Wednesday, December 10, 2008

China's Trade Gap and the Global Economic Future

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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China's import/export figures for November were released today. Both had significant declines. Year over year exports fell 2.2%, while only last month they were up 19.2%. Imports fell even more, declining 17.9% after being up 15.6% on the year in October. The Trade Surplus swelled. The turnaround was dramatic to say the least and gives the appearance of an economy falling off a cliff. The last time China's exports fell was in February 2002.

The sharp fall in imports is perhaps more worrisome than the export drop, even though the Chinese economy is export driven with internal demand being weak and an undeveloped component. As a manufacturing economy which imports a lot of the raw materials that it needs to produce the items it exports, large drops in imports can mean a lot less will be produced in the future. Falling prices of commodities could account for much of this drop however. Regardless, lower imports imply significant weakening is taking place in the commodity producing economies that supply China. On the other hand, lower exports imply weakening is accelerating in the world's developed economies that buy China's finished goods.

In case you might find these figures worrisome, the Wall Street hype machine has been out in full force this week to bull up expectations about the U.S. economy and stock market (you should always worry when this happens). Headlines like, "Worst of the recession upon us, forecasters say" and "Stocks most undervalued since 1974" are just some of the many examples that I have seen lately. The optimistic forecasters all work for Wall Street firms of course and even the top ranked are pretty sure that things will be getting better soon (by the way, being a top ranked Wall Street economist is an honor similar to having the best vision in the school for the blind). I particularly liked the article I read quoting a well-known investor about how it was a good time to get into the stock market. You had to look toward the end of the article to see that he was down 58% for the year and his judgment about the market had obviously been completely wrong lately.

All of the recent press also shows that Wall Street is universally in favor of the Fed lowering interest rates further (which would make the New York Investing's prediction of ZIRP - zero interest rate policy - a reality) and "flooding the economy with money". This of course would benefit the big Wall Street banks and brokers by lowering their costs and increasing their profits. And, yes the economy would likely recover for a short time before it drowned in the wave of inflation that will inevitably followed these actions.

NEXT: Unemployment - Truth Worse than Even Government Reports

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


CJ said...

I must ask -- and I guess it's kind of a rhetorical question -- how come that some small, private players, such as the NYIM and a few others, could smell this crisis from miles away, while e.g. the Fed -- with literally ALL the relevant economic data available to them -- could not?

And if they could; did they pretend not to while hoping everything was going to fix itself? Wouldn't that be an awful, not to say deceiving and dangerous, way to utilize the massive responsibility and authority they have?

It boggles the mind and I gotta say -- it's hard not to buy in to some of these conspiracy theories.

New York Investing meetup said...

Response to CJ,

If you look at the record, mainstream economists are some of the most inaccurate forecasters of what is going on in the economy. This is not necessarily a result of conspiracy (although people who voice negative views frequently have short careers). Group think permeates the profession. Theory also trumps reality - and economic theory is highly defective because it is based on the idea that human beings always behave rationally (see if you can get any psychologist to agree with that one). And yes, you should not discount self interest on the part of Wall Street/Fed/Treasury complex. They have a vested interest in presenting more positive information, while New York Investing's purpose is to tell the truth.


Who knows what the future holds.