Big Hitters, The Dangers Of “Resulting”, And A 3x Bagger…

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Rising Interest Rates & Discovery (DISCA) — AK reviews the broader market, analyzes what rising rates mean, and also covers our long Discovery (DISCA) thesis.

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Articles I’m reading —

This week, economist and China based punk rock music executive, Michael Pettis, wrote an excellent piece in Bloomberg on the US-China trade imbalance and why China buying more US goods won’t bring down the US trade deficit one whit.

The issue comes down to basic accounting. China could easily close its trade imbalance with the US, but that would simply lead to another country buying an equal amount less of US exports. The reason why is explained in Pettis’ national identity accounting framework and he lays out how this works. Pettis explains:

Under the current global system, the distribution of income in a number of countries — not just China, but also Germany, Japan, South Korea and several others — is distorted in favor of government and businesses rather than households. This is because these economies effectively subsidize manufacturing exports with various hidden transfers from households, including low wages and low deposit rates. The household share of income is consequently too low for domestic demand to absorb everything produced domestically.

Such distortions also lead to structurally high savings rates in these countries. Income can be consumed or it can be saved. Households consume most of their income while governments and businesses typically save all or nearly all of theirs. By giving the latter a disproportionately high share of income, and households a disproportionately low share, these countries automatically force up their savings rates.

The global economy, in other words, suffers from excess savings generated by a small group of high-surplus countries. The U.S. plays a stabilizing role by absorbing nearly half of this excess of global savings. That’s not because the U.S. has any need for such huge amounts of foreign savings, but because it has completely open, deep and flexible capital markets.

Since the US private sector is not wanting for additional financing (we’ve got plenty of cheap capital), this surplus capital flows right back out through the trade channel, in the form of greater imports into the US. This is an ironclad rule of the balance of payments. And so, we would have to address capital imbalances with the entire world, not just China, if we really wanted to reduce the US trade deficit.

Here’s the link to the article, it’s worth a read.

Also, check out this shareholder letter from Edelweiss Holdings (link here). It’s about how Scientism has polluted financial and economic thinking. It’s exceptionally well-written. Here’s an excerpt.

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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