State of the US Economy and Globalization

by Bruce Fenton

An interview with Peter S. Cohan on the state of the US Economy and Globalization. Mr. Cohan has written seven books, produced one audio program, been featured in eight compendiums of modern management thinking, writes two online management and investment columns, and contributes to two blogs. Mr. Cohan also edits a monthly investment-oriented newsletter entitled The Cohan Letter.

Bruce Fenton: How do you feel the US deficit situation will impact the economy in the future?

Peter Cohan: The US deficit situation will need to be fixed through a combination of raising taxes and cutting government spending. This will probably happen in 2009 and 2010 at the beginning of the next presidential administration. The impact of this in the short-term will be an economic slowdown. However, in the longer-term, the reduction in the deficit will lower long term interest rates and lead to a stronger dollar.

Bruce Fenton: What about the trade deficit?

Peter Cohan: The US trade deficit is likely to reverse if the deficit declines and the dollar strengthens. A weak dollar is beneficial to US exporters who can charge less for their products in overseas markets. Conversely, a strong dollar creates incentives for US companies to operate more efficiently.

Bruce Fenton: What about China’s ownership of US debt? How significant is the current foreign (particularly Chinese) ownership of US debt? Is it benign passive ownership or potentially detrimental? What is your prediction about this?

Peter Cohan: China is America's second largest lender -- it owns $350 billion worth of US government securities. This ownership is not a problem as long as China continues to hold onto the securities. However, with the dollar declining in value, the return that China earns on those securities is declining. Meanwhile other currencies like the Euro and the Pound are strengthening. This creates an incentive for China to sell more US securities and buy those backed by the strengthening currencies.

The result of China selling US securities is a further weakening of the dollar. In order to attract foreign investors back into its securities, the US government will need to raise interest rates which will slow down the US economy,

Bruce Fenton: Many other nations and economic groups have a trade surplus how does this affect the US economy long term?

Peter Cohan: The trade surplus with the US will encourage income inequality. Workers in the firms which are losing ground to foreign competitors will experience wage stagnation and consumer price inflation. Workers in the private equity and hedge fund industries whose work is not being outsourced will use their access to debt to further enrich themselves.

But the long-term success of the US economy is at risk unless US firms are able to become globally competitive and reverse the trade surplus with these other nations. In the absence of global market share gains, increased borrowing is the only way to keep up in the short term.

Bruce Fenton: Rapid growth of India, China, Russia, Brazil and other areas is significant relative to US growth. Is this a problem for the US – are we losing our competitive advantage?

Peter Cohan: The US is losing its competitive advantage in many business activities. And the activities in which the US is losing its advantage are moving up the income ladder. While in the 1970s and 1980s the US lost its manufacturing advantage, it is increasingly losing its advantage in fields such as systems consulting, legal, pharmaceutical, and investment research. When the US starts to lose its advantage in private equity, hedge funds, and investment management the loss of competitive advantage government officials will pay more attention.

Bruce Fenton: 70 million baby boomers are reaching retirement in the coming 15 or so years – how significant of an economic impact will this have?

Peter Cohan: I am not sure these projections will prove correct. I suspect that many baby boomers will not retire -- they'll keep working until they drop. I think those boomers who do retire will have more money so they will keep spending at high levels. And when they sell stock -- both their own shares to finance their retirement and by cashing in the trillions they'll receive from their parents -- they will generate huge capital gains which will benefit the government.

Bruce Fenton: Is the dollar weakening? If so how much and how significant and what is the long term effect of this?

Peter Cohan: As noted above the dollar is weakening. It's likely to decline at least another 10% by the end of 2008. That's significant because it creates a cycle of weakening that feeds on itself. We finance our economy through borrowing money from Japan, China and others. But they are not willing to keep doing this if our currency depreciates in value. So they sell the debt which puts further downward pressure on the dollar -- leading to further selling.

Bruce Fenton: How do you see increased government spending of recent years affecting the economy?

Peter Cohan: Increased US government spending has been great for defense contractors and oil companies. An endless global war is great for workers and shareholders in these companies. It's not good for oil consumers or soldiers. This increased government spending will continue stimulating those industries until the next president cuts back on these expenditure categories. Then those parts of the economy will suffer.

Bruce Fenton: One of the US’s major exports is copyrighted material such as software and other intellectual property. Do you see copyright theft as an important factor in our economic future? What about the flipside of this that argues that overzealous copyright enforcement stifles competition and free exchange of ideas?

Peter Cohan: We will not be able to get other countries to change their intellectual property enforcement practices. This will force content providers to change how they make money. They may end up needing to give away the content and make up some of the lost revenue through advertising. I don't think overzealous patent enforcement stifles competition. I think patents encourage innovation by protecting its profit.

Bruce Fenton: Do you feel the US is isolationist? Why or why not? Do you see our isolation or lack of it being a problem? Why?

Peter Cohan: The U.S. is involved in some way with most of the countries in the world. So it's not isolationist. But it does have an image problem with other countries. Fixing that problem will fall to the next presidential administration.

Bruce Fenton: Do you feel Americans generally have a lack of knowledge of Islam / Asia / other areas & cultures of the world? Will this harm us in the new global economy?

Peter Cohan: I think that American's lack of knowledge of other cultures is only a problem if the Americans lacking that knowledge are attempting to live in those other cultures or operate a business there. This is not a problem for the rest of the Americans who are ignorant of other cultures.

Bruce Fenton: How significant is Iraq War spending to our long term economy?

Peter Cohan: It is not significant to our long term economy because Iraq War spending will taper off in 2009.

Bruce Fenton: Do you feel commodity prices will increase? Specifically oil prices? How will this affect us and why?

Peter Cohan: Oil prices will increase which will create stronger incentives to come up with renewable energy sources and for consumers to drive less.

Bruce Fenton: The world public opinion of the US is not at its best. What are your thoughts on this from an economic standpoint with respect to trade agreements, tourism revenue etc.

Peter Cohan: I think most people around the world realize that the current administration is an aberration. Over the longer term, world opinion of the US will improve because Americans will elect an administration that raises the world's opinion of the US back to the high level it enjoyed in the 1990s.

Bruce Fenton: Any comments on US worker productivity?

Peter Cohan: US worker productivity is declining as a result of business' failure to invest in productivity enhancing technology.

Bruce Fenton: We feel that Sarbanes Oxley et al and the rise of US compliance legal and productivity costs are extremely significant. Do you agree with this? Do you feel that the increase in these areas is harmful to business?

Peter Cohan: No. I think that business is just whining because it believes it now has a sympathetic ear in the current administration. What is damaging to business is the lack of incentive for productivity enhancing technology investment. By reducing the tax rate on dividends, business is using its cash flow to pay coupon clippers and to buy back shares. This creates greater income inequality.

Bruce Fenton: Thank you for your thoughts.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Adventure Capitalist Jim Rogers on US Isolationism

China, Dubai, the US and Globalization from the man who may know it best

by Bruce Fenton (watch Globalization Video)

Like many things to do with global change, my conversation with legendary investor, adventurer and traveler Jim Rogers may be scary to most Americans. This fear is exactly the kind of thing Mr. Rogers sees as potentially harmful to the US. His thoughts make one wonder if the US is like the General who asks where his troops are so he can go lead them. As striking as the changes in our world are, even more striking is how few Americans are aware of and participating in these changes. Could isolationism cause the US to miss the boat? Worse yet, will it place us aboard a sinking ship?

The experiences of Jim Rogers seem to make him uniquely qualified for such questions. Co-founder of the Quantum Fund with George Soros (among the most successful funds of all time), Mr. Rogers is recognized by John Train in Money Masters of Our Time as one of today's leading investors. His extraordinary track record and insights set him apart from his peers but possibly most interesting is Mr. Rogers's view of the global economy and his Guinness World Record travel adventures.

In 1990-1992, Jim traveled over 100,000 miles on his motorcycle chronicling his adventures in his book, Investment Biker. At the turn of this century Jim and his wife Paige undertook an even more ambitious journey: 152,000 miles and 116 countries in three years. More than an exciting adventure: this trip was another learning experience for a man who already may have known more about our global financial system than anyone.

Jim and Paige saw up close the changes in our international economy, absorbing details and the feel for places that cannot be gleaned from economic reports. If an uneducated teenager with no investment background traveled such a journey, he would emerge a wise expert on the world. When you place a leading authority with a decades-long travel and investment record on such a journey, the exponential growth in Rogers's already extensive knowledge base is nearly incomprehensible.

Travel Channel star and Chef Anthony Bourdain says "travel makes one smarter". If so, Jim Rogers may be the smartest person on earth. In any event, his travels, insights as an investor and his uncanny track record make Mr. Rogers someone very worth listening to.

Jim's latest book, Hot Commodities, praises commodity markets and his view of their strong potential. Jim and Paige's daughter, born not long after their return from their journey in 2002, is now able to speak both English and Mandarin Chinese, the language that Jim Rogers believes represents the future of business in this century.

Jim's website, www.jimrogers.com, includes a chronicle of his adventures as well as some fascinating discussions with experts like the brilliant Daniel Yergin, author of The Commanding Heights: The Battle for the World Economy. Mr. Roger's books are available at Amazon.com or from his website.

Bruce Fenton: You may have seen our article about Dubai.

Jim Rogers: Yes

Bruce Fenton: One of the things that really surprised us was how staggering the misconceptions are. Most Americans seem to think [Dubai] is a terrorist state and they envision Al Qaeda.

Jim Rogers: You don’t have to tell me.

Bruce Fenton: Why do you think that is? Why is there such a staggering difference from perception and reality? And what do we do about it?

Jim Rogers: There is a staggering misconception about China about Japan, about Europe, about everywhere. Most Americans can't even find Japan on a map and don’t even know why they should be able to find Japan on a map. Most Americans can't find the Pacific Ocean on a map and don’t know why it's of any interest to them to find anything on a map. They can't even find Oklahoma on a map! [laughs]

It's unfortunate because of our history and our geographic location we are very isolationist and always have been, we have very little knowledge of the rest of the world. Our press doesn’t help. Most press companies don’t even have foreign offices anymore.

I mean, if the middle of Africa blew up we wouldn’t know about it for two or three weeks…the rest of the world might, but we wouldn’t.

Bruce Fenton: You see oil going up to $100 a barrel in the future; that seems to bode well for places like Dubai. What are you thoughts on Dubai and the rest of the Middle East?

Jim Rogers: Dubai doesn’t have much oil, you can see this from doing your homework, Dubai will be out of oil in five years or something. Dubai is doing their best to become a center for the Middle East: for shopping, for finance, for technology, for everything else, because they are running out of oil. Abu Dhabi has plenty of oil but that’s a different world. We'll have to wait and see what happens with Dubai.

They are certainly doing a brilliant job of what they're trying to do. As you know they have the best horse race in the world and the best golf tournament in the world and the best everything in the world. So it’s a question of "will it be successful down the road". I don’t know…who knows. I have no idea if all these massive investments are going to pay off in the end. You might be a better judge of that since you've been there more recently.

They are certainly investing large amounts of money on the idea that they will become the major center in the Middle East. If it works, then clearly it will be great. If it doesn’t work, or if there is a war, they are a sitting duck. I don’t know whether it's going to work. Bahrain is trying to do the same thing, Qatar is trying to do the same thing, Kuwait is trying to do the same thing so well have to wait and see. And all the others by the way have much more money than Dubai does because, as I say, Dubai is running out of oil, the others aren’t.

Bruce Fenton: Also Saudi Arabia has King Abdullah Economic City, and they are trying to copy it.

Jim Rogers: Well said. Even the Saudis are now trying to copy. Everyone is trying to copy what Dubai set out to do before. Dubai had to do it out of necessity because they were running out of oil. The others are trying to do it because they are now trying to compete.

Bruce Fenton: Obviously commodities are what you are recommending now. They are still terrifying to most investors and even most people on Wall Street. What would you say to those people? Are they really just missing the boat?

Jim Rogers: First of all I'd say that the fact that it's still terrifying to most people is a great sign because that means it is still an un-invested and untouched asset class. In the world there are something like 70,000 mutual funds containing stocks and bonds for the public and fewer than 50 for the public to invest in commodities. So this has a long way to go, a huge way to go.

And I would point out, as I do in my book, that you can invest in commodities the same way you buy IBM. If you buy IBM most people put up 50 or 100% of the money, well you can do that if you want to buy cotton as well. Most of the terrifying stories about commodities are because of huge leverage that people have used and gotten wiped out with short term fluctuations. So don’t buy it that way.

I would also point out that everybody knows a lot more about commodities than they know about stocks. I mean nobody had a clue about dot com stocks: what they were, what they did or anything else, yet they were rushing out there buying them in a big way. Most people don’t even know anything about IBM or Toyota for that matter. Toyota's got hundreds of thousands of employees and operations all over the world etcetera.

Everybody before they get to work uses most commodities. Before you get to work you use sugar, coffee, orange juice, rice, wheat, corn, rubber if you go running, wool, cotton silk, zinc, lead, gasoline. We know what this stuff is. It's a lot easier to analyze commodities than it is stocks. I did not say it was easy. I just said it was a lot easier. So people have no reason to be terrified, in fact they should be embracing it enthusiastically. They'd probably make a lot more money.

Bruce Fenton: Now on to China. Most of the focus has been on how China will change. How to you see us changing? Do you think that there will be a lot more Americans like you daughter learning to speak Chinese? Are we going to change or will we remain the same and shrink global market share?

Jim Rogers: A little of both. Certainly more Americans are going to learn Chinese for many reasons partly because so very few speak Chinese now. But I'm afraid we'll go the way of Great Britain. The UK: in 1918 they were the richest most powerful country in the world; their currency was the major world's currency at the time etcetera, etcetera. Well, they sort of were over the top. They were over extended and there were many flaws within the underlying system. We're sort of there too at this stage: over extended in every way and unfortunately I don’t see anything that’s going to change. Certainly no attitude here: you've already pointed out some of our shortcomings and that’s going to get worse, not better.

The best opportunities I know are in Asia and in commodities. Learn Chinese and start investing in commodities. Commodities are the single best way I know to protect yourself from the things you have come up with in your analysis. That’s where the money is going to be made in the next 10 or 15 years. If you're clients don’t invest in commodities, they should be. There are plenty of ways to do it, you can buy indexes, you don’t have to buy specific commodities. These days there are a lot of structured products in commodities where your principal is guaranteed if your clients are worried about that kind of thing.

Urge your clients to get their money out of the US Dollar, whether that’s commodities or foreign currency or what. I've told you where the opportunities are.

Bruce Fenton: Thank you very much for your time, we appreciate it.

Bruce Fenton is Managing Director of Atlantic Financial Inc., which specializes in investments and global wealth management and is based outside of Boston, Massachusetts. Atlantic Financial advises corporations, endowments and individuals on international investing including Asia and the Mid East region.

Bruce welcomes comments and is available for speaking engagements, interviews and consultations. Bruce can be reached at 800-559-2900 or email Bruce Fenton.

Please Note: Commentary in this interview may not be appropriate for all investors. Always consult an investment professional before investing.

This information does not represent a recommendation to buy, sell or hold any security. The views and opinions expressed are the author's own and not necessarily those of Cantella & Co., Inc., there is no implied endorsement by Cantella of any advice or trading strategy.

Please carefully consider your own investment objectives and all risks, charges and expenses before investing. Cantella & Co., Inc. does not offer futures or commodities.