Wednesday, October 21, 2015

A Tale of Two Engines

Ever see one of the modern freight train engines? They appear as twins in back-to-back formation. Also, in many cases, they appear to be facing in opposite direction, although directly attached. I thought about that. Maybe they use one to pull forward and the other to push backward when on the same track. I'm not in the business, but their is a metaphor for an analogy to the global economy.
The US is the lead engine in the world market and China is the twin engine. Together, they powered the global community out of the 2008 crisis. Both used the same techniques: low interest rates that provided cheap money, stimulus to market sectors and the recapitalization of their banking system. It worked, at least for a while until over capacity gummed up the stations. Now, the train is slowing in both directions as it approaches a steep hill.
The World Trade Organization just reduced its global outlook. Historically, global trade runs around six percent. Today, it is down to three percent. This is the latest in a long line of bureaucratic reports that add to the declining trend. Agencies like the EU, IMF and IB all have reduced their global outlook. Dear reader, I offer you a closer look at the twin engines.
The Caixen Flash China General Manufacturing Purchasing Managers' Index, basically PMI, in China dropped to a 78-month low. It sits at 47. Anything below 50 is contraction. Could it be an engine mechanical problem? It seems like no one is setting aside money for repairs which need to be done. Companies have been using their bread for buybacks and not basic needs which offers a cloudy outlook. If there is nothing to move on the train or the engine needs repairs, there is nothing to buy or sell which means eventually, layoffs. People without income do not shop even if the train finally brings something to the station. The continuing slowdown in China's GDP is gathering steam as it fell again, this time to 6.9%. Of course, I don't put any faith in Chinese government agencies numbers which are even worse than ours which are pretty bad.
The US engine faces its own problems. The rising dollar has hurt the S & P 500 companies and sinking oil has caused severe layoffs across the board and across borders like OPEC, Russia and Canada. (See recent articles.)
Looking closer at the US engine, internal problems loom. The Empire State Mfg. Survey is negative. The Philadelphia Fed Business Outlook shows contraction, as well as the Kansas City and Dallas Fed Mfg. reports along with the general Factory Orders Report.
Here is a perfect example with a Wall St. institution no less. Morgan Stanley's earnings plunged 42% after the CEO restructured the company so it would stabilize its earnings. Nice job, you overpriced flunky!
In addition to poor earnings the US economy has other problems. When the train stops at stations, every global player is adding cars to pull as they dump on the US economy. In fact, they're building a new depot, the Trans-Pacific Partnership which will only dump more on the train and US economy to which will cause the mechanical breakdown of the engine. In fact, the recent monthly trade balance report confirms my viewpoint: The US ran a $48B deficit.
At present, the train faces a steep hill. I think a retrograde motion will happen whereby the train reverses, stops and uses the China engine to give dual strength to climb the hill. However, both engines need repairs which have been neglected. Both will be recalled for repairs at their respective depots and I see them there for quite awhile. I wonder what is happening in the caboose?