Fall in the Spring

Making stuff, what everyone believes is the core of any economy, is the next market sector to take the brunt of this market collapse. Machines, manufacturing, material… are where 18 percent of this planet’s jobs are. Look at the contraction numbers in that manufacturing sector compared to a year ago (NY Times, March 19^th): Europe down 12 percent; US 11 percent; Brazil 15 percent; Taiwan, 43 percent; China, 17 percent. Exports are sinking even faster: “Germany’s exports down are 20 percent from a year ago, Japan’s have plunged 46 percent, and in the United States, exports fell at an annualized rate of 23.6 percent in the fourth quarter of 2008… [China] more than 25 percent and millions of factory workers being laid off.” (same article)

People who have lost their jobs who think they might, or who are earning less (or fear they will), don’t buy. Even as the price of gasoline is really cheap compared to last year at this time, Americans are driving less, in record-breaking numbers. With unbelievable discounts, consumers aren’t buying. With cheap car prices and financing from the car companies, consumers aren’t buying. The fashion industry is gathering on a tall cliff as a combined army of bulldozers pushes toward them - no factoring (the ability to borrow on what people owe you), no credit for expansion, and consumers staying away from high-end clothing as if it carried the bubonic plague. Think you’ve seen sales so far? Wait till the liquidators arrive.

So if your country’s economy side-stepped the banking crisis, because that’s not where you generate much of your gross domestic product (like China), you now get to enjoy financial despair generated by the contraction in buying habits from consumer countries where the financing was vastly more important (like the U.S.) in generating wealth. While the U.S. generates only 18% of its GDP from manufacturing, China makes about one third of its GDP from marketing. And this contraction also slams jobs and further challenges the financial markets… a big spinning downward spiral, unless government invention or “no place left to fall” halts the plunge.

Nobody wins this one, but though Chinese banks have money (lots of ours - $2 trillion worth in reserves), they really cannot expand their manufacturing capacity (no buyers!), so guess what they are doing? If you’ve reading my blogs, you know exactly what they are doing! Training the workers to have better skills, building long-term efficiency-enhancing infrastructure and buying technology-based (but economically distressed) companies in foreign countries. So while there is plenty of suffering to go around, China actually can deploy all those vast currency reserves to buy itself a brilliant future… and our value impairment has actually created a need in our business world for them to do just that – buy us!

We are focused on fixing our banking system, and while our stock markets reacted really well, at least initially, to Treasury’s new announced “toxic relabeled legacy" assets purchase plan, there is still much skepticism in play about how well it will work and what the auction pricing method will really do to the balance sheets of the banks. More government funding for more “plans” still stirs the inflation worries down road, and, despite her initial statement on March 23^rd that she will continue to buy Treasuries, China must ultimately take care of her own people first and deal with an over-reliance on manufacturing for exports. The warnings have been issued; the writing is on the wall.

I have spoken about how someone seems to have hit the “reset” button – to conform (maybe even a bit too much) artificially-inflated assets bought with very cheap borrowed money to our new and “real values” and economic realities. But that may not have been the only button that someone pushed. Someone seems to have also pushed the “national wealth transfer” button as well. As we watch the dollar fall as the Federal Reserve increases the money supply, who cares if you aren’t really buying much? If other countries are even worse off than you are?

But if values collapse as prices increase due to currency devaluation (“stagflation”), where’s the fun in that? Especially if it’s your currency that’s collapsing against other countries whose currency does not? Ni-how! (Hello in Mandarin!). One’s a buyer looking for values; the other’s a seller desperate to stay alive. Guess who’s who? Hmmm, Western investment bankers have some major new buyers; high-end real estate brokers will soon…. Not everyone suffers equally.

As a final note, to all of us who were and remain outraged at the AIG bonus debacle, there is a letter you might want to read from AIG soon-to-be-gone executive vice president, Jake DeSantis, to see the other side of this debate: http://www.nytimes.com/2009/03/25/opinion/25desantis.html

I’m Peter Dekom, and I wish someone would make the bad man stop!