Empowerment Through Knowledge

I note a few points. 

First, China was actually there on the list of top exporters in 1961. Then it disappeared and did not reappear until 35 years later. 

Second, at no time did Japan ever exceed Germany as an exporter but not once was there any paranoia in the US about Germans taking over the US economy?

Third, the UK was falling down the ranks of exporters until the pound sterling collapse in 1992 and the devaluation actually helped them recover along with the Maastricht Treaty in 1993 - giving them the access to EU export market without the monetary shackles of the Euro. And Brexiters still think Britain is better off??? 

Fourth, the gap between Germany and Japan was almost narrowing to zero until 1993, then Germany pulled away resolutely - and today exports twice as much as Japan. 

So, Germany will always stand by the Eurozone - nobody has benefitted like they have.

I’m going to use 3M to illustrate the following points. 

1. Equities as an asset class is often perceived as riskier than others but there is one sector within equities that I will argue is safer than everything else including fixed income and real estate. 

2. If you invest in a world class, global scale company that is from this sector, you are already fully diversified, hedged and all the macro economic issues and challenges taken care of. 

3. This sector is resilient in the face of even a global financial crisis because frequently, these companies do not have high financial leverage. (Caveat: In recent years, it has become less true in the US and Europe) 

What is 3M really? It is a deep physics, chemistry and material science company. Everything they do is about manipulating the atoms and molecules of nature to create functional materials that we can use in our daily lives.  

With each passing year, 3M piles on more patents, a bigger library of chemicals and processes, more knowhow. All this knowledge is cumulative. The company is now 115 years old. All that accumulated intellectual property is practically unassailable. There will never be another company like 3M anywhere else in the world. Certain segments of their business can be separately attacked but there will never be another company that can challenge 3M on most fronts simultaneously.  

This is the nature of science and intellectual property. The strength is cumulative over time. In contrast, for real estate companies and banks, big or small has no bearing on vulnerability to debt crisis storms, as we all learnt in 2008. The underlying strength is not cumulative over time, not the way it is for a science and intellectual property company.

It has become increasingly popular to turn bullish on Emerging Markets (EM). I am not a believer.

The biggest EM market is China. But the most important driver of China’s economy, the M2 monetary aggregate, has turned down again.

Already with each passing quarter, the Chinese economy is generating less GDP for every dollar of M2. And now, M2 growth is decelerating sharply.

There’s no big recovery ahead for China. Just more drift and struggle.

Meanwhile after rising relentlessly since 2010, the US inventory to sales ratio for various sectors like retail, wholesale and manufacturing have begun to fall, starting from Apr 2016.

Yet largely unnoticed amid the cut and thrust of the Brexit debate, something remarkable is happening; the corpse is showing unmistakable signs of life. These may be no more than last gasp death throes, and in any case are far too late, and as yet too small, to have any meaningful effect on Britain’s referendum vote. Nobody is pretending that the Eurozone has solved its problems and is about to rebound into rude economic health.

All the same, something is plainly stirring. In the first quarter of this year, Eurozone growth was markedly higher than both the US and the UK. Job creation too has been substantially better in recent months. That the Eurozone is finally beginning to play catch-up should come as no great surprise to close observers of economic events, for the main reason for this bounce is that belatedly policymakers have begun to apply some of the same therapies as their Anglo-Saxon counterparts. Indeed, the real surprise is that the scale of the recovery has not been greater.

Early on in the banking crisis, both the US Federal Reserve and the Bank of England sought to underpin the financial system with massive asset purchase programmes. These were bold, and substantially untried measures at the time which may still carry a quite destructive long term cost. For instance, they have discouraged people from saving while simultaneously forcing money into higher risk investment, thereby incubating financial instability for the future. Yet they broadly worked in calming the storms and preventing economic calamity.

The European Central Bank, by contrast, held back. German intransigence over anything that looked like a transfer prevented the ECB from acting like a proper central bank and monetising government debt accordingly. As a confederation of separate sovereign nations, the Eurozone seemed incapable of acting to save itself as any sensible single country would. The Eurozone had to get to the very brink of collapse before Germany and its Northern neighbours would relent. Had the ECB been allowed, like its US and UK counterparts, to apply “quantitative easing” at an earlier stage, much of the Eurozone’s existential crisis could have been avoided, or at least would have worked its way out in an entirely different way. The moment Mario Draghi, the ECB president, said he would buy government bonds without limit, the financial crisis, together with the threat of immediate break-up, began to ease.

Since then, the Eurozone recovery has followed almost exactly the same trajectory as the UK and the US. As with these earlier recoveries, growth is heavily focused on household consumption and the industries that service it. Just recently, Draghi announced he was doubling up again on measures to revive the European economy. The past year has also seen the fiscal straightjacket of the Eurozone’s initial response to the government debt crisis progressively loosened. Faced with open rebellion from the likes of Italy and Spain, Brussels has been forced to trim its demands. Fiscal targets have either been extended or abandoned altogether, so much so that this year should be mildly expansionary from a fiscal perspective, for the first time since the crisis began.

Growth in European imports, measured in USD, has been accelerating from deep negative towards zero.

Another way to think about it is to ask how much Eurozone buys from the rest of the world compared to the US i.e. how much of global output does it consume relative to the US.

I find the above chart interesting. We are used to thinking of the US as the big buyer of goods for the export economies around the world but in fact, until 2014, the Eurozone bought more than the US! The crisis brought demand down drastically but the chart shows we could be emerging from the worst of the Eurozone crisis.

In May 2013, I wrote an essay “ASIAN CRISIS AGAIN”. I was mainly referring to ASEAN, not so much North Asia. As I continued to follow the theme, it became clear that it would not be a sudden shock event like in 1998 but a long period of protracted economic malaise.

I already discussed some the factors in my essay “ASEAN Enters Its Lost Decade. Maybe Two” in Aug 2015. Since then, many of the numbers I follow have become worse and the more I read, the more I am convinced that ASEAN is at a dead end.

The bureaucracy of ASEAN is talking about AEC and TPP as if it is going to solve our problems. It’s a classic situation of using the same formula again and again, even when the circumstances have changed. AEC and TPP won’t matter. ASEAN’s problems go far deeper.

ASEAN exports have struggled with a NEGATIVE growth bias since 2013 and the magnitude of the decline has accelerated in the past 12 months.

Only Vietnam is doing well on the export front. A lot of people have the perception that it is from a small base but their export boom has been ongoing for long enough that the base is no longer small.

For example, Vietnam’s export of electrical & electronic products has just overtaken that of Malaysia.

From the above chart, you can see that Malaysia’s export of “high tech” goods has stagnated since the mid-2000s.

The overall economic malaise is borne out by the Manufacturing PMI, which has been mostly below 50 i.e. contraction mode, since 2014.

Of course, there is the “consumption boom that will come from the burgeoning young population of ASEAN”. How many times have you heard this argument? In my opinion, it is hogwash.

Here is the logic without the jargon.

You can’t consume more if you don’t have rising income. You won’t have rising income unless you have the ability to keep producing ever higher value goods and services (to domestic and overseas markets). And you can’t do that unless you keep investing heavily in the education of your population.

Even if you do make the investment in education, you can’t benefit fully unless you have your own indigenous companies that are built on the intellectual property you have created or if your best trained people keep leaving the country in large numbers for greener pastures. The former situation limits your benefits as a nation to only the remuneration portion of the value-added while the latter puts you on an endless treadmill just to keep your position.

Something has gone wrong with global demand. The 4 biggest economies in the world are the US, Eurozone, China and Japan. Combined, they have a GDP of nearly US$55 trillion or 70% of the world’s GDP.

The next 4 charts show what has happened to the YoY growth in their imports (measured in USD).

They’re all shrinking.

In my last essay dated 2015 Oct 25, I tabulated the nominal GDP Per Capita of Singapore as US$53,800 in 2014 versus US$32,100 for Japan, a gap of 68%.

On the surface it may seem like Singapore is now a far more successful economy than Japan. This is astounding for all the people of Generation X and older because we all grew up looking to Japan as a superior economy.

However, upon deeper reflection and calculation, I discovered that this isn’t quite true.