2012 Second Half Outlook: Policy Response & How To Invest
+Global+trade+through+europe.png)
+Sizing+The+PIIGS.jpg)
+India+GDP+Growth.png)
China allowed the total number of bank loans to grow by 60% over a two year period beginning in 2009. This number is staggering. Money flowed or was channeled into massive real estate projects. Visitors in China’s largest cities over past few years always reported seeing hundreds of cranes filling the skylines. China began to build empty cities and enormous empty malls. The factory worker jobs were replaced with construction based jobs.
+China+PMI.png)
The
following picture provides a great visual of just how interconnected our global
economy is today. It shows that over 50 percent of the global trade now runs
through Europe.
+Global+trade+through+europe.png)
This means
that austerity cuts in the PIIGS (Portugal, Ireland, Italy, Greece, Spain) have
an impact on factory workers in India and China. The impact on those factory workers has an impact on investment demand in the United States and Brazil, and
so on it goes. The PIIGS economies make
up over 5% of global GDP seen in the following chart.
+Sizing+The+PIIGS.jpg)
As Europe moves into recession, the butterfly effect has washed onto the shores of two
of the largest economies in the world: India and China. The following graph
shows India’s GDP collapsing downward to only 5.3%, below the 2008 financial
crisis lows and the lowest level in 9 years.
+India+GDP+Growth.png)
The problems
in China are even greater. Beginning in 1990, China built their economic model
around export led growth. They did this by providing goods at a low price
(through extremely low wages of Chinese workers) and artificially manipulating
their currency to stay competitive. This model worked beautifully until
the main purchaser of these goods, US consumers, hit a brick wall in terms of
their ability to take on additional debt and spend (we will cover this topic in detail in just a moment).
As exports
began to collapse in late 2008, China faced a serious
problem. International newspapers reported that 20 million Chinese factory
workers lost their jobs and were forced to return to the countryside to look
for work as agricultural laborers. China needed a way to keep the economy
growing until exports picked back up and they responded with the growth of
credit through the banking system.
China allowed the total number of bank loans to grow by 60% over a two year period beginning in 2009. This number is staggering. Money flowed or was channeled into massive real estate projects. Visitors in China’s largest cities over past few years always reported seeing hundreds of cranes filling the skylines. China began to build empty cities and enormous empty malls. The factory worker jobs were replaced with construction based jobs.
Over 25% of
China’s GDP is now related to the construction industry. Over the past 8 months
there have been problems emerging for this “economic miracle." Real estate prices, which had been surging in price due to the massive credit
expansion, have now reversed and are falling. Developer loans for massive
projects built for future growth now sit empty and the loans are delinquent.
The cranes that once flooded the skyline are now slowly disappearing as the
massive effect of overbuilding takes hold.
China is now
in serious trouble. They have have an oncoming banking crisis and an economy
that is searching for its next form of growth. They are looking for the next
“economic miracle” just as Japan was after their real estate bubble burst in
1990. Recent manufacturing data (their PMI) show a continuous and worrisome
decline.
+China+PMI.png)
China’s goal was to buy some time until their global export model moved back
into high gear allowing real estate workers to shift back into factory workers.
In order for that to happen, the consumers of the largest economies have to once
again be both willing and able to borrow and spend. We have already discussed
the outlook for that prospect in Europe. We will now look at the United States
.
