Monday, October 9, 2017

Useless Advice from the Likud Boiler Room

Andrew C. McCarthy has joined the crowd. He usually writes about legal matters, and did so again. But this time, when he sensed that his legal arguments were as ineffective as a Netanyahu speech delivered at the UN, he added a paragraph and stuffed it with an economic argument that, unknown to him, was demolished long ago.

I discussed that sort of economic matters once before, and some people understood my arguments. Apparently others did not understand them or most likely missed them entirely – one soul being Andrew McCarthy. And so, I'll explain my point again for the benefit of these people, but I'll take a different approach this time. What I'll do is start by telling a true story that will help me illustrate my argument. Here is the story:

I was a young man a little over fifty years ago when I received a phone call from someone I didn't know. He said he was from a brokerage firm that's promoting the stock of a new mining company, and he recommended that I buy some shares. Not knowing what to think on the spot, I said I'll call him back. I then remembered my father mentioning once that he tried his hand at trading commodities when he was just about my age at the time, and so I decided to ask him for advice.

What made the discussion with my father more nuanced was the fact that the name IBM was everywhere. The era represented the age of innocence where small boons filled people with enormous psychological satisfaction. Thus, to pronounce the three letters of the bluest of the blue chips on the stock market, instantly bumped you to an upscale category that made you feel like a tycoon. To own shares in IBM made you feel like a royal. And so I asked my father if it would not be better that I buy IBM shares instead of those from an upstart company the promoter was suggesting.

We had a long discussion about the pros and cons of trading in different kinds of stocks. The lesson I came out with in the end was that IBM will be good for my ego and safe on my bank account but nothing too spectacular. As to the upstart company, it represented a risk if it failed or a possible spectacular reward if it succeeded.

For these reasons, I was convinced I should maintain a varied and balanced portfolio with a small amount placed on risky stocks that could someday become the new IBM. This would be good for my wallet and my ego. And so I followed that advice more or less as I learned it, during the periods when I traded on the market. I can say that I had a good time because I was never surprised of what happened in all these years.

What follows is the economic argument that Andrew McCarthy borrowed from others and repeated in his article; argument that I analyze through the prism of my lifelong experience:

“What the Iran-deal apologists never mention is that the United States still has enormous leverage in the form of the American economy. As former Senate staffer Richard Goldberg recounts, this kind of pressure works. If the Trump administration were serious, the calculating players would understand in short order that, if they want access to the $19 trillion U.S. economy, they must shun Iran. They would shun Iran”.

No, they would not. Richard Goldberg and Andrew McCarthy are wrong. Their approach might have worked at one time, but it began to lose its allure when the globalized economy started to entrench itself. What investors look for today is not the size of an economy but the rate of growth that it is poised to produce.

In fact, if they can make seven percent annual return on their investment in a company that's drilling for natural gas in Mozambique, they'll sell their stock in a fracking company that's burdened with debt and producing a growth rate of one percent or less in America. If they can make a higher return producing textile in Bangladesh than producing it in America, they'll close the plant in America and move it to Bangladesh.

By that same logic, European, Asian and American investors will prefer to invest in Iran that is opening to them and promising a high return, than invest in America that is closing to them and promising a low return. They will build a refinery in Iran cheaper than they would in America, and then collect higher dividends year after year.

If America tries to pressure them, they'll bend a little but not change course. If America pressures them a lot, they'll break with America and pledge their allegiance to someone else.

This is why even American companies keep money to the tune of trillions of dollars parked abroad. Their executives know that's where the opportunities exist.

They'll move some of that money to America if they are bribed with “incentives” by the government, but will continue to bid frantically on the opportunities that open to them in the developing world … come hell or high water or foolish American threats.