Several weeks ago my colleague penned a couple of pieces on what-if scenarios regarding demand for various products containing metals here and here. What-if scenarios (one of the finer consulting tools of the trade I picked up during my days at Andersen) provide context for understanding how events may unfold. Ideally, they are coupled with scenario planning so that companies can better react to the road signs indicating when these what-ifs actually occur. And they help provide contrarian points of view particularly around demand (which is something we metals buyers need to track like a hawk).
All of this, combined with the piece we published earlier today on Warren Buffett’s proposed trade deficit reduction plan, got me wondering again about the whole notion of the China Super-Cycle. First, I have recently read a number of pieces on the subject of China manipulating its currency. But actually seeing the history behind the rates paints a different picture. The Federal Reserve has published these rates since January 1, 1981. You can take a look at exchange rates from 1990 here. And indeed, we see a big change from December 31, 1993 to January 3, 1994 from 5.81 RMB/USD to 8.72 RMB/USD. I recall reading that prior to 1980 (also coincidentally the time that Buffett sites in his trade deficit article from Fortune, America’s net ownership balance hit its high in 1980 at $360b.) By going back even further one can see that the exchange rate remained less than 3 RMB/USD until October, 1985.
If the US deployed Buffet’s trade deficit reduction plan, or if the US economy stayed in a long-term recession, our trade imbalance would correct itself. Unfortunately, we don’t think that a likely proposition. Traders and market makers by their nature, trade when arbitrage opportunities exist. And once demand ticks up (and credit issues ease a bit), even ever so slightly, we suspect global trade will also kick back into gear. Unfortunately, we could find ourselves digging further into our trade deficit hole.
But one thing we’ve learned about this recession in particular, relates to China’s performance relative to the rest of the world. China can’t sustain its astronomical growth rates completely on its own. It requires a US willing buyer. We have seen growth rates from China anywhere from 5% – 6.8%. Yes, growth for sure, but below their magic 8% number cited as the growth rate needed to maintain civil order (though the Chinese government addressed the civil unrest issue with its various stimulus packages).
Now if the US were to deploy a Buffett styled trade deficit reduction diet (or stay in a prolonged recession), nearly every industry would skinny down. And this list provides a good idea as to who would face the music. Noticeably absent from this list? Oil imports. According to the CIA World Factbook, oil represents only 8.2% of total US imports.
What do you think about the China Super-Cycle? Is it sustainable? Where will the growth come from? What do you think of Warren Buffett’s trade deficit proposition? Leave a comment. We’d love to hear from you.