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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Robert Douglas who wrote (7977)	2/9/1999 12:07:00 PM
From: Henry Volquardsen	Respond to of 9980

Robert, good post. I agree with your scenario regarding world growth rates. Henry

To: Robert Douglas who wrote (7977)	2/9/1999 1:27:00 PM
From: Sam	Respond to of 9980

Robert, Good post, but.... It used to be the case in this country (the US) that we had to import labor to build our infrastructure, populate the West, work in our factories, etc. It mattered more then where things were made. Often enough, when, e.g., the railroads' heavy infrastructure work was done, many of the workers were shipped back to whence they came, or they left of their own accord (a little known fact about 19th century immigration to the US is that most of the immigrants returned to their native country after just a few years in residence here; I can dig up the source for that if you want). Now we don't have to import labor, we just import the "goods". We use the labor of the Third World without having to see the laborers. We cringe when and if we hear about or see pictures of horrid working conditions, of child labor, we indignantly (sometimes) say that "Action must be taken" [see Heinrich Boll's hilarious short story of that title] to remedy such conditions, but I am willing to bet that virtually none of the clothes I am now wearing, none of the appliances that are in my home, probably none of the three computers that I frequently use, are made in the US or Europe, to mention just a few products that all of constantly use. This is a long way of saying that what worries me about the current "excess capacity" is the number of people who may be mobilized to produce "goods" but who are paid wages that make it impossible for them to become consumers. And what makes this possible is countries that adopt policies that promote the creation of a relatively few huge fortunes with some trickle down wealth but not enough to actually create good sized middle classes that consume. And governments that measure their success by the creation of these fortunes. These countries don't appear to me to be creating internal markets that the businesses will serve; the quick way to achieve their goal of nurturing large fortunes is the Japanese model of export oriented businesses that produce willy nilly to gain market share whether or not the market for those goods is saturated. This inattention to reality is, as you suggest, the way all excess capacity begins, but I don't think that we have ever had so many governments so dedicated to the production "game" before. And these goverments effectively control a huge labor pool. That is what seems to me different about "excess capacity" this time. Please tell me why I am a mad Cassandra. Best wishes, Sam

To: Robert Douglas who wrote (7977)	2/9/1999 2:32:00 PM
From: Paul Berliner	Respond to of 9980

I agree, Robert. Though many have argued that the business cycle as we know it is no more, the argument is full of wholes, primarily that most of the world is still developing and do not have 'service economies' yet. Even if we do have a different business cycle now because of services, the cyclical nature of the manufacturing segment and of commodities can cause chaos for our financial infrastructure, mainly in cases where huge manufacturing companies lose money in cyclical downturns and are unable to service their debt. It can happen here in a so-called service economy if companies that are dependant on oil, steel, chemicals, pulp and other 'business cycle' industries become insolvent and default on their debts. Once this 'new paradigm' leads to a weak banking system, the growth in services will no longer offset the weakness in manufacturing and a critical situation will arise. Japan may be net exporters, but they have a large 'services' economy, too. Has the strength, if any, in that segment resulted in growth that has offset the weak manufacturing sector there? No. Because Japan's banking system is weak, and how did it get that way? Because the business cycle concluded and the banks became weak as manufacturing companies missed debt payments and real estate markets slumped. Stateside, we have several huge business cycle companies here, primarily the goliaths of oil, whom may be able to weather a prolonged downturn in oil prices for another year at least, but what if oil does not recover to a high teens pp/BBL. by then? Dominos will fall in the industry which may weaken instituitions that are bondholders. Just think of how Russia hurt institutions here with losses, but this could be on a much grander scale - and Russia's woes are a direct result of weak oil prices. The recent merger of exxon & mobil was not a celebration of the bull market; it was done strictly for long term survival and a stronger balance sheet. It makes you wonder how low oil can go before these guys really do start to cry. Has anyone checked the margins in the methanol industry of late - even the goliaths of that market had negative margins for a large part of 98. Well, if any well-known oil company was to suddenly annouce that it was seriously cash strapped, I have a hunch it would have a far greater psychological effect on the markets than Long Term Capital or even BT (had it gone under). But perhaps the Lawrence Kudlows out there believe we are in a new paradigm and don't need oil to drive the economy because 'technological innovations' are offsetting that industry's weakness. As the months go by and more natural resource companies go bust, we will all take heed to what is actually happening and the markets will sell off accordingly. So far only small players in the steel and oil service industry have gone bust - but that only means that those companies couldn't stand the pain as long as the goliaths, who have a higher threashold but we won't know what it is until the first 'surprise' is announced. It's not a simple as doing math with the balance sheet because some banks that will get burned on the lines of credit extended to the smaller O&G concerns will sanction the whole industry once the trend of missed payments is in place by a formerly 'model' customer.

To: Robert Douglas who wrote (7977)	2/9/1999 7:54:00 PM
From: Frodo Baxter	Read Replies (2) \| Respond to of 9980

What makes you think the US economy will slow? I'm figuring 3, 3.5% real GDP growth, but frankly, this is barely a nudge up from those consensus lowball 2% figures. With the first half shaping up to be probably 5%, where's that second half slowdown gonna come from? And I also believe that slowdown in anticipation of Y2K is pure bunkos. If anything, inventory will be stockpiled.

To: Robert Douglas who wrote (7977)	2/9/1999 8:04:00 PM
From: Lee	Respond to of 9980

Robert, Zeev, Thank you for your thoughtful responses. After sleeping on it, I too came to similar conclusions. The second half of Makin's argument, "stock valuations are too high," well true versus historical averages has yet to mean much to this market. It seems we need that and something more for the markets to take notice. China, and other international concerns are out there, but we seem less dependent rather than more on international markets than 2 years ago. Another concern is the overbuilding I see in some areas of the country. The question I wondered, from where might good news come? We awoke to 2.2% productivity increase. Perhaps the cost cutting efforts of Q2 and Q3 of last year will show in profits during 1999. The impeachment is about to pass. Intel is about to launch th P!!! For now the good old consumer and US job machine might keep everyone drunk around the punch bowl. Thanks again for your response. Regards, Lee

To: Robert Douglas who wrote (7977)	2/9/1999 8:37:00 PM
From: Ramsey Su	Read Replies (1) \| Respond to of 9980

Robert and all, I am a Makin fan. It is quite interesting to go back and read his previous articles. So far, he has not been far off. As for over capacity, I want to add that there is tremendous over capacity in labor also. China has over 1 billion, India around 1 billion. Then there are almost 300M in Indonesia, about 70M in Thailand and who knows how many in Bangladesh, Myamar ..... Bottom line is about 2.5 billion people willing to work for anywhere between $50 to $200 a month. They can make more Nike, Reebok, Barbie dolls than the western world can ever consume. Having just returned from Thailand, I see empty buildings everywhere. The rate that they were building in China, during visits in 1996 and 1998, I don't see how they can absorb the supply. Hong Kong investors were buying real estate in major cities such as Shanghai, I don't think there is much of that anymore. While the US had remained an oasis of prosperity, whether it can survive another round of Brazil, Asian contagion II or Russia remains to be seen. It is certainly going to be an exciting year. Ramsey