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Caixin Online
May 11, 2010, 10:40 p.m. EDT · Recommend (21) · Post:
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China's new real-estate rules ease bubble fears
First Take "º
Macy's resonates, but stays cautious
By Andy Xie
BEIJING (Caixin Online) -- Major economies reported strong growth for the first quarter. In the United States, for example, gross domestic product grew 3.2% from the fourth-quarter level. Year-on-year growth rates were not far behind.
East Asian export-oriented countries reported even stronger data than those in the West. As a group, they probably grew twice as fast as the United States. And their second-quarter reports are likely to reflect similar strength. Meanwhile, the International Monetary Fund has upgraded its global, 2010 GDP growth forecast to 4%.
All these positive statistics raise an important question: Are we in the midst of a V-shaped recovery following the economic collapse that began in the second half 2008?
The answer is no. I think the current recovery is merely based on government stimulus and low-base effect. And given the amount of stimulus spending, this is not a strong recovery.
More importantly, structural problems exposed by the financial crisis were merely covered up, not resolved, by stimulus spending. This is why the recovery is not sustainable.
Since stimulus will eventually lead to inflation, interest rates will have to be raised. That will lead to another dip in the global economy. I expect this second dip in 2012, which means we are en route to a W-shaped economic phenomenon, not a V-shaped recovery.
When so many people are bullish about an economic outlook -- and offer lots of data to support their optimism -- it is easy for little people like you and I to be persuaded. But one should always question the consensus.
You don't have to poke too deep to find holes in the latest recovery story. One year ago, the consensus was that the financial crisis was the most serious in 60 years. Now, the doomsayers have changed their tune. How can things change so dramatically in just a year?
In early 2009, I predicted the people who were panicking at that time would declare everything fine by the end of the year. I also thought that, in the middle of the crisis, policy makers around the world had decided to err on the side of too much stimulus rather than too little. These predictions have come true. So the latest growth rates should be analyzed in that context.
Here's what's really happening: Major economies such as the United States and Britain are running fiscal budget deficits exceeding 10% of GDP. Deficits in Europe and Japan are half that amount. Interest rates around the world are close to zero. When viewed in this context, 4% global growth is not impressive. Actually, we should be asking why the global economy isn't growing faster.
But can individuals like you and I make sense of what's happening in our huge global economy, with its roughly $60 trillion in gross output and more than 6 billion people? More importantly, can we identify unsustainable trends and make the right decisions to avoid collective or personal losses?
In fact, it's impossible for an individual to gather and analyze all the data needed to reach meaningful conclusions. We have to rely instead on government agencies. But bureaucrats are slow, and they're usually too late in delivering data and analyses.
In addition, some agencies massage data to achieve desired financial-market reactions. As a result, a lot of little people have been force-fed misinformation. They've been left to search for answers in the dark before being led to the slaughterhouse.
Yet we can improve our odds of success while navigating the vast global economy and avoid being fooled by consensus views. This is possible if we always remember that the economy is guided by a price system. Multinational companies have arbitraged away production-cost differences over the past two decades, so price information about a company or a product can shed light on macroeconomic trends.
Let's look at China's auto industry to prove the point. Everyone says the industry is booming. Meanwhile, auto makers are depressed everywhere else around the world. How should we read the difference? What facts are true and sustainable, true but not sustainable, or false?
It's true that auto demand is booming in China. This is line with the global industry's trend. Whenever a country's per-capita income rises above $6,000, auto demand tends to take off. And that income level has been surpassed in many Chinese cities.
But is this growth rate sustainable? It is not. China's auto market is new, which means many consumers are buying their first car, creating a spike in demand. Demand for replacement vehicles will be the market's next development, and that will be a long time coming.
On the supply side, which includes auto dealers and manufacturers, China's auto sector seems highly profitable. One can be easily enticed to think this profitability is due to strong demand. But it is not. Autos are a globally traded product, so supply and demand sides in any single country don't have to reflect each other. China-based auto producers and distributors are profitable due to trade barriers that keep global competition out. The telltale sign is that prices are higher in China than elsewhere.
What's the significance of this story? From an investment perspective, one should be cautious about China's auto sector. Most analysts pushing auto stocks cite strong demand growth and high profitability. But this profitability is due to trade barriers.
After a tough run, Macy's is obviously getting a lot of things right, and being prudent about the future is one of them.
40 min ago1:58 p.m. May 12, 2010
- bgamall | 9:51 p.m. May 11, 2010
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