Trading Places Redux

There’s free lunch. Even with free trade.

Ever since David Ricardo published the Principles of Political Economy, economists have recognized the benefits of trade, even if your trading partner can do everything cheaper than you can. It may seem illogical, but it works. It’s like a lawyer who can type 120 words-per-minute hiring a slower-typing secretary. Even if the lawyer’s faster, it’s better for them both for the secretary to do the filing.

So when global trade exploded after the fall of the Wall in 1989, economists rejoiced. All that comparative trading meant global output could grow faster. Restrictions fell, and billions of consumers entered the market. The only thing to worry about, according to many, was the transition to this trade nirvana.

But the law of unintended consequences asserted itself. Since trade expanded, networks are much more complex, and problems with fuel prices, piracy, and border control are huge. Disruptions in one area can affect the whole globe. So with an increase in global growth comes an increase in volatility.

It’s as if the world’s portfolio went from a blue-chip index to a group of small-cap stocks. The long-term returns are better, but at the price of more volatility. So Milton Friedman is proven right again: there’s no free lunch.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T17:58:21+00:00 March 4th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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