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Five Things You Need to Know: China Downgrades US Credit Rating Ahead of G20

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There are no meaningful meaningless gestures in global politics.

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Kevin Depew's Five Things You Need to Know


1. China Downgrades US Credit Rating Ahead of G20

In 1976, or maybe 1977, sometime in the mid-to-late '70s, who can be sure, I remember seeing a man in a kilt jump from a height of about five feet and savagely drive another man's head into the ground. The people watching this act of brutality -- and there were many -- cheered wildly, some of them yelling at the man on the ground to get up and fight. But the poor bastard just lay there quivering, his entire body convulsing in pain.

Meanwhile, after briefly celebrating the pain he'd just caused, the man in the kilt climbed back up to his perch and prepared to jump on the convulsing man again, to finish him off I guessed, one final blow for good measure. He exhorted the crowd by raising his fists above his head, screaming like a wild Hyena, and then he jumped.

Surely, I thought to myself, this will kill him. But a funny thing happened. Moments before the man in the kilt landed, the man on the ground stopped convulsing and rolled over to one side, just enough for the man to miss. The man in the kilt landed on his back and writhed in pain. His victim, who only moments before had been convulsing and quivering like a dying jellyfish, struggled to his feet, holding his bleeding head in his hands. He staggered for a bit, seemed to gather his bearings, and then proceeded to viciously stomp the man in the kilt a dozen, maybe 14 times. Over and over he stomped.

Incredibly, the man in the kilt, Rowdy Roddy Piper, survived that awful beat down. Even stranger, the police in the gymnasium allowed Ric "The Nature Boy" Flair to sit right next to Piper, the man he'd just savagely beaten, and sign autographs. For a full hour after the fight, the two just sat there, side-by-side, signing their names, laughing and joking and posing for pictures as if nothing had ever happened.

How could this possibly be? As a young man from the dark and bloody ground of Kentucky, whose heart since birth had been trained to permanently hold a thousand grudges and slights, no matter how minor or insignificant, and in fact, the more minor and insignificant the better, it was impossible for me to fathom how these two men could set aside their anger for a mere $5 a signed photo, $2 for a photo without a signature. I was both horrified and intrigued.

This almost goes without saying, but I walked away from that spectacle with numerous lessons in sportsmanship and hand-to-hand combat that would later serve me in good stead in pool rooms, bars, and backwater taverns from Paris, Kentucky, to Kansas City, to Prince Georges County on the outskirts of Washington DC and, today, New York City.

Lesson One: Hot and savage political rhetoric is no more dangerous than a trained professional wrestler's vicious foot stomp. You can put that in the bank.

Lesson Two: Never talk to a woman in a bar that serves Schlitz Malt Liquor Bull on tap unless you are prepared to fight everyone in the bar for the privilege, including the bartender.

Lesson Three: There are no meaningful meaningless gestures in global politics.

Tomorrow, Group of 20 leaders will meet in Seoul to discuss "global imbalances." The conventional wisdom is that President Obama will face a harsh rebuke of US economic policies when the meetings get underway. The New York Times this morning reported it this way:

Anyone wondering what President Obama will face when he arrives in South Korea on Wednesday for a global financial summit meeting need look no further than an announcement by China's leading state-endorsed rating agency, which downgraded the United States' credit rating on Tuesday -- and provocatively questioned American leadership of the global economy.


According to the Times, the downgrade cites the "deteriorating debt repayment capability" and "serious defects in the United States economic development and management model," which will lead to "fundamentally lowering the national solvency." Of course, in the next sentence, the Times was forced to retract all that gibberish by pointing out the obvious; that in the rest of the world, "the United States is still the strongest of credit risks." Indeed. If we're not going to pay back our debts, nobody will.

Still, just as the announcers in professional wrestling must set the stage for the brutal soap operatic dramatizations the audience has paid to see, so too must we be learned in the conventional wisdom, that President Obama is "on the defensive" as European and Asian governments decry US economic policies that weaken the dollar and stoke hot money flows... hot money flows, of course, that European and Asian governments so desperately need to stave off recession or depression in their own countries.


2. The Myth of the Awful Emerging Markets Bubble

Meanwhile, also on tap at the G20 meeting is more hot and savage political rhetoric about the emerging bubble in emerging markets, ostensibly due to the excessive liquidity being dumped into the global system by the US Federal Reserve.

"The last thing a developing economy wants is for that liquidity to distort their asset markets and create a destabilizing bubble," Stephen Roach, Morgan Stanley's nonexecutive Asia chairman, told Bloomberg Television in an interview yesterday, which, I'm sorry, is not the last thing developing economies want at all. It's the first thing they want. Bubbles are bad for economists, and the general populace that never ever benefits from them... they are almost uniformly fantastic for politicians and bankers.

So while it's marginally true in a sanitized laboratorial sense that emerging markets do not need a bubble, it's not even remotely true that they do not want one. Of course, far be it for us to allow the purported fear of an indefinable bubble get in the way of the real story.

The following chart from Bloomberg illustrates exactly why the charades of G20 protestations against US economic policy are just that -- charades:



What this chart shows is that the economies of emerging markets such as Brazil, Russia, and China are increasingly dependent on US growth, their share of US imports having nearly doubled since 2006, according to Bloomberg. "They want their cake and they
want to eat it too," Doug Porter, deputy chief economist with BMO Capital Markets told Bloomberg, adding that countries like China stand to be "big beneficiaries" of the Fed's policy.

Now, understand that this is not to say that there is not an emerging markets bubble, only to say that if there is, so what? Go back and review the business cycle. The business cycle is bubbles. By definition. Capitalism, as it is practiced, creates bubbles that then collapse. The history of successful investing involves one of two approaches; one, determining where the next bubble will be and getting in just before it begins, and two, determining where the current bubble are and getting out before they collapse. My recommendation is to focus on trying to manage your investments in one of the two ways described above and leave the bubble warnings for your Twitter stream.


3. Does the G20 Matter?

So, what do we make of the G20 summit then? Is there anything remotely related to macro strategy or investing or portfolio management we can take away?

Not really. Here's what you need to know: At the end of the day, China leaders will stand up and make bold, frightening, and disingenuous statements about US economic policy. They will be joined by other Asian leaders who do the same, will be followed by European officials who, in more cautious tones, will warn of the ominous effects of ongoing dollar debasement, and then, later, they will all have dinner together, shake hands, slap backs, and were this happening on a smaller scale sit side-by-side and sign autographs and have photos taken for $5 apiece, $2 for the photo without signature.


4. Why We Don't Invest Our Money Based on What People Show on Television

Speaking of emerging markets and things that are of no use to people who are actively managing or investing their money, you may have seen the many, many news reports of the horrific drug-related violence in Mexico. Why, a person would have to be mad to invest in a country where drug-related crimes are spiraling out of control, where the "good guys" are increasingly difficult to distinguish from the "bad guys," where the drug laws themselves make absolutely no sense, where... wait, are we still talking about Mexico? Yes, we are. This is not to downplay the tragedy of drug-related violence, whether in the US (remember the 1980s?) or Mexico, but before jumping to investment conclusions, we need to count the data.

"An examination of a range of indicators including retail sales, manufacturing, employment, FDI and tourism figures reveals, at least for now, no meaningful evidence of any underperformance in the states affected by drug-related violence," Jimena Zuniga, an economist covering Chile, Colombia, and Mexico for Barclays Capital wrote for Bloomberg.

The bottom line: "While drug-related violence undoubtedly has a detrimental effect on Mexico's social and political institutions, evidence of a meaningful impact on economic variables remains scarce. Some economic impact may become perceptible over the medium and long run, but this is not yet the case."


5. Why We Might Be Well-Served to Invest Our Money Based on How the New York Mets' New GM Runs the Team

This morning tens of thousands of people involved in making trading and investment decisions have already spent several hours reading opinion pieces (like the one above!) on the G20, US economic policy, the Fed!, and whatever else is on the top-read list on Bloomberg. A fraction of them will have read this article on the woeful New York Mets. And that's too bad.

As a long-suffering New York Mets fan, I understand that this is going to be hard for non-New York Mets fans to believe, but the Mets have changed! First, they brought on Sandy Alderson as their new general manager. Alderson, you may recall, was one of the chief architects of the "Moneyball legend" in Oakland. Since arriving as GM, Alderson has also brought on much of the management team responsible for the A's success, including Paul DePodesta, who will act as the Mets vice president for player personnel and amateur scouting.

Take a deep breath and try to expunge from your mind everything you've read about economic policy and global macro stuff and instead focus on the following nuggets of wisdom from DePodesta. These are directly related to trading and investment and will be worth 20 times the amount of time spent evaluating central banking policy:

  • "In my mind, Moneyball really has absolutely nothing to do with on-base percentage; for that matter, it doesn't really have anything to do with statistics," [DePodesta] said Tuesday on a conference call with reporters. "Rather, Moneyball is really about a constant investigation of stagnant systems to see if you can find value where it isn't readily apparent."

  • While he was in Oakland a decade ago, statistics happened to be the best way to find better players, DePodesta said. But that will not always be the case, he said, adding that new frontiers must be explored.

  • "One of the most important things is we're still going to be wrong, probably often," he said. "But hopefully, we can be disciplined enough in our processes to be right more often than wrong. The guiding principle of our industry is uncertainty."

All of which are precisely what investing and trading are all about.

Steve Smith's OptionSmith portfolio is +40% in 2010. Take a FREE 14 day trial to get exclusive access to the portfolio and trade alerts emailed to you before every trade. Learn more.


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No positions in stocks mentioned.

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