We saw an article yesterday that gives us hope for the future as we reach these last few days of 2009.   The New York Times wrote,

When the clock strikes midnight on New Year’s Eve, China and 10 Southeast Asian nations will usher in the world’s third-largest free trade area….  Trade between China and the 10 states that make up the Association of Southeast Asian Nations has soared in recent years, to $192.5 billion in 2008, from $59.6 billion in 2003. The new free trade zone, which will remove tariffs on 90 percent of traded goods, is expected to increase that commerce still more.

The zone will rank behind only the European Economic Area and the North American Free Trade Area in trade volume. It will encompass 1.9 billion people. The free trade area is expected to help Asean countries increase exports, particularly those with commodities that resource-hungry China desperately wants.

Being the hand-wringing, left-leaning New York Times, they of course titled the article “In Southeast Asia, Unease Over Free Trade Zone.”  Leave it to the NYT to fixate on the anti-trade grumbling of a small number of people and completely miss the larger story:  that after the biggest financial crisis since the Great Depression, free trade isn’t dead!

We’ve seen a surge of anti-free-trade sentiment pop up in the U.S.and Europe (remember the shameless “Buy American” provisions?), but luckily the actual damage has been fairly small.  Still, while we free traders in the West are fighting a rear guard action to simply hold on to what we have, in Asia they are boldly moving forward.  Good for them.

Increased intra-Asian trade should help to gradually wean the region off of its reliance on exports to the West.  It should help to facilitate the continued rise of the middle-class Asian consumer.  This is good for Asia and good for the world.

We are not “sinophiles” here at HS Dent.  Unlike some other commentators, most notably Jim Rogers, we do not believe that the coming decades will see China emerge as the new world economic leader.  The country simply has too many serious demographic issues with which to contend.   But, we do believe that a healthy China and a healthy ASEAN is beneficial to ourselves and to the world economy more broadly.  So, here’s to the success of the Asian free-trade zone in 2010 and beyond.  Cheers!

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

A funny thing happened on the way to the dollar’s imminent destruction: it broke its downtrend and is now looking to finish 2009 strongly. (See chart)

We’ve been highly skeptical of the “dollar bear” argument for quite a while now (see “Short the Euro“).  We wonder if half of the “experts” who joined the anti-dollar bandwagon over the past two years have ever left the United States.  Had they been to Europe recently, they would have found that prices there already defy reality for those of us paying in dollars. (My recent visit to Madrid was nearly 50% more expensive that the one I took a few years ago…and this during a period where Spain is suffering a severe deflationary recession in which domestic prices are falling.)

Long suffering readers of the HS Dent blog are probably aware that we are temporarily residing in Paijan, Peru (see “Unconventional Medical Tourism“).   Even here, in the coastal Peruvian farm country, about as far in middle of nowhere as you can imagine (see map), the dollar has lost significant purchasing power.  Prices are increasingly expressed in the local currency, the nuevo sol, and more and more locals are opting to be paid in soles rather than dollars.

Yet none of this makes sense.  Is the US federal government spending an irresponsibly large amount of money these days on stimulus…much of it borrowed?  Absolutely.  But so is virtually every European country, and yet the euro remains strong.  The same is true for the Fed’s excessively lax monetary policy.   As bad as it is, it is only marginally worse than that of most other developed countries.  As we wrote in a prior post (see “Who’s Next?“), some Eurozone members are at significant risk of sovereign default.  And what might a default by a member or, in the most extreme case, the exit from the Eurozone of a major regional economic power like Italy, mean for the future of the euro?  Let’s just say it wouldn’t be good.

The dollar was too expensive in 2000.  But today, after nearly ten years of grinding bear market,  the dollar is cheap and despised.  Legendary speculator George Soros is credited with saying that the secret to making money in the financial markets is to find the trend whose premise is false and then bet against it.  And we believe that the dollar bear market is one such trend.  And Soros’s old partner, legendary contrarian investor Jim Rogers, agrees (see “Jim Rogers is Loading Up on the Dollar“).

We remain bullish on the dollar for the next 6-18 months and recommend steering clear of the anti-dollar hysteria.

Related Posts:  “Gold is a Lousy Investment“, “Must the Dollar Fall If Stocks Rise?”

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Yesterday, Dennis Gartman wrote a few words we’d like to repeat. (Yes, we know we quote him a lot in this blog, but the man does good work). Gartman said,

“Long time readers of [the Gartman Letter] know that we believe demographics drive everything. Demographic trends…trump taxation; they trump economics; they trump politics on the Left and on the Right. Simply put, demographics are triumphant, and yet few pay any heed to these tidal circumstances that colour all things else”

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