Thursday, March 14, 2013

China inflation

Here is a copy of a post at the Mad Hedge Fund Trader site:

Rampant Wage Inflation Strikes China
By Mad Hedge Fund Trader
on March 14, 2013 in Diary, Newsletter I rely on hundreds of ‘moles’ around the world whose job it is to watch a single, but important indicator for the world economy. One of them checks for me the want ads in the manufacturing mega city of Shenzhen, China, and what he told me last week was alarming.
Wage demands by Chinese workers have been skyrocketing this year. The biggest increases have been at the low end of the spectrum, where migrant workers from the provinces are earning up to 40% more than a year ago. Wage settlements of 20% or more for trained workers are common. One factory that gave staff only a 10% increase saw many of them fail to return after the recent Chinese lunar New Year.
Of course China’s blistering 8% GDP growth is to cause, which has pushed inflation well beyond the government’s 4% target. So the cost of living in the Middle Kingdom is rising dramatically. The problem has been particularly severe with imported commodities, such as in food. Hence, the increased demands.
This is important for the rest of us because low wages have been the cornerstone of the Chinese economic miracle. In just the last decade, average monthly Chinese wages have climbed from the bottom rung to the middle tier. That seriously erodes the country’s cost advantage, which has gained such enormous shares in foreign markets, like the US. Take away the country’s price advantages, and demand will wither, slowing growth globally.
What will they be demanding next? Collective bargaining rights? In the meantime, keep checking those Craig’s List entries for Shanghai.
Average Monthly Salary$3,099 Yokohama, Japan
$1,220 Seoul, South Korea
$888 Taipei, Taiwan
$235 Shenzhen, China
$148 Jakarta, Indonesia
$100 Ho Chi Minh City, Vietnam
$47 Dhaka, Bangla Desh

Many question the durability of the U.S. stock market rally. There are still plenty of doom and gloomers around. Take a look at the Zero Hedge, or even at Jesse's Cafe Americain.

Rational people have doubts about the sustainability of a national economy that is holding so much debt. In actuality the debt is mostly held by the Federal reserve and the U.S. Govt. Corporate America is holding large amounts of cash and bonds.
And on a larger scale, the Chinese, Japanese, and the Middle East oil states hold large amounts of U.S. Treasury bonds.

(Former Vice-President of the U.S. Dick Cheney once was quoted as saying that "deficits don't matter". He was an oil man. I never liked the fellow but he may have had a point that was lost in the political fray.)

And the fear seems to be that as soon as we get a whiff of inflation interest rates will rise, the foreigners will dump our bonds and cause our government borrowing costs to rise, and the economy will tank. Due to high interest rates.

Well, the ability of the government to service it's debt is dependent on the state of the economy. A growing economy, and a rising velocity of money will increase the flow of funds to the Federal and State governments.

And interest rates were much higher back in the 1990's as the economy soared.

The secret to a strong economy is plentiful energy. But wait, you say. The cost of oil rises every time the economy picks up.
It does. Oil in this country is up to $92 today. But the cost of Brent crude is $108. Energy is much higher in other parts of the world. This is due to the tar sands being mined in Canada and N. Dakota.
And look at the price of Natural Gas. $3.64 per mmBtu today. Cheap, very cheap by historical standards. Due to the fracking technology that makes NG cheaper in this country by a long shot.

Energy is what makes an economy hum. And we, the United States of America are finding ourselves with the cheapest energy in the world right now. We have been given a great gift. It almost makes me religious when I think about it. (Not really!)

But seriously. Look at a chart of oil prices and you see prices back near all time highs. When measured in U.S. Dollars. But all of the currencies of the world have been getting devalued for many years. The governments of the world are in a battle to make their own currency the cheapest and thus gain an export advantage. So what does the value of a currency mean? Not much. They are all valued relative to each other.
It is the price of energy compared to the rest of the world that matters.

Take a look at a long term chart of oil here.

Take a look at a long term chart of natural gas here.

Look carefully. Think of the years in the 1990's. See that doubling of oil prices that derailed the stock market in 2000. In Jan. of '99 oil was $12.  In Mar. of 2000 oil was $30. Actually almost a triple...

In Dec. of '03 oil was at $32.
In Mar. of '08 oil was at $105 per barrel.

The run up in the stock market from '03 to '07 started with oil at the same price as in the year 2000.

It was only when oil got TOO high that the rally and the economy stalled. When the cost of energy gets TOO high it pushes up interest rates as lenders have doubts about ability to repay.

And it has to do with the serviceability of credit. When energy is cheap, relatively to the money supply and interest rates, business expands. People can move about freely, goods can be shipped over long distances, and things can be manufactured inexpensively. And loans can be repaid, with interest. And the interest rate really doesn't matter. It is the availability of energy that matters.

We have VERY inexpensive Natural gas. And as we switch to that form of energy the cost of other forms will be held down. And people will do things. And the economy will expand. Despite the baby boomers, and the gold bugs, and the Tea Party. Despite all of the nay-sayers.

It was like this back in the late 1940's. Lots of uncertainty. But we won the war and were the oil king of the world.
It was like this back in the mid 1980's. Doom and gloom.
Same in 2002.
Same in 2009.
If you think about it the stock market has been in a holding pattern since 2000. Waiting on plentiful energy.

With some ups and downs I expect the economy and the stock market to grow over the next decade.

I started this rambling narrative with an article on China inflation. I have been saying and expecting that China would have to start exporting inflation at some point. All working people have expectations of an improvement in lifestyle. The Chinese are not exception. Their government will have to give them a raise in pay.

Not by increasing their wages/hour necessarily, but by allowing the national currency to rise as they raise interest rates and cool inflation. This means letting the U.S. dollar go down. This will enhance our capacity to export at the same time we have an energy advantage....

Have a good day.

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