Monday, January 30, 2017

US vs China in a trade war - who will win ?

One clear takeaway from Chinese President Xi Jinping’s Jan. 17 speech at the World Economic Forum in Davos was that U.S. President Donald Trump has him on the defensive.

Xi delivered a minor surprise by passionately backing free trade in a rebuke to the protectionist platform that helped Trump get elected. “No one will emerge as a winner in a trade war,” Xi said. What he forgot to say is that those conflicts are never officially declared, and China has been in one for years.

It’s one thing for China to use its cheap and disciplined labor force to grow rapidly through exports, most of which directly and indirectly end up in North America and Europe. It’s another to dump excess steel, aluminum and other products on world markets. 

The pressure is on. The era of China’s growth by exporting is over, because just about all the manufacturing jobs that could be moved from the West to China and other developing countries have left. In the late 1990s, 17 percent of U.S. gross domestic product came from manufacturing. In 2009, the share fell to 12 percent, then leveled off. Chinese exports used to rise 20 percent to 30 percent per year, but now are falling.

Chinese infrastructure spending, used to offset waning exports, has spawned huge excess capacity, ghost cities and debt, which together leaped from 164 percent of GDP in 2008 to 247 percent in 2015, based on the latest data available. The planned shift to consumer spending and services is behind schedule and troubled. Sizable increases in minimum wages, designed to promote household spending, have displaced low-end manufacturing to cheaper locales such as Vietnam and Pakistan. The bubbly Chinese real estate sector appears to have peaked. China’s economic growth is slipping and the 6.7 percent official GDP number for 2016 probably is double the true number. 

Xi’s response involves a competitive devaluation of the yuan, a normal protectionist measure aimed at encouraging exports and discouraging imports. But to limit capital flight and curtail foreign criticism, China’s central bank surreptitiously alternates between emphasizing the currency’s link to the dollar and to a trade-weighted basket. China’s foreign currency reserves have been cut to $3 trillion from as much as $4 trillion in June 2014.

Despite Xi’s pleas at Davos, free trade is rare, and only occurs when a global power uses it to its advantage. The U.K. did so in the 19th century to secure raw materials for its rapidly industrializing economy and markets for its output. Post-World War II, the U.S. used free trade to promote recovery in Western Europe and Japan. That was cheaper than garrisoning more American troops around the world to contain communism.

Most Americans accepted that strategy and tolerated rapid growth in China -- until globalization moved so many manufacturing jobs there that real incomes declined for most Americans, starting over a decade ago. The deleveraging of the excess debt accumulated in the 1980s and 1990s, contributing to sluggish economic growth and depressed wages in the West. Furthermore, American business cut labor costs to promote profits in the absence of significant revenue growth. 

Trump’s hyperbolic call for a 45 percent tariff on Chinese imports is, no doubt, the opening gambit from a man who considers himself the world’s best negotiator. Whether his business successes transfer to the international arena remains uncertain, but he’s well aware that, in the present world of excess capacity and ample labor, it’s the buyer -- the U.S. -- that has the upper hand, not China, the seller. 

Xi may be right that no one wins a trade war, but the U.S. will probably lose less than China. That will boost the dollar further, as will its haven status and the almost universal attempts by nations to devalue their currencies. As a result, earnings at American exporters will suffer as the dollar gets stronger. Conversely, domestically oriented U.S. companies will be better off, especially in those service industries that are relatively immune to imports. 

The Chinese are pragmatic and will probably give way on issues such as intellectual property and access to markets. Xi’s China is fading, much like Japan after the late 1980s collapse in stocks and real estate.

Monday, January 9, 2017

Retail stores vs Online Shopping

Another holiday shopping season has passed, and though the rapid growth of online spending has been a well-told story for a number of years now, it’s worth highlighting the latest developments and what they mean for investors.

Internet sales rose an estimated 15 percent, to 19 percent, from a year earlier, while those at traditional stores fell 10 percent as the number of shopper visits plunged 15 percent. The appeal of online shopping is only getting stronger as people who came of age using computers and smartphones become a bigger factor in consumer spending.

At its core, the ease of comparison shopping online puts downward pressure on retail prices, especially prices of big-ticket items such as appliances and consumer electronics where service is a minor part of the transaction. That helps explain why inflation remains stubbornly below the Federal Reserve’s desired levels. Gone are the days when a store could entice consumers with several low-cost offerings and be assured that they would also buy other items at full list price on that same trip. E-commerce is exploding because consumers want it, not necessarily because retailers find it desirable or profitable. In many cases, they don’t and stockholders are punishing conventional retailers for sales declines. Almost any good can be purchased online, and often with free shipping and no sales tax.

The S&P 500 Consumer Discretionary Index fell 0.11 percent in December, versus a 1.82 percent gain for the market overall. That doesn’t mean the future for retailing is online. E-tailers and traditional brick-and-mortar retailers can lose – and lose big – in e-commerce. Retailing is a very competitive, low-profit margin business, and the ease of entry for online sales guarantees that it, too, has similar characteristics.

As for shopping malls, it’s undeniable that consumers like to try out products in person and enjoy the social aspect of a trip to the shopping center with friends. Plus, it’s easier to return unwanted merchandise at a physical store rather than having to repackage undesired goods and arrange for pick-up. Stock prices of mall properties have risen twice as much as the S&P 500 since the beginning of 2009, thanks in part to historically low interest rates.

Yet there’s no denying that physical spaces are hurting, too. This year through September, some 14 major U.S. retailers from Macy’s to Men’s Wearhouse each closed 100 or more stores. Adding insult to injury, Macy’s this week said it plans to cut 6,200 jobs in early 2017, or about 4 percent of its workforce, after holiday sales came in at the low end of its forecast. The Bloomberg REIT Regional Mall Index dropped 0.31 percent in December.

When major retail locations disappear, smaller stores suffer, especially in major malls where jewelers, shoe stores, gift shops and bookstores depend on the big chains to generate traffic. Also, much of what the little guys sell is highly susceptible to online sales. Consider greeting cards that can be ordered and customized with ease online.The loss of a major anchor may rapidly lead to the demise of an entire shopping mall as small stores fold. That will call into question the real estate values in that mall’s service area, and indeed, the economic vitality of the neighborhood, including employment, commercial and even residential construction.

As noted earlier, online sales are highly deflationary. They cut out many middlemen. Bricks-and-mortar facilities are largely unnecessary. Head counts and employee costs are reduced as many retail employees and their benefits costs are replaced by fewer, lower-cost, on-demand workers. Small sellers can operate out of their kitchens without office and commuting costs.

The way to think about these trends is to remember the California Gold Rush. Back then, it wasn’t the prospectors who got rich, but rather it was the purveyors of picks and shovels. Today’s equivalent include United Parcel Service Inc., and FedEx Corp. – the companies that delivery the bulk of merchandise to homes and offices. The S&P 500 is up 119 percent since the end of 2008 while FedEx has gained 134 percent and UPS 78 percent.

Thursday, January 5, 2017

Everybody wants to devalue their currency

We are going to have massive fiscal stimulus because voters are mad as hell, that's why Trump got elected. Its going to take a couple of years, its going to have to go thru Congress. I think the markets have jumped the gun's on this.

Other topics covered:
Japan stimulus, Japan's budgets, Limits of monetary policies, Helicopter money in USA,  No inflation in the foreseeable future, China growth slowing with the official rate being overstated to save face.