answer a Dear Reader’s challenge.
Caesar should call the shots in trade, he says.
This discussion (today and on Monday) will help us connect a number of dots… and possibly glimpse at the future, too.
We’ll check out the odds of building a high wall around the American economy – turning it into an island of stability, calm, and high wages in an ocean of globalized competition and chaos.
We’ll take a look at North Korea and see what high walls have done for its economy.
And we’ll see how trade barriers expand the reach of the Deep State, replacing win-win private sector deals with the win-lose deals of the cronies and canoodlers.
So hang onto your hat…
Checking in with the markets first… we see that the Dow fell again yesterday, the eighth day in a row of losses. And on Tuesday, General Electric (GE) was booted out of the Dow after 100 years.
Under former CEO Jack Welch, GE – probably more than any other large company – led the swing away from manufacturing… that is, from honest output to financial hocus-pocus.
It borrowed money to buy businesses at the rate of one new company every five business days. As a business strategy, it was suicidal. There is no way managers could evaluate, understand, and absorb new enterprises at such a rate.
But as a financial strategy, it looked great. Each new business brought top-end growth and lazy, flattering headlines about what a genius Mr. Welch was and what a “dynamic” company he was running.
The share price rose, making it possible to borrow even more money.
But then, like all debt-financed spending sprees, the bills came in and it was hard to pay them. A lot of the acquisitions went bad, and GE executives had neither the time nor the talent to fix them.
Its share price has been falling for the last 18 years, down 55% in the last 18 months alone… And now, it’s back to where it began its spectacular rise in 1995.
GE was also a pioneer of outsourcing. That is, rather than make things itself at Appliance Park, its Louisville, Kentucky plant, it moved manufacturing to cheaper, foreign destinations. The Atlantic magazine was on the case:
By 1955, Appliance Park employed 16,000 workers. By the 1960s, the sixth building had been built, the union workforce was turning out 60,000 appliances a week, and the complex was powering the explosion of the U.S. consumer economy.
The arc that followed is familiar. Employment kept rising through the ’60s, but it peaked at 23,000 in 1973… In 2011, the number of time-card employees – the people who make the appliances – bottomed out at 1,863. By then, Appliance Park had been in decline for twice as long as it had been rising.
The decision to offshore was made – more or less, honestly – by people in the private sector with some skin in the game. Nobody forced them to do it… and they hoped it would pay off.
But Caesar was already pulling strings. His central bank was providing fake money at fake, low interest rates. But that part of the story is for another day.
Today, we look at how Caesar is rigging the game even more directly. Yes, there were trade barriers on this and that… here and there… in Welch’s era.
But almost all economists had realized that they were a drag on wealth creation. Tariffs had generally been coming down for an entire generation.
Cometh now a new Caesar, in the person of the U.S. president, Donald J. Trump – along with his quack trade advisor, and four-time election loser, Peter Navarro.
Modern economists are wrong about a lot of things…
They think they can know things that they can never know. They think they can measure things that they can never measure. And they think they can control things that they can never even understand.
But they’re not wrong about everything. And one thing they are right about is trade. It’s a fairly settled matter: Import taxes may be good politics, but they are very rarely (and perhaps never) good economics.
But a Dear Reader posed an earnest question: Why shouldn’t a high-wage country protect its workers against low-wage competition?
The purpose of a nation is to defend the common interests of its citizens. Certainly, the ability to earn a living at a standard of living higher than that of the Chinese worker, with his family’s bathroom at the end of his block and shared with 50 other families, is part of what our nation exists to achieve.
But your viewpoint shows that you consider nations to no longer be of use. Your elitist underwear is showing. You know that you are smart. But this pride has blinded you from appreciating the true values of conservatism.
Okay. Let’s tuck in our underwear and think about this. This view may be widely shared among our readers. Can the nation – Caesar, using his win-lose power to wallop, whack, bludgeon, and bully – really help Americans earn more?
Tune in on Monday to find the answer.
Editor’s Note: Regular readers know Nick Giambruno as Casey Research’s globetrotting analyst dedicated to finding overlooked investment opportunities from “crisis” situations. Today, he shares why Middle East tensions could spark a third oil shock.
By Nick Giambruno, Editor, The Casey Report
Big wars in the Middle East are often catastrophic for global oil supplies.
This makes sense. The Middle East accounts for more than 40% of global oil exports. So a big conflict in the Middle East often triggers a big spike in the price of oil.
Take the 1973 “oil shock,” for example. Israel was battling Egypt and Syria in the Yom Kippur War. In response to U.S. support for Israel, the Organization of the Petroleum Exporting Countries (OPEC) placed an embargo on oil exports to the U.S. and several other countries. It also cut oil production.
Oil prices suddenly spiked – roughly quadrupling, from $3 to $12 per barrel, in a matter of weeks.
The second oil shock started in 1979. It grew out of the Iranian Revolution and continued with the Iran-Iraq War, which was one of the bloodiest conflicts of the past 50 years. And as you can see from the chart below, oil prices more than doubled, from around $15 to close to $40 per barrel.
Today, we could be on the verge of an oil crisis even worse than that. That’s because regional tension is growing in the Middle East. The conflict between Iran and Israel – and their respective allies – is quickly getting worse.
Iran will almost certainly be the focal point of the Middle East’s next regional war. Many people think that war has already started.
Recently, Israel launched its biggest military strike on Syria since the 1973 Yom Kippur War. This attack, along with other recent ones, killed dozens of Syrian and Iranian soldiers.
I only expect the conflict to escalate from here.
Aside from what appears to be the start of an actual war, there have been numerous, unambiguous signs that the U.S. has Iran in its sights.
To start, President Trump has recently staffed up on known war hawks. In April, he made John Bolton his National Security Advisor and Mike Pompeo his Secretary of State. Both have been eager to bomb Iran for years.
In early May, Rudy Giuliani, one of Trump’s lawyers and a longtime political ally, announced that Trump is “committed to regime change” in Iran.
A few days later, President Trump pulled out of the 2015 Iran nuclear deal. He also re-imposed economic sanctions on Iran.
Iran has the world’s third-largest proven oil reserves – or 10% of the world’s total. It exports about 2.4 million barrels of oil per day. China, India, and Europe buy most of it.
So a war between Iran and Israel (and its U.S.-led allies) would wreak havoc on the oil market. That’s because Iran holds a very powerful card…
Iran could effectively shut down the Strait of Hormuz, the narrow channel connecting the Persian Gulf to global markets. It is the only sea route from the Persian Gulf to the open ocean.
Oil tankers moving oil from Iraq, Iran, Saudi Arabia, Qatar, Kuwait, and the United Arab Emirates all have to pass through the strait. That translates into roughly 35% of the world’s oil being traded by sea.
In the event of an all-out war, Iran would quickly shut down the Strait of Hormuz. It’s been blatantly clear about this.
If, and when, a war with Iran happens – even if there’s only a whiff of it happening – investors should expect the third and most dramatic oil shock.
Of course, we’re not cheering on a war or the collateral damage that would inevitably come with it.
Nevertheless, the odds of a big war in the Middle East starting soon are high. That means a sudden spike in the price of oil is equally likely.
– Nick Giambruno
P.S. Last week, I told subscribers to The Casey Report about an elite company in the oil industry set to soar along with the price of oil. I think it’s poised for big gains… even if Middle East tensions cool down.
The Release of Fannie and Freddie
Mortgage giants Fannie Mae and Freddie Mac are notorious for their contributions to the 2008 financial crisis. Since then, both companies have been under the purview of the U.S. government. But President Trump wants to change that…
A Blow to Online Retail
A Supreme Court ruling yesterday could have huge implications for online retailers like Amazon. The court ruled that retailers can be required to collect taxes in states where they have no physical presence. Here’s what it means for the future of retail…
It may seem unbelievable. But Jeff Brown, Bill’s top technology analyst, believes that e-commerce giant Amazon is preparing to launch its very own cryptocurrency. Skeptical? See the proof right here.
In the mailbag, Bill’s story of Canadian shoe smugglers draws some smiles – and presidential critiques…
Thanks for my first laugh of the day – the shoes!
– Susan G.
I thought that, in many respects, Canadian shoes were far superior to the U.S.’s ones. Am I wrong? Why would they want to smuggle our shoes? I don’t see it, unless it’s some of that cheap, tennis shoe crap that isn’t made here, in any case.
– Pat F.
Trump’s complaint about Canadians smuggling sneakers from the U.S. back to Canada may have been the most ill-informed, asinine statement by a modern American president…
Almost all sneakers sold in the U.S. are made in other countries, such as China; so no American manufacturers are being harmed. And if they are made in the U.S., then they are duty-free under NAFTA.
Further, like the U.S., Canada allows its citizens to claim a certain amount of goods purchased in the U.S. as duty- and tax-free, depending on how long they were away. And if the returning Canadian doesn’t apply for an exemption (e.g., a same-day trip) and, in fact, does smuggle the shoes, then it is the Canadian government that loses duty and tax revenue.
It is really getting tiresome to hear this clown make assertions based on stories he heard from some uninformed White House advisor or Fox News “journalist.” And it is really sad that at least 40% of Americans – and a good portion of your readers – seem to believe his every lie, boast, and erroneous statement. Indeed, those three types of things are all that come out of his mouth. Oh, and the insults/blaming of past presidents, which is completely classless.
– Gary M.
Meanwhile, Bill’s Diary, “They Were Ordered to Shoot…” has forced readers to reflect…
Wow. Just wow. What an incredible essay. It’s too bad that most people are scared sh**less to actually think for themselves or to question authority. Nevertheless, great words.
– Al J.
Bill, comparing anything Jeff Sessions is doing to what they did in Germany in 1942 is complete BS. I taught history and have watched and read about Nazi Germany. I generally like your commentary, but this is ludicrous.
– Anthony L.
What’s your point? Is it all propaganda taken out of context? Just because you know a little of the Bible does not make you an expert on what it says… Even Satan knows the Bible. Deception is one of the main tools in Satan’s toolbox. Knowing some truth and mixing it in with lies to appeal to the ignorant is a very dangerous sin!
– James C.
One of your best. Thanks.
– Fred A.
The economy is growing, and stocks remain near all-time highs. But behind the scenes, something strange is happening…
The U.S. government and global financial elites are considering implementing a radical new change to America’s money. If passed, the money in your bank account would fall firmly under government control.
They call it “The Chicago Plan.”