Geithner, Obama and China by David Kotok
January 24, 2009

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


Following Treasury Secretary designee Tim Geithner’s public confirmation hearing, an extensive Q & A occurred in writing. We have posted a copy of the US Senate Finance Committee’s 100-page text on our website. See: . This is must reading for any serious investor, economist, strategist, analyst, or observer. In this text you will find what is on the minds of the Senators, and you will gain insight into the polices that will be forthcoming from the Obama administration.

One telling example is found in the following quote that has already created international consternation. Geithner twice answered questions about currency and China. In so doing he has placed the Obama administration squarely in the middle of the tension between the United States and the largest international buyer and holder of US debt: China. This happened as the same Obama administration is unveiling a package that will add to the TARP financing needs and the cyclical deficit financing needs and cause the United States to borrow about $2 trillion this year. Two trillion dollars of newly issued Treasury debt – and this is how the question was answered. Not once but twice.

Geithner (on page 81 and again on page 95) answered: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices.”

“Manipulation?” “Aggressively?“ This is strong language. Geithner did not do this on his own authority. These are prepared answers. He is citing the new President, not once but twice.

China’s response was fast and direct. China’s commerce ministry said in Beijing that China “has never used so-called currency manipulation to gain benefits in its international trade. Directing unsubstantiated criticism at China on the exchange-rate issue will only help US protectionism and will not help towards a real solution to the issue.”

Are we seeing the world’s largest and third largest economies calling each other names in the middle of a global economic and financial meltdown?

The world is in recession. The economic growth rates in the major and mature economies are now negative numbers. In China the growth rate is at least 4 and maybe as much as 8 points below last year. All the governments of the world that are running deficits are enlarging them in order to finance stimulus packages. Their central banks are bringing the policy interest rates toward zero. Trillions will need to be borrowed by those governments. Either they will be financed by the outright massive printing of money through the central bank mechanism, or they will be financed by those in the world who have savings. China is the largest single holder of financial savings in the world. Japan is next.

Why are we picking a fight with China? The implied question is why are we alluding to one with Japan, whose currency is currently the strongest of the G4 majors? In a world where global finance is mostly in US dollars, British pounds, euros, and yen, this is engaging in a dangerous sport.

The pound has lost one third of its value against the dollar since the crisis began. It is destined to weaken more. The euro struggles because of the structural issue of having to conduct monetary policy in the sovereign debt of the various euro zone member countries. The gap between those sovereign interest rates has reached nearly 3% between the weakest and strongest. This is an extremely difficult task for the European Central Bank to manage.

And Japan is getting killed by the flight to the strong yen. Japan will intervene soon to weaken the yen; they have as much as said so. The yen is strengthening against the Chinese Yuan; that is Japan’s largest trading partner. The yen is 1.5 standard deviations above the JPY/USD exchange rate. It is nearly 3 standard deviations above the JPY/EUR cross rate that has been established during the ten years the euro existed. And it is over 3 standard deviations above the JPY/GBP cross rate.

So that leaves the dollar likely to get stronger. Right now it is the default choice of the world. We have currency strength not because we are so desirable but because we are currently better than the others. All bad; we’re not as bad as they are. Or all bad and the others are even worse.

So what do we do within 72 hours of launching the Obama administration that says it is seeking “change?” We fire the first public salvo in what could easily become a trade war or a threat to global financial integration.

What makes us so credible? Is it our proven record of regulatory oversight of our financial markets, as demonstrated by the Madoff scandal and the SEC? Is it the way our rating agencies work so diligently to place a coveted “AAA” on paper that was peddled to the rest of the world and was found out to be highly toxic? Is it the way we honor the promises of federal agencies by having tier-one-eligible Fannie and Freddie preferred held in the US and abroad by institutions, and then essentially cause a structural default on that preferred (actually, dividend suspension)? Or is it the way the actions of Treasury and the Federal Reserve allowed a primary dealer (Lehman) to fail, thus triggering a global contagion?

C’mon? Where is the plan to restore confidence and credibility and transparency and consistent policy for the United States? And how does the Obama administration believe that launching a fight with China is beneficial?

In the 1930s the severe recession of 1929-1931 was turned into the depression of 1931-1933 because of protectionism. Every historian knows that. Every economist learns it in school. This is well-known by Geithner and even better-known by Larry Summers and Paul Volcker. They are the three members of the Obama economic troika.

The statement Geithner repeated twice was certainly known to them in advance. Why did they not temper it? What is the plan? Do they want to threaten and see if China backs down? This, too, is dangerous. Do they intend to pursue the Schumer tariff scheme? There are more questions than answers.

Lastly, Larry Summers was going to attend the World Economic Forum in Davos, Switzerland. He has cancelled. Why? Was it because he did not want to have to face the private conversations that would follow such statements as have been made by Geithner in the name of the President?

Watch Davos closely. And remember that the absence of statements is as revealing, if not more so, than the presence of them. Not one mention of trade openness appears in our reading of the 100 pages of answers to the Senate. Maybe someone else can find an affirmation of free and open trade. I cannot.

We fear protectionism. It starts with rhetoric. We now have that threat. If it is pursued, it ends badly for everyone. No one wins.

Geithner’s answers are sobering. We are now in the realm of fiscal policy and national policy. This is not in the realm of the central bank; the Federal Reserve is not the player here. The Fed is doing all it can to unfreeze the financial system and restore it to functionality. If permitted to complete its task, that policy will work. If stymied or corrupted by conflicting policy in trade or federal finance, the recession will worsen and the pain will become more severe.

We are maintaining our 50-50 allocation between bonds and stocks in balanced accounts. Our normal baseline is 70% stocks and 30% bonds. Thus we are 20 points below baseline in stocks and 20 points above in bonds. We were planning to raise the stock portion as the credit markets improved. That change is now on hold. We continue to favor tax-free municipal bonds and taxable high-grade instruments and continue to avoid Treasury notes.

We believe cash at near zero percent interest is not desirable. We find that the amount of cash on the uninvested sidelines now approaches nearly half the value of the security markets. It has no precedent at that size. It represents future purchases of securities when and if this mess finally starts to clear.

David R. Kotok, Chairman and Chief Investment Officer, email:

Copyright 2008, Cumberland Advisors. All rights reserved.

The preceding was provided by Cumberland Advisors, 614 Landis Ave, Vineland, NJ 08360 856-692-6690. This report has been derived from information considered reliable but it cannot be guaranteed as to its accuracy or completeness.

For a list of all equity sales/purchases for the past year, please contact Therese Pantalione at 856-692-6690, ext. 315. This report is currently about 600 pages in length. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. This does not constitute an offer to sell or the solicitation or recommendation of an offer to buy or sell any securities directly or indirectly herein.

Cumberland Advisors supervises approximately $1 billion in separate account assets for individuals, institutions, retirement plans, government entities, and cash management portfolios. Cumberland manages portfolios for clients in 42 states, the District of Columbia, and in countries outside the U.S. Cumberland Advisors is an SEC registered investment adviser. For further information about Cumberland Advisors, please visit our website at

Category: Bailouts, BP Cafe, Markets, Regulation, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “Geithner, Obama and China”

  1. try2bamused says:

    If you want proof that the Chinese were right in saying that Geithner’s remarks were meant for domestic consumption, look no further than the exploding head of the above author. And he’s recommending 50-50 stock and bonds to boot. That’s enough to make my head explode! Oy-vey!

  2. Bruce in Tn says:

    “We are maintaining our 50-50 allocation between bonds and stocks in balanced accounts. Our normal baseline is 70% stocks and 30% bonds. Thus we are 20 points below baseline in stocks and 20 points above in bonds. We were planning to raise the stock portion as the credit markets improved.”

    …well, ain’t that ducky…er, it seems to me, if you fellows started this with a 70/30 allocation, and did nothing, that you probably came to the 50/50 allocation by the losses you’ve had in stocks the last 24 months…

    Talks a good game though….

  3. Bruce in Tn says:

    David…here’s the BP..

    Deleveraging will continue..even the homebuilders expect another 29% decline in home values in 2009.

    Unemployment is much worse than reported..the numbers of part-time workers, 32 hour zombies, are exploding…and soon even they won’t have a job. How bad will it get? I don’t know, but it certainly will get worse..

    Our “strong” dollar here is hurting exports, just as predicted…

    States and cities are desperate..

    The value of the bad credit instruments is several times the GDP…you see how well the first trillion of stimulus is being received..notice all the new jobs? There is still a massive unwind to go…

    People with cash have decided not to take chances…period…getting them to spend again, er, could be problematic…

    There is no economy that will do “well” in 2009…

    In sum, if your allocation is indeed still 50/50…just give it a little time, you’ll get where you need to be, say 20/80….

    Good luck.

  4. Moss says:

    As if this is the first time the US has questioned China on their currency. C’mon.. this has been going on for some time now. What exactly is global financial integration? Nice talking points. Why don’t you guys provide some constructive ideas? Mocking the administration, criticizing the actions taken (in hindsight), is that your idea of real change?

  5. DL says:

    I’ve heard this phrase many times by China-bashers: “China is manipulating its currency”.

    What does this mean exactly? I think that, in large measure, it means that they are buying our Treasury bonds (and notes), thereby restraining appreciation of their currency. And so what do these China-bashers want? Do they really want China to stop buying our Treasury bonds? If Obama really thinks that China is “manipulating” its currency, it would serve him right if China were to suddenly dump all its Treasury holdings.

  6. VangelV says:

    David R. Kotok, seems to have some problems understanding what is going on.

    First, why wouldn’t anyone who understood what was going on would not advise that individuals invest more in gold? It seems to me that Obama will need to borrow a great deal to fund his programs at a time when the Chinese are unable or unwilling to lend the US government any more and are financing UST treasuries by unsing proceeds from dumping GSE debt. Absent foreign buyers of treasuries the Fed is likely to step in and use the printing press to monetize the new debt issues. That is very inflationary over the medium and long run and will cause the USD to keep losing purchasing power.

    Second, it seems naive for a grown man to expect that politicians can come up with a credible plan, “to restore confidence and credibility and transparency and consistent policy for the United States.” American politicians are no more capable of running the economy than the Russian or East German politicians were during the glory days of communism. The current failure was not caused by the markets but by meddling politicians who handed out goodies to special interests and who initiated social experiments such as the one that created the subprime crisis.

    The bottom line is that the US economy will have to adjust and the process will not be made better by pissing off America’s biggest creditor. Obama needs to earn trust by abandoning failed Keynesian thinking and by letting the market liquidate those companies and individuals who made the bad decisions that got them into trouble. Let competent and prudent investors buy up assets cheaply and use them to create wealth by allocating them to activities that are in demand by private consumers instead of serving an artificial demand created by political whim. And lets get rid of the cancer that is the Fed once and for all. It has shown that its primary function is the transfer of wealth from the many to the few and there is no reason for voters to put up with it any longer.

  7. VangelV says:

    Sorry about the grammatical errors in the first sentence above. Cutting and pasting does not seem to a good idea unless one is willing to edit more carefully than I usually do. The opening sentence should have read as:

    “First, why wouldn’t anyone who understood what was going on tell individuals to invest more in gold?”

  8. bdg123 says:

    I’ve seen Kotok on TV and he seems like a nice enough guy. But, let’s be frank. He hasn’t been the source of terribly critical thought since his popularity has risen by being on CNBC. He has been wrong on everything since this crisis started collapsing and he was caught completely off guard by his writings and public statements. So, why should we listen to him now? We shouldn’t.

    China is clearly a currency manipulator. They have devalued their currency by 80% in the last fifteen years. They have the most mercantilistic and protectist policy of any major country in the world today. Anyone who doesn’t understand this doesn’t understand the world today.

    This ridiculous BS about trade war causing a crisis is a little like the horseshit leading into the Great Depression. Revisionists blame the GD partly on Smoot Hawley. But, LOOK AT THE TRUTH. Global trade first collapsed post 1929. Then we saw a race to devaluation that would have led to the destruction of global economies. That is what led to tariffs. Countries tried to devalue their products to save their domestic economies at the expense of anyone who would buy their products. A strategy that would have led to even greater unemployment. Oh, guess what? That is what is happening today.

  9. Bruce in Tn says:

    Here, at Thanksgiving 2008, Mr. Kotok tells us recovery is coming in 2009, and a “robust recovery” in 2010….

    If he really believed that, he’d be 100% in stocks…(see my above posts)

    Another Big Hat, No Cattle…CNBC lightweight..

  10. dunnage says:

    stupid is as stupid does. Geithner ought get the top job at Harvard and Summers should head to Vassar. Fairs fair.

  11. Mike in Nola says:

    The other side of the coin is that China is now in the position the US was in at the time of the Great Depression. It is the exporter and creditor instead of the United States and has fueled the great imbalance that needs to be rectified to repair things. Yet China is trying to pursue its policy of subsidizing exports.

    History is simply repeating itself with the players in different roles.

  12. Jaded Gen-X says:

    All I know is -
    *We owe China alot of money.
    *According to BBC News, China is executing 2 men for their involvement in the tainted milk scam. I believe a woman was sentenced to life in prison.
    *(They added melamine to raw milk to make it appear higher in protein. This led to the deaths of 6 babies and made some 300,000 ill.)
    *These are not people that I want to make angry.

  13. odnalro zeraus says:

    Whether or not the new Secretary of the Treasury is deflecting the spotlight from his tax dodger persona, by highlighting the issue of China’s exchange rate manipulation. it is obvious that he has chosen the wrong venue and the wrong time to do it.
    The Chinese may be right to signal that he may be immature for the responsibilities of the post.
    It seems as if the larger issue is why a tax dodger has been nominated for this job and identified as “too big to fail.” when he is called upon to oversee others “too big to fail.” who have also engaged in unethical and unwise business and financial practices that have destroyed the confidence of all members of society in the American economy leading us into a Depression that may yet become the ‘Greater Depression.” of all times.
    He may blend in as well as the thief, of the old story, that was named the chief of police.
    One would think that President Obama will not imitate his tragic predecessor by not admiting a mistake.
    What the country needs now is Leadership that promotes Confidence.
    Confidence in our leaders and their actions, and not political sermons.