Wednesday, February 4, 2009

Asia Decoupling Proven Correct

For years I have said that Asia would not decouple from the global economy. I said that as consumption in the US slowed, Asia's export based economy would suffer. They would not be able to quickly retool their economies for domestic consumption and would thereby re-couple with the rest of the world.

I was wrong.

Asia has decoupled. The above influences have proven so disastrous that their economies are not only slowing along with the rest of the world, but they are crashing at a faster pace than the west. Consider the following:

China: Up to 26 Million Migrant Workers Now Jobless

As many as 26 million migrant workers are unemployed as China's exporters reel from effects of the global economic slowdown, a top rural affairs official said Monday, noting that widespread unemployment could threaten the country's social stability.

The figures were announced one day after Beijing warned of "possibly the toughest year" since the turn of the century, calling for development of agriculture and rural areas to offset the economic fallout. Though many Chinese cities have seen double-digit growth in recent years, the countryside has lagged far behind, forcing peasants to seek urban factory jobs churning out goods that are sold around the world.

But a recent government survey showed that slightly more than 15 percent of China's estimated 130 million migrant workers have returned to their hometowns and are now unemployed, said Chen Xiwen, director of the Central Rural Work Leading Group, a central government advisory body. Another 5 or 6 million new migrants enter the work force each year, he added.

Keep in mind, this is just a number tabulating migrant workers. It says nothing about regular city dwellers losing their jobs.

Regardless, the number is unreliable and keeps growing by the day. On Sunday, premier Wen Jiabao estimated a total of 12 million. By monday, the number grew to 20 million. Now we're at 26 million. Does anyone really know? And if they did, would the Communist Party of China tell us? I think not. But clearly, the situation is spiraling out of control. Millions of single, middle-aged men out of work. I don't think we've heard the end of this story.

As I stated in my 2009 Macro Outlook, I am expecting contraction in Chinese GDP this year. I haven't seen any mainstream analyst give projections under 5% growth. This will be yet one more example of them missing the mark completely. 2010 could see even further contraction (I'm thinking double digits). Consider the following chart that shows electrical output (dotted line) compared with GDP (solid line). Can you guess where GDP is headed?

The situation in Japan is worse. Far worse.

We learned last Friday that industrial output fell 9.6% in December. That is not year over year. That is compared to November. At first I saw this number and thought that it had to be a mistake. No industrial based economy can contract like that. Well, it is happening in Japan. The year over year number is closer to 21% and if what the major industrial companies have been telling us is correct, that number is already over 30% through January - with more to come. What's more, is that these numbers really only started declining late this summer. We're talking a drop of 1/3 in only 6 months. That is unheard of. Wait, let me put that in bold: That is unheard of. It has never happened before in a major industrial nation.

I've been bullish on the Yen for the last few years, as much of its government debt flowed overseas and eventually needed to come back home. I'm not sure if that is done yet, but if I were a holder of Yen, I would be thinking of the broader social/political implications of this crisis and consider selling. The Japanese are very interventionist, and the chances of them doing something incredibly stupid rises every day. I wouldn't want to be caught on the receiving end of something like that. The risk/reward has shifted as far as I'm concerned.

So with Asia's two biggest economies literally falling to pieces, inquiring minds might wonder what is happening on that little peninsula in between - Korea.

Well, things are falling apart rapidly there also. Exports, which represent 1/3 of the South Korean economy, fell by 32.8% in January compared to last year. Doing some advanced mathematics, we can figure that the Korean economy is losing 10% of it's GDP in exports alone.

Apparently, while politicians in the west are arguing at the dinner table about the size of the next stimulus package, Asia is choking on a chicken bone and turning blue.

Like clockwork, never turning down an opportunity to stir the pot, North Korea is preparing to test-fire a missile toward Japan. Now wouldn't that serve as a mighty convenient distraction from economic woes? Japan and South Korea were far more willing to talk with the North and give them economic aid so as to preserve stability in the region while their economies were humming along. That could all change as social mood darkens, unemployment rises and nationalistic fervor is easily stoked.


EconStudent said...

I have always thought that the Japanese Yen was a flawed currency before this financial crisis. Japanese government has one of the largest debt in the world and Japanese central bank is known for its quantitative easing (lending money to whoever wants it and speculate abroad).

Any suggestions about getting a job? I am graduating 2010 and I attended a job fair today. The jobs available were mostly insurance sales positions, which are paid with commissions.

My personal aspiration is to bring Vanguard Group to Canada. The average Canadian mutual fund management fee of 2.50% is ridiculous. I have not been able to contact Vanguard.

Matt Stiles said...


I would imagine that by 2010 if you try to make a living selling investments to regular folks, you'll not only bear the brunt of society's ire, but you'll be wasting your time. Even if it turns out to be "the buying opportunity of the century," you're not likely to be able to convince anyone of that.

The people that do well in the next decade will be those that figure out how to provide quality goods and services to local customers. Real labour costs will be going down, therefore producing things that were normally produced in China can be done at home - and with far better quality - which is what people are really going to want. Everything from clothing to food to kitchen utensils.

Use your economic acumen to produce things. Shuffling paper is a dead industry - for at least another 40 years.

This is my intention. Speculating right now is a way of building capital so I can make those kinds of investments later on. Timeframe is 2012-2013.


mannfm11 said...

great advice Matt. I recall Jimmy Rogers saying we would know when this mess was done when 29 year olds driving Mazerattis became 34 year olds driving cabs. The absolute size of the loot temporarily shown in paper profits is astonishing. I heard someone on CNBC say that the Dow as a broken index. The reason was its rally wasn't as good as the others. But, the SPX declined to a total value at the bottom in November that was right at the bottom of the April 1997 downswing. Had you bought a 15 year treasury at that time, you would have outperformed the SPX by roughly 4%, though there were exit points that would have done very well for the SPX. When the SPX was basing in April 1997 in the lower 700 range, the Dow as basing at about 6000. The Dow is higher than any index relative to where it was in the past. But, it has been rigged.

Bear markets are really tough to speculate in. Look at the nomans land we are in now. We could have a 15% rip in either direction and what you were short could blow sky high. They are trying to put the fix in on mark to market and we all know that if they didn't require mark to market, LTCM wouldn't have been a crisis.

I studied Prechter in the late 1990's, which I know is where Matt gets a lot of his stuff. When we are at the bottom, you won't be able to give burned people stock. The reason Madoff's stuff collapsed is because people pile in at the top and get out on the way down. Big money has to sell out on the way up and never forget that the business of stocks is selling stocks, not buying them. It is one reason they don't like the public on the short side.

You might read some of my blog. I haven't posted anything in awhile because I haven't been able to get my thoughts in order to write. But, I was pretty right this mess a year or so ago and I too thought Asia would implode. The world depends on dollar cash flow, good, bad or indifferent and the US slowing is really going to take the lustre off the Asian expansion. Expansion is really a greater economic activity than production.

Matt Stiles said...

Mannfm11, thanks. I've bookmarked your blog.

I wouldn't say I get a lot of my stuff from Elliott/Socionomics. It's just one of many tools I use. I quote it more often than others because it is the only system I know of that can explain rallies while all other metrics (P/E, P/B, Div Yields) suggest we are still way too high.

View My Stats