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Global Trade on the Fritz
One of the most bizarre aspects of our modern world is that many people now look to the Chinese as saviors of the global economy.
Which is to say that they look with hope to a small cadre of self-serving socialists sitting around a shiny table in Beijing to be the “deciders” on which specific programs will pull their own economy out of a tailspin and, in the process, also save the world.
If I were into self-inflicted pain, such a notion might cause me to slap myself across the face in an attempt to return to reality. Anyone who believes in this fiction has never picked up a history book, let alone one dedicated to the study of economics. If they had, they might have found the following entry under the heading Command Economy.
“An economic system where supply and prices are regulated by a small cadre of individuals. Also see, economic systems that have never worked.”
While I will commend the Chinese leadership for having liberalized much of their economy in recent years, and for outthinking the Western leadership (not real hard) in matters of manufacturing and trade, I’m under no delusions as how the shot-calling is done in China. Or, that country’s long-term prospects for success under the same regime.
It is for this reason that I have often compared the myth of a Super-China to that which circulated in the 1980s about Super-Japan. (And, why, in the July edition of The Casey Report, we provided a list of bullish China stock ETFs as possible shorting candidates… since that issue, the Shanghai index is off by better than 20%.)
It’s widely known that the Chinese government has been ordering a lot of raw materials in recent months, trading their many U.S. dollars for items more tangible. But this is a game that cannot last in a new global economy of sharply reduced trade, another topic we have written about with some regularity. Specifically, the lack of activity in the world’s formerly busiest ports, a story now intersecting that of China’s resurgence, or lack thereof. This, today, from Bloomberg…
Aug. 31 (Bloomberg) -- Just as global trade starts to recover, the shipping market is crashing for the second time in a year as China reduces raw-material imports and record numbers of new vessels set sail.
The rate for leasing capesize ships, boats three times the size of the Statue of Liberty, will drop about 50 percent from the current price of $37,865 a day to as low as $18,000 before the end of the year, according to the median in a Bloomberg survey of six analysts and fund managers. Forward freight agreements traded by brokers show the fourth-quarter average price will be 7 percent lower.
Shipping rates, which already fell 59 percent from this year’s high, are retreating as the Organization for Economic Cooperation and Development predicts a 16 percent drop in world trade for all of 2009. China’s State Council called for curbs on steel and cement production last week. A record 146 capesizes will be added this year, equal to 28 percent of the fleet, according to Fearnley Consultants A/S.
It’s well documented that during the last Great Depression, protectionist legislation helped to suppress global trade and exacerbate the long decline. While there’s some of that this time around -- starting with the Buy American provisions of the stimulus package (and there will be more as the crisis deepens) -- structural realities are serving to create the same basic scenario of collapsing global trade.
Those realities include generally tight commercial credit and a faltering U.S. market, the result of a general reordering of priorities by the overindebted and largely satiated American consumer, the prior reigning champion of frivolous spending.
While there has been a small rebound in imports to China in recent months, thanks to a command decision to restock that country’s warehouses with all manner of hard commodities, those imports remain well below the bubble top. (The following chart is from the always excellent SeekingAlpha.com site).
And, per the latest data, it looks like that’s about as good as it’s going to get for the foreseeable future, as Beijing’s puppet masters appear to have decided to slow the restocking, causing imports to fall off again. That, in turn, will reverse recent improvements in the widely watched shipping indices that have been pointed to by many as yet another green shoot.
Increasingly, it appears that China’s leadership know that the country’s hugely successful U.S. export program is a thing of the past, and are now focusing on regional markets as well as increasingly turning inward. In my opinion, the recent spate of Chinese buying of foreign resource companies has little to do with trying to secure the raw materials needed to keep exports cheap, and far more to do with securing Fortress China while simultaneously reducing U.S. dollar reserves.
And why not turn inward? It’s a given that the American consumer is toast for some years to come. The deafening silence now echoing around the world’s ports underscores the current situation.
Which brings me back to the notion of China as a savior of the world economy. Assuming that struggling U.S. consumers can’t be relied on to spend the world out of the slump, then one surmises hope for economic revival rests more on the U.S. finding eager buyers for its exports in a revitalized China. That’s a laughable idea. What, pray tell, can the U.S. provide to China that they can’t already produce themselves? (Or, if they don’t already produce it, quickly can – thanks to their productive capacity and willingness to reverse engineer anything we send their way.)
One of the primary attributes of a command economy is the ability to make decisions quickly and forcefully. If the old men of Beijing come to believe that the U.S. is “soooo yesterday,” they are capable of making decisions that will quickly reverse the roles between the two. That’s not to say that such decisions will be the right decisions – any system where economic decisions are made based on anything other than the feedback received from an unfettered, free market is a system at dire risk of a miscalculation.
What’s important in all of this to us as investors?
First and foremost, forget China as a global knight in shining armor. They have an almost impossible task – especially given the country’s central planning model – to save themselves, let alone everyone else.
Secondly, until you see the U.S. government enthusiastically embracing free markets and stopping the incessant political meddling in the economy, which is now almost on a par with that of China, you can forget about the U.S. enjoying a sustainable recovery.
The most likely next phase of this crisis will be another sharp reversal in global trade, as China looks inward and is taken off the table as the engine to lead a recovery. In response, expect more U.S. government stimulus, leading, in time, to the wealth-destroying inflation that is now a certainty.
In the final analysis, despite history’s clear lessons, the world’s major economies have all adopted central planning models to varying degrees – China’s is just a bit more visible. In the U.S. and Europe, the iron fist is gloved in rules, regulations, and tax and monetary policies. But the end result is the same: more barriers to commerce, not less. And right now, less is best. |
