The Grinch Stole Christmas. Next He Steals Global Growth.
We've highlighted problems with retail sales for the last year. They have typically been shrugged off until a handful of months ago when retail related stocks started trading lower. Now they are substantially lower. Today retail sales are reported to be what is probably the worst Christmas sales numbers in decades if not longer. At a time when many retailers make the majority of their annual profits. A week or so ago when individual retailers were reporting sales I actually heard a floor trader on Wall Street remark that a major reason sales were weak is that there is nothing new for consumers to buy. Do I live on Mars? The only people who believe that graduated from the school of clueless. Why don't they interview moms and dads and ask why they actually cut back Christmas spending? I'm sorry, that would indeed be confused with journalism.
Retail weakness extends well beyond store sales. Home sales are a retail data point everyone knows is weak and continuing to weaken. Ford has reported annual sales of 690,000 pickup trucks versus sales consistently at or over one million units in a healthy economy. Nissan's pickup sales are so weak that there are rumors it is going to cancel its recently launched full size pickup truck. We had a post about the pickup truck economy and how many important economic sectors rely on that data point for economic vibrancy. We've already talked about trucking company weakness. And, a contact I have in the rail industry said loads have dropped faster than at any time in the last thirty five years.
I haven't really talked about it alot recently but a major theme of 2006's posts was that the entire world was ramping up industrial production to shove more and more garbage down the American consumer's gullet. That included those actually making the product as well as those providing the raw material to build out the infrastructure to make the product. And, how all of this excess capacity was going to have a deflationary impact and a bust for that emerging market supply chain. The industrial supply chain causes many of the largest recessionary shocks in a normal economic slow down. And what function does emerging markets now play? The industrial supply chain for American consumers. In effect, the U.S. has outsourced many of the shocks associated with significant recessionary forces. Not that I agree or disagree with that strategy but who cares what I think anyway? And, where is all of the incremental demand for basic materials, commodities and energy going? That massive overinvestment and overindustrialization in.......emerging markets.
Few if any of these countries have addressed any type of serious economic and political reforms allowing for sustainable wealth creation and growth of their own economies. How many times did I rhetorically ask what any of these countries actually did to create the explosion they were experiencing? And, what is the answer? The answer is not alot. It was primarily the American economy and American monies driving their economic booms. Monies through outsourced investment, through direct economic investment and through asset investment. It has been a projection of our wealth and our stupidity. We've seen this story to a certain extent but on a smaller scale. It was Thailand. It's not a coincidence I posted a video on here about Thailand and the empty buildings and busted economy that still remains in that country. A quote from that post is, "I think it's important to remember that Asia has had many chances over the decades to prove itself as a place where progressive economic change, democratic change and true capitalist reforms could take hold.......I've incessantly ranted about my concerns over China and emerging markets since starting this blog. For those of you who believe the next century is the Asian century, you might want to watch this short video highlighting the economic devastation that still looms over Thailand ten years after their crisis. Was Thailand in 1997-98 the equivalent of China today in terms of economic reform, transparency and capitalism?"
It never ceases to amaze me that people simply take everything at face value without any thought. They see China growth and immediately add in 1.3 billion people and extrapolate to infinite. Yet, China has had all of modernity to develop its economy. Yet it only started to succeed when it begain receiving foreign investment. Now, people have written books on China's greatness, the Asian century, the demise of the U.S., people moving to China and on and on and on. As I've said before, I hope for success for China's citizens but I also don't confuse hope with reality.
Let's look at this in very simple terms. I'm sure everyone has read or heard this great little piece of wisdom, "Give a man a fish and feed him for a day. Teach a man to fish and feed him for a lifetime.". Primarily, the U.S. and to a lesser extent, other democracies have given emerging markets plenty of fish. But, in effect, they have simply enabled destructive economic and political institutions, governance and behavior that has kept these countries in the "emerging" category for decades or centuries. Unfortunately, long term wealth is only achieved by teaching them to fish. More appropriately, that they teach themselves to fish. As I wrote before, these markets are reliant on the kindness of strangers.
Emerging markets are feeding off of the wealth created by rising assets this cycle. Feeding off of inflation. What happens if that dynamic no longer exists? And if the American business and/or consumers no longer supports these markets with the intensity of the past decade? It's as obvious as obvious can be that emerging markets are experiencing massive inflation. The crowd clearly recognizes this point. That is one reason why they keep yammering that the Fed should not cut rates. They say we are importing inflation. And, we are. But, what insidious dirty little problems exist that the crowd doesn't recognize? The U.S.'s deflation is fueling emerging market inflation. A fact that not a single person rolled out for public opinion has brought up. It's highly likely emerging markets and their inflation party will end for reasons most do not understand and they too will join the U.S. in a global deflation.
American consumers are tiring from their shopping sprees as we said they likely would in 2006. And, so too are businesses likely to pull back on international investment. That will cause tremendous shocks in emerging markets. To date the macro pieces I have written about continue to fall into place. It could all blow up in my face but I would recognize much has changed before hand through quantitative work. Instead, as time passes there is even more evidence of the ultimate outcome for this cycle. That outcome, if it comes to pass, means nearly everything the media and Wall Street told you would come to pass at the height of their hubris in fact resolved itself in exactly the opposite fashion in the final outcome. Their "black swan". Their unpredictable outcome. Conditioning---here and here---is a powerful force.
Retail weakness extends well beyond store sales. Home sales are a retail data point everyone knows is weak and continuing to weaken. Ford has reported annual sales of 690,000 pickup trucks versus sales consistently at or over one million units in a healthy economy. Nissan's pickup sales are so weak that there are rumors it is going to cancel its recently launched full size pickup truck. We had a post about the pickup truck economy and how many important economic sectors rely on that data point for economic vibrancy. We've already talked about trucking company weakness. And, a contact I have in the rail industry said loads have dropped faster than at any time in the last thirty five years.
I haven't really talked about it alot recently but a major theme of 2006's posts was that the entire world was ramping up industrial production to shove more and more garbage down the American consumer's gullet. That included those actually making the product as well as those providing the raw material to build out the infrastructure to make the product. And, how all of this excess capacity was going to have a deflationary impact and a bust for that emerging market supply chain. The industrial supply chain causes many of the largest recessionary shocks in a normal economic slow down. And what function does emerging markets now play? The industrial supply chain for American consumers. In effect, the U.S. has outsourced many of the shocks associated with significant recessionary forces. Not that I agree or disagree with that strategy but who cares what I think anyway? And, where is all of the incremental demand for basic materials, commodities and energy going? That massive overinvestment and overindustrialization in.......emerging markets.
Few if any of these countries have addressed any type of serious economic and political reforms allowing for sustainable wealth creation and growth of their own economies. How many times did I rhetorically ask what any of these countries actually did to create the explosion they were experiencing? And, what is the answer? The answer is not alot. It was primarily the American economy and American monies driving their economic booms. Monies through outsourced investment, through direct economic investment and through asset investment. It has been a projection of our wealth and our stupidity. We've seen this story to a certain extent but on a smaller scale. It was Thailand. It's not a coincidence I posted a video on here about Thailand and the empty buildings and busted economy that still remains in that country. A quote from that post is, "I think it's important to remember that Asia has had many chances over the decades to prove itself as a place where progressive economic change, democratic change and true capitalist reforms could take hold.......I've incessantly ranted about my concerns over China and emerging markets since starting this blog. For those of you who believe the next century is the Asian century, you might want to watch this short video highlighting the economic devastation that still looms over Thailand ten years after their crisis. Was Thailand in 1997-98 the equivalent of China today in terms of economic reform, transparency and capitalism?"
It never ceases to amaze me that people simply take everything at face value without any thought. They see China growth and immediately add in 1.3 billion people and extrapolate to infinite. Yet, China has had all of modernity to develop its economy. Yet it only started to succeed when it begain receiving foreign investment. Now, people have written books on China's greatness, the Asian century, the demise of the U.S., people moving to China and on and on and on. As I've said before, I hope for success for China's citizens but I also don't confuse hope with reality.
Let's look at this in very simple terms. I'm sure everyone has read or heard this great little piece of wisdom, "Give a man a fish and feed him for a day. Teach a man to fish and feed him for a lifetime.". Primarily, the U.S. and to a lesser extent, other democracies have given emerging markets plenty of fish. But, in effect, they have simply enabled destructive economic and political institutions, governance and behavior that has kept these countries in the "emerging" category for decades or centuries. Unfortunately, long term wealth is only achieved by teaching them to fish. More appropriately, that they teach themselves to fish. As I wrote before, these markets are reliant on the kindness of strangers.
Emerging markets are feeding off of the wealth created by rising assets this cycle. Feeding off of inflation. What happens if that dynamic no longer exists? And if the American business and/or consumers no longer supports these markets with the intensity of the past decade? It's as obvious as obvious can be that emerging markets are experiencing massive inflation. The crowd clearly recognizes this point. That is one reason why they keep yammering that the Fed should not cut rates. They say we are importing inflation. And, we are. But, what insidious dirty little problems exist that the crowd doesn't recognize? The U.S.'s deflation is fueling emerging market inflation. A fact that not a single person rolled out for public opinion has brought up. It's highly likely emerging markets and their inflation party will end for reasons most do not understand and they too will join the U.S. in a global deflation.
American consumers are tiring from their shopping sprees as we said they likely would in 2006. And, so too are businesses likely to pull back on international investment. That will cause tremendous shocks in emerging markets. To date the macro pieces I have written about continue to fall into place. It could all blow up in my face but I would recognize much has changed before hand through quantitative work. Instead, as time passes there is even more evidence of the ultimate outcome for this cycle. That outcome, if it comes to pass, means nearly everything the media and Wall Street told you would come to pass at the height of their hubris in fact resolved itself in exactly the opposite fashion in the final outcome. Their "black swan". Their unpredictable outcome. Conditioning---here and here---is a powerful force.
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