Imperfect Storm Blows Across All Regions, All Marketplaces

We are witnessing an imperfect storm, or two storms, or perhaps even three. Let’s try to unwind the interwoven, swirling winds and see if we can make some sense of what is going on, and hopefully derive a sound fundamental analysis of affected markets.

Southeast Asia, the BRICS and the Pacific Rim economies are of most concern. China is dying a slow manufacturing death at the same time it keeps shouting prosperity is just around the corner from the rooftops. We almost expect Herbert Hoover to appear on the dais with the central planners of the Communist Party and wave his bowler hat to the crowds. Manufacturing in the world’s second-largest economy is still contracting.

It is also contracting severely in Vietnam. India is a bit better off but is fast running out of room before it hits a credit wall. Brazil, as anyone who follows world business economics knows, has lost control of its currency from overspending, poor VC/start-up strategies in the private sector and over-generous government benefits. (We’re not against benefits, but rather stating facts about budget issues.)

The real is so weak that many transactions, from the very large to small consumer deals, are being executed in U.S. dollars. There is worry inside Brazil that it will become the largest economy ever to maintain the greenback as its shadow currency.

South Africa provides us with another gauge of the status of emerging economies. South Africa was improving quite nicely for half a decade but now its electricity generation and consumption are tanking. The major culprit is the manufacturing sector again.

At the risk of making gross generalizations, we think the BRICS slowdowns in factory activity is due to those countries’ lack of proper income distribution, and more importantly, a series of almost incredible advancements in manufacturing capabilities in the advanced societies.

We know that bigger ticket items such as autos, planes, ships, mainframe computers, heavy equipment and so forth, no require very little labor. (Although the labor it does require has to be very highly skilled to operate advanced machines.) This is due to innovations in robotics.

Robotics has a strange dissemination curve. Manufacturing the most expensive goods – which are also claim title to highest profit margins – soak up robotics improvements, because they can afford the upfront investments. The innovations are then spun off to plants that make ever less sophisticated and less expensive goods. This is now a fact of life. So, in the most advanced countries, because of improvements in robotics, less labor is required to make simple items – say, clothespins, cardboard boxes and nail clippers.

On a different tangent with advanced economies, consumer demand in the U.S. is very robust, although not so strong as to generate much in the way of inflation. The sales of automobiles in the U.S. maybe top the 18-million per-month rate (on an annualized basis) for the first time since 2005.

Demand is high for almost all durable goods in the U.S. and demand is very high for housing. Those two heavy bombers are driving the U.S. forward at breathtaking, but not dangerous speed.

On a descending scale, Europe is also consuming and making, as is Japan, although the latter has always had a problematic consumer ethos.

We are still of the mind that we are in a serious correction in equities, although not in a bear market. If we are going to get an interest rate hike, our feeling is that we should be getting on with it. (Not that we are advocating a rate rise in the least.)

The uncertainty is killing everyone. It’s killing the markets.

Wishing you as always, good trading,