The One Global Market Where There are Gains Behind the Gloom
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
It’s easy to be gloomy when it comes to the financial markets.
It’s even easier to write off China.
After all, the Red Dragon’s markets have collapsed by 70%, businesses are shutting down, lead-laced toys and poisoned medicines have tainted the minds of Western consumers, there’s a growing gap between the rich and the poor, inflationary clouds seem to be gathering, and overbuilding is a growing concern.
And that’s just a partial list.
The situation has gotten bad enough that China’s economic growth rate may slow from 9.6% this year to 7.75% in 2009. For those who are struggling to find the “next” profit opportunity at a time when the U.S. economy is straining to maintain any bit of forward momentum possible, those statistics should serve as a gigantic neon arrow over a lighted sign that reads: “Invest Here.”
Simply and succinctly put: U.S. investors are unlikely to ever see this kind of growth here at home ever again.
On the other hand, China is much like America was at the dawn of the Industrial Revolution. Sure, there are problems – and, admittedly, it’s easy to focus on a whole slew of them right now – but there’s still all kinds of potential, too.
If you’ve ever been to China, you know exactly what I’m talking about. You literally can feel the broad sense that the best is yet to come. Contrast that with the United States or Western Europe, where hand wringing, and finger pointing are the norm.
Why is that?
Because, as I mentioned a few weeks back, Beijing “gets it.” And China’s central government is taking major, decisive steps to ensure that China’s people do, too, an admirable example of the kind of leadership that Washington’s self-absorbed politicians seem no longer capable of delivering. Most recently, as Money Morning reported, Beijing approved a $586 billion stimulus package. In an era of trillion-dollar bailouts, that was almost too small to register on the old Richter scale here in America. But it should have.
If America were to put in place a stimulus plan that represented the same proportionate outlay that Beijing’s will for China, we’d be talking about an infusion of nearly $1.83 trillion, or 10.89 times more than the positively puny $168 billion stimulus that went into the hands of U.S. taxpayers last year. And it would probably dwarf anything that President-elect Barack Obama is contemplating right now.
Think of the pile-driver-like effect a stimulus of that size would have on U.S. consumer spending – which, after all, accounts for 70% of what the American economy does. Billions of dollars in loans could be paid off and consumer debt retired. In that sense, such a massive capital infusion could do what U.S. Federal Reserve Chairman Ben S. Bernanke and his Bailout Boys can’t achieve. The Beijing-like infusion would provide a needed recapitalization of the financial markets – without rewarding those who got us into this mess in the first place. Most important of all, it would help the folks who are caught in the middle – us consumers.
|
What makes this particularly ironic is that the nature and composition of China’s stimulus program suggests that Beijing’s communist government understands consumer psychology and capitalist financial markets better than Western governments do right now – particularly the psychology.
For example, because of the credit crisis and relentless coverage of the flagging economy, consumers are scared stiff at the moment. And understandably so. They see factory orders declining and jobless claims spiking to their highest levels in 25 years. They read the news that retail stalwart Wal-Mart Stores Inc. (WMT) – is lowering expectations. So consumers opt to hoard money out of fear, rather than spend it, and that’s what really kicks a recession into gear.
So what will China’s stimulus package do that ours won’t?
For starters, Beijing’s stimulus is designed to encourage spending, rather than reward malfeasance, as our bailout plan is doing. Further, there’s no buying up of bad debt. Instead, there’s an implied recapitalization that will take place through growth. But most importantly, Beijing is sending an ultra-clear message to its people – we will be here for you and we will help you directly – and that’s stoked the confidence in every Chinese contact I’ve talked to since the plan was announced.
And that uptick in confidence is warranted, given all that China is planning, including:
- Improved environmental-protection projects, including new sewage and waste treatment projects.
- More low-rent and affordable-housing projects.
- Distributed healthcare projects, including hospitals, clinics and medical equipment, particularly in the historically ignored rural regions.
- New highways that will more than double China’s navigable area and that will account for nearly 40 million new jobs in the next 24 months.
- New railways and railway-related projects, which will create 6 million jobs during 2009 alone and more after that.
Beijing’s stimulus is geared toward creating 3.0% to 5.0% gross domestic product (GDP) growth to augment the 3.0% domestic-consumption activity, for a total 2009 target growth rate of at least 7.0%.
While China’s stimulus is designed to create valuable growth, the U.S. package is simply concerned with plugging leaks. China’s package is forward-looking, while ours is not.
Clearly though, the effects won’t be immediate and Beijing knows that. And that’s why, based on historical trends, we expect it to be about six months before the money really begins to work its way through the system. Look for an uptick in Chinese demand in late 2009, and acceleration in 2010.
Look, also, for the worldwide ripple effects, particularly for commodities producers and exporters that do business with China, and the infrastructure providers. This package will stop many of these sector skids, and we can look to see them rebound in earnest once demand kicks in and the Renminbi (yuan) start to flow.
Let’s hope that the rest of the world gets the message. Washington’s current bailout plan isn’t large enough to restart the global markets and it sure as heck isn’t large enough to recharge investor psychology.
But China’s plan is. And that’s what Washington should be looking at.
News and Related Story Links:
- Money Morning News Analysis:
Massive China Stimulus is Viewed as an Attempt to Help the West. - Wikipedia:
- Wikipedia:
Pile Driver.
Comment by P. Denaco on 21 November 2008:
Shows good thought in a general sense, but lacks content as to what you would recommend to do with that information. I was in China this past year, including the major cities of Beijing, Xian, and Shanghai. It is a powerhouse of labor potential, with over 200 million of that labor force being itinerants. They need to make “stuff” and to be able to sell it as well as to assure that, as a nation they have exposure to the raw materials and commodities it takes for them to continue. What say you as to actions to take re: China?
Comment by Scott on 21 November 2008:
Hi Money Morning,
Your ideas, news and happenings really help me to make a new step in my business from early morning to late night.
I cant afford to miss your news.
Thanks for publishing honest and fresh news.
Scott
Comment by Nick Bacani on 21 November 2008:
I do hope that those who are in power as well as those who will start sitting of the throne read your articles……and make sense of it.
I makes a lot of sense to me!
Keep them coming!
Thanx, cheerz n all the best!
Nick
Pingback by Jutia Group - Market Jitters & Political Critters on 21 November 2008:
[...] Keith Fitz-Gerald Money Morning addthis_pub = ‘jutiagroup’; addthis_logo = ‘http://www.jutiagroup.com/favicon.ico’; addthis_brand [...]
Comment by Paul on 21 November 2008:
Honourable Fitz-Gerald, let me put something to you in simple terms. Think of the current financial landscape as a farm with livestock, any form of livestock. A portion of the Livestock dies, a portion is still living. The owner of the farm decides to sell or ask for a bailout. Would you be interested in the dead livestock or the living ones?
Comment by don on 21 November 2008:
These chinese make work projects will just exacerbate and lengthen their recession just as roosevelt’s did and paulson/obama’s will do here. govt can’t create one job. they have nothing except that which they steal from us…and there is an enormous DC/Beijing service charge before funds arrive in the hinterlands. far better to sell off some govt assets (how about Pentagon’s property to start), and distribute the proceeds to each of us equal owners.
Comment by Tom on 22 November 2008:
Hey Paul,
Pass another doobie, dude!
Comment by Dhruba Munshi on 22 November 2008:
Whom do you hold responsible for this whole mess? India has all the three so called financial and economics geniuses at the helm of affairs, the Prime Minister Manmohan Singh, Finance Minister Chidambaram and Montek Singh, the Deputy Chairman of the Planning Commission, yet Indian economy,trade and the bourses are is doldrums.
No body bothers about the country – only self & Party.
Robert Kiyosaki in his book Prophecy had predicted this, but people call him a radical.
It is only the profit driven economics which is responsible for this fiscal chaos that we are in.
Comment by Rayford on 23 November 2008:
You imply the US should make a larger stimulus package. There is a difference. China has our money. We owe Trillions. We cannot stimulate ourselves, just as dirty as it sounds, by borrowing from our future or diluting our money.
Comment by eugene tano on 23 November 2008:
i agree with don, the us military has 648 bases world wide. these cost trillions to build and 500 billion each year to operate and maintain. why ??? do we need 648 bases. is it really necessary to waste so much of the peoples money on the military when john doe is going broke, his jobs are going to slave labor camps in china who then ship back junk products to us and then laugh. its time for our bumb politicians to earn their keep instead of being on the take and making one stupid mistake after another.. i say sell as many us assets as we can and use this capital to get the country moving. if we keep spending money we dont have.. then we will did ourselves a hole with no–bottom. and we will be doomed for ever. its time to use our brains for==a===change-,,,,,,,,,
Comment by Dr SO Uremadu, Head of Banking & Finance, Covenant University, Ota, Nigeria on 23 November 2008:
The One Global Market Where There Are Gains Behind The Gloom:Comments
No matter what, China’s economic growth still holds waters. Even if it reduces time being due to ongoing global financial crisis, it will sooner than later pick up again. China has a work force that has apetite for hard work, very frugal and saves more than readily disposed to spendrift unlike what is obtainable in the US where people depend mainly onconsumption credit to squander what has been created.In the final analysis, China with its huge forign reserves valued at 1.9trillion USD, a big reservior of well disciplined hu
Comment by Dr SO Uremadu, Head of Banking & Finance, Covenant University, Ota, Nigeria on 23 November 2008:
Looking through China’s stimulus package one observes that these are real asset productive investments that will lead to huge accumulation of capital formation which will spark off wealthcreation in real terms and in turn boost economic growth . With its target for job creation it will definitely rise GDP IN THE YEARS AHEAD. I seriously support China’s positive moves.
Comment by Scott on 24 November 2008:
Good thing China is spending all their money. Maybe when things go down the crapper for them, they’ll give us a discount on what we owe them?
Comment by Dr SO Uremadu, Head of Banking & Finance, Covenant University, Ota, Nigeria on 24 November 2008:
I agree wholly that the USA with about 648 military bases worldwide is fighting many wars `in so many fronts some of which are not necessary as they are gulping the taxpayers’ money. There is definitely need for restraints in its balance of power pursuit in this wider world of 21st century. There may be other ways to maintain dominance without increasing the costs of doing it. These other ways should be devised and or sought for. I concur with most of the opions canversed here by other commentators.
Pingback by Gains Can Be Made Behind the Gloom ? « In Pursuit of Happiness on 25 November 2008:
[...] http://www.moneymorning.com/2008/11/21/china-stimulus-2/ [...]
Comment by Su Xiang Yan on 25 November 2008:
Accolades! You can obviously see the big picture.
The Occidental world has a few lessons to learn from China…should the West so chose to do so, right up to an including the most current initiatives being taken by Beijing. While nothing is ever perfect, what China has accomplished in over the past 25+ years socially, politically and economically is unprecedented in the history of civilization of mankind, much less what America has accomplished since 1776!
Ironcially, since the death of Mao in 1976, but without conincidence, America has gone from Prince to Pauper status and China has achieved the exact opposite status. It is a good thing China is in the position it is in for the world economies sake.
No different than China’s system was essentially defunct in 1976, today the Occidental world is in need of a new paradigm. I suggest a starting point is to look and learn what China (57 geographically dispersed minorities) has done in the past 25 years as never before has there been such a role reversal. Until such time ‘band-aids will be band-aid’. All the aid in the world will not fix the problems at hand. We have something to learn from everybody….including China!
Comment by admin on 16 December 2008:
Comment by P. Denaco on 21 November 2008:
“Shows good thought in a general sense, but lacks content as to what you would recommend to do with that information. I was in China this past year, including the major cities of Beijing, Xian, and Shanghai. It is a powerhouse of labor potential, with over 200 million of that labor force being itinerants. They need to make “stuff” and to be able to sell it as well as to assure that, as a nation they have exposure to the raw materials and commodities it takes for them to continue. What say you as to actions to take re: China?”
Great question – thank you! As you know from personal experience – having been there – Chinese companies active in the provision of water, electricity, filtration, travel and pollution control figure prominently in Beijing’s plans (and ours), which is why we’re focused on them right now. The same can be said for the international companies tied up with them. Obviously there are other trends to consider in China, but there’s nothing else even remotely on the radar screen with this kind of potential and state funding.
Keith Fitz-Gerald
Investment Director
Money Morning
Pingback by Keith Fitz-Gerald on 16 December 2008:
[...] Money Morning Market Commentary: The One Global Market Where There are Gains Behind the Gloom. [...]
Pingback by Keith Fitz-Gerald | Geiger Index - Keith Fitz-Gerald on 17 December 2008:
[...] Money Morning Market Commentary: The One Global Market Where There are Gains Behind the Gloom. [...]
Pingback by The Five Keys to Value Investing Profits | Geiger Index - Keith Fitz-Gerald on 18 December 2008:
[...] Keith Fitz-Gerald Editor, Griger Index Investment Director Money Morning Investment News/The Money Map [...]
Pingback by The One Global Market Where There are Gains Behind the Gloom | Geiger Index - Keith Fitz-Gerald on 18 December 2008:
[...] Keith Fitz-Gerald Editor, Griger Index Investment Director Money Morning Investment News/The Money Map [...]
Pingback by Happy Holidays! Money Morning Readers Weigh In on 24 December 2008:
[...] The One Global Market Where There are Gains Behind the Gloom [...]