Thursday, August 27, 2015

Today's a 2-fer ... First, a Market Update and Second, a Comment on Why Donald Trump Is Wrong About Chinese Imports ... China Offers U.S. Consumers Great Buys at Low Prices ... Sounds Good to Me

1- Market Update .... Stock markets are in rally mode, and today looks like we could see the second in a row of a solid recovery for U.S. stocks. The Dow rose 600+ points yesterday, and today looks like we could see another triple digit gain. China even had a good day as its market climbed more than 5%. European markets are showing huge gains as well.

My market view remains that prices are undervalued and that the strong U.S. dollar, low commodity prices, low import prices, low inflation, a growing U.S. economy and low interest rates all combine to make for a solid long term investing environment for individuals.

In future postings, we'll explore this 'room to grow' thesis in more detail, but for now suffice it to say that sustained low interest rates should result in an overall improvement in 'price to earnings' (PE) multiples, thereby raising share prices.

Currently the market PE is ~17 and my expectation is that it can increase to 20 or higher. If I'm right, that means stock prices are more than 15% lower than they should be based on the more realistic and higher expected market PE.

The basis for this belief is my view that future interest rates will remain much lower than their historical averages due to the many positive effects of the aforementioned strong dollar, low inflation and a growing U.S. economy. Interest rates will rise from their present historically low base over time, of course, but not by much.

CAVEAT ... All that said, nobody knows the future. That's why it's called the future, and it hasn't happened yet. But that's the way I see things. In any event, as a long term individual investor in stocks, it doesn't change my approach even if I'm wrong about the expanding PE scenario.}

2 - Now let's talk about Donald Trump and why he's wrong about Chinese imports and other imported products as well.


Some things we can see and some we can't. But frequently it's the 'unseen' that makes all the difference.

Let's take low price Chinese imported goods as an example of this seen versus unseen story.

How China Makes America Better Off says this:

"Economist Don Boudreaux writing in his blog, Café Hayek, Aug. 20:

If the Chinese become zealous devotees of a religion whose doctrine requires that they serve Americans by shipping to Americans goods and services free of charge, then Americans are made better off. If the Chinese innovate in ways that lower their costs of production—and distribution and, thus, enable them to sell goods and services to Americans at lower prices—then Americans are made better off. If the Chinese invent new products and offer to sell these new products to Americans at prices that Americans find attractive, Americans are made better off. If the forces of international competition oblige Chinese producers to lower their export prices to levels closer to their costs of production, then Americans are made better off. If the Chinese government forces Chinese citizens to subsidize the production of goods and services sold to Americans so that Americans can purchase these goods and services at artificially low prices, then Americans are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off). If the Chinese monetary authority buys U.S. dollars with newly created yuan in order to (of necessity temporarily) make Chinese exports artificially inexpensive for Americans to buy, then Americans are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off).

The above reality is missed by people, such as Donald Trump (but hardly limited to him) who judge trade to be ‘successful’ only if the jobs and businesses that it visibly—that is, directly —creates in the domestic economy are perceived as being greater than the number of jobs and businesses that it visibly destroys. This error is among the oldest and most difficult to kill in economics—not only because this error is serviceable to domestic producers who greedily seek protection from competition, but also because it appeals to people who refuse to think beyond what is immediately and blindingly obvious."        

So if the Chinese are willing to supply American consumers with the world's best values, let's take them up on that.

And if they want to provide them essentially for free, that would be all the better for America's consumers.

But let's also get serious about upgrading the skills and knowledge of America's workforce and students.

That includes instilling in them the knowledge of how free market competition works to make a society's standard of living better.

By taking advantage of all the 'free' stuff offered by the Chinese, our citizens can then be free to focus on preparing themselves to perform higher value added work. That in turn will result in Americans having more money at their disposal to buy the low price Chinese offerings or anything else they may choose to buy.

But first, as Americans let's resolve to compete with all comers in a free and global market. That way we all win.

And that's my take.

Thanks. Bob.

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