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“Cauldron of Anxiety” by Joe Average December 2005. “…..many
Americans worry that the Chinese dragon will be a
fire-breather. There is a cauldron of anxiety about China”.
U.S. Deputy Secretary of State Robert
Zoellick. Anxiety
about China These
unambiguous comments were made by the U.S.Deputy Secretary of State in a speech
to the National Committee on U.S.-China Relations on Sept. 21, 2005. Mr.
Zoellick’s blunt comments surprised the pro-China audience and met with a cool
reception. There was, however, no doubting that he was merely expressing what
has become a deep and widening concern about the decreasing
competitiveness of American manufacturers. China, an export-reliant economy, ships
some 40 per cent of its exports to the U.S. (its biggest market) and is heavily
reliant on the American consumer. A retrenchment by U.S. consumers would
impact heavily on the Chinese economy. However, 3 million U.S. manufacturing
jobs have been lost since 2000. Manufacturing employment is down to one
in nine Americans today, down from one in three in 1950. The crisis
in U.S. manufacturing moved to centre stage with the announcement that the
world’s largest automotive parts manufacturer Delphi was filing for bankruptcy.
In filing for Chapter 11 Delphi
conceded that it was saddled with an impossibly high cost structure, and set
alarm bells ringing about whether this was an omen about the future of the big
three U.S. auto manufacturers---General Motors, Ford and Chrysler. General Motors (which spun Delphi
off in 1999) saw its shares drop 10 percent after
the announcement since it still retained responsibility for some of Delphi’s
pension, health and retirement benefits. Thus far GM has fallen over
70% over the past five and a half years. One industry analyst went so far
as to raise the chances of General Motors also filing for bankruptcy to 40
percent. Banc of
America’s securities analyst Ron Tadross estimated GM might be lumbered with an
extra $11 billion in liabilities to its former employees, and promptly slashed
his 12 month target price for GM from $32 to $18. Standard & Poor’s
responded by downgrading GM’s credit rating from ‘BB’ to ‘BB-‘. Delphi’s
survival strategy to avoid bankruptcy is to slash worker’s wages from
$27 to $12 per hour or less (excluding pension and healthcare benefits
which would also be sharply cut under any restructuring agreement). The
prospect that American worker rights to a well paid job and a secure retirement
were in jeopardy brought howls of protest: “What happens when
the ladder to the middle class is broken? What happens when you can’t Jesse
Jackson. “How do US firms compete in the global economy? If the only way to
compete is $10 wages,
Harley Shaiken, Economist University of California While globalisation
threatens to further undermine American manufacturing competitiveness, the prediction
that the US would counteract this by holding the high ground and
controlling Information Technology and knowledge is also looking precarious.
Harvard
economics Professor Richard Freeman warns that China and India are rapidly
catching up in science and technology. The US global share of
Science PhD’s is projected to fall to 15 percent by 2010 (down from 50 percent
in 1975). China graduated an amazing 700,000 engineers in 2003 while the US
could manage only 60,000. This past decade the Chinese have increased their
output of university graduates an amazing five-fold. Even more astounding and
worrying is that they are now feverishly beginning to build new laboratories
and biotech research centres for 1/10th the cost of American
facilities. Meanwhile,
cries for China to revalue the Yuan substantially will continue to fall on
deaf ears. Needing to find over 200 million jobs for the rural workers who are
looking to move to an industrialised world, China has no option for now but to
continue to export its cheap labour services (and deflation) to the
world. Signs are
that China is already beginning to move up the food chain and away from
being merely a source of cheap manufacturing labour. Motorola, which once
contracted out manufacturing to companies like The Ningbo Bird Company, soon
found this former supplier had become a serious rival in the Chinese handset
market. That’s why America (and the
Western world) really do need to “worry that the Chinese dragon
will be a fire-breather”.  Graph
courtesy Elliott Wave International www.elliottwave.com
Anxiety at Wal-Mart “The
film that’s got Wal-Mart off its trolley”. “With the release of his latest film exposing myriad corporate ills at
America’s biggest company, Wal-Mart, and following the success last year of Outfoxed
(the documentary exposing bias at Rupert Murdoch’s Fox News ),
60-year-old Greenwald is again being called the new Michael Moore. …Greenwald uses his 95 minutes to steadily and carefully amass a
mind-boggling array of facts and figures on Wal-Mart’s less than exemplary
employment, health and environmental policies and practices. To name a few: systemic non-payment of overtime, senior executives
turning a blind eye to sweatshop conditions in third-world contract companies,
and company health insurance policies so costly as to be out of reach for the
majority of Wal-Mart employees, forcing them onto Medicaid…. Wal-Mart is the
world’s largest retailer by sales, with $US 285 billion last year. Wal-Mart’s response to the film…has been to amass a “war room” full of
political operatives to counter accusations raised in the film and elsewhere. Earlier this month, in one of a series of extensive and unflattering
stories about Wal-Mart, The New York Times reported that the retailer’s
new public relations “war room” was staffed by veteran’s of the 2004 Bush and
Kerry presidential campaigns, as well as Ronald Reagan’s image guru, and one of
Bill Clinton’s media consultants”.
Emily Carr, Los Angeles, AFR Nov. 12-13, 2005. Meanwhile,
anti Wal-Mart group (Walmartwatch.com), a Washington based coalition of
community, labor and environmental groups, has urged religious leaders to raise
the issue in sermons from their pulpits, while at the same time organising over
a 1,000 screenings of the movie.  Anxiety about the Greenspan Put The
concept of “The Greenspan Put” centred on investor belief that Federal
Reserve chairman Alan Greenspan had the power and the will to do “whatever it
takes” to prevent a devastating fall in financial markets. The concept was
explained perfectly in a quote by the late Rudi Dornbusch, Professor of
Economics, M.I.T. Cambridge MA: “This expansion will run forever…(the American
economy will) not see a recession for years to come…We don’t want one, we don’t need
one, and, as we have the tools to keep the current expansion going, we won’t have
one…Fortunately, we have the monetary and fiscal resources to keep that from
happening, as well as a policy team that won’t hesitate to use them for continued
expansion”. The “Greenspan
Put” gave traders the confidence to bid equity values up to unprecedented
heights in defiance of the customary economic cycles. Now, after eighteen years,
the curtain is about to come down on the Alan Greenspan era. Some are already
lauding him: “He has a legitimate claim
to being the greatest central banker who ever lived”!
Princeton University
economist Alan Blinder. Greenspan detractors,
on the other hand, dub him “the worst Fed chief ever” and point out that
this Fed chairman has created more credit than all the previous Fed
chairmen combined, and is responsible for allowing a series of “bubbles”
to develop on his watch (oil and real estate in the late ‘80’s…stocks in the
late’90’s…and real estate again this decade). On top of this he leaves behind a
record current account deficit and insane levels of corporate and
personal debt. The fear
now, however, is that Greenspan’s understudy and replacement Ben Bernanke
(famous for his remarks…”the U.S.
government has a technology called a printing press” and “helicopter money”)
may not be entrusted with the same overwhelming confidence and respect. Stephen
Roach (Morgan Stanley) is concerned that “the history of recent Fed leadership transitions does not read well in
the financial markets”. All eyes will now remain focused squarely on
the new man filling Alan Greenspan’s shoes…the shoes of a man who was arguably
the second most powerful public official in the world. Financial
markets around the globe will watch with bated breath to see if Ben Bernanke
can quickly establish the same confidence in the “Bernanke Put”. Anxiety about the “Invisible Hand”
Why the concern? Toni
Straka (www.prudentinvestor.blogspot.com
) explains it well; “M3 is the
most important money aggregate for economists, analysts and Fed watchers to get
an idea at what speed the (electronic) printing press is running. The European Central Bank (ECB)
honors this set of data with a special press release every month… Since Bush
took office money supply M3 has risen 39.2%. The Fed prints it and the
government spends it…” Robert
McHugh (www.technicalindicatorindex.com)
worries that it is “so that the Plunge
Protection Team can hide its market manipulative, equity buying activities…Does
Greenspan have an all-encompassing, overriding desire to ensure his legacy by
seeing the Dow Industrials at an all-time high when he retires in January”? More
analysts are starting to worry that the Fed is using “smoke and mirrors” to
massage inflation and unemployment figures, and about an increasing lack of
central bank transparency. With the coming change of command at the Fed it is
more critical than ever that US Federal Reserve integrity be seen to be beyond
reproach. Anxiety about Stocks? It would appear not just yet!  Graph
courtesy Jes Black, Black Flag Capital Partners, www.fxmoneytrends.com The Volatility
Index (VIX) measures the level of complacency or anxiety in the markets.
The lower VIX, the more complacency there is in the market. A
rapid spike up (to the 40’s) indicates panic in the market place. The VIX
has recently been bumping along the bottom of its range indicating
extreme levels of complacency in the markets possibly due to investors’
faith that Wall Street and the Fed (and the Plunge Protection Team) will not
allow the Dow Jones Industrials to drop below the psychologically
vital 10,000 (where it appears the line has been drawn in the sand). It’s
almost as if investors have been lulled into a sense of security believing in a
perpetual boom. Trouble is … the MACD is turning up from extreme lows warning
that turbulent times may lie directly ahead. Anxiety at Republican Headquarters “US President George Bush has suffered a disastrous slump in his personal
image with just 33 per cent of Americans now regarding him as honest and
straightforward, according to an NBC/Wall Street Journal poll (from November 4
to 7). Equally worrying for the White
House, in the midst of cumulative scandals about exaggerated pre-war
intelligence, was that 57 per cent of those polled believe that the President
deliberately misled people to make a case for war. The poll also coincided with
the 2000th US fatality in Iraq, which refocused attention on the
debacle”.
Tony Walker, Washington, AFR Nov. 12-13, 2005. “(Arnold) Schwarzenegger, whose approval rating is hovering around 30 per
cent, which makes him even less popular than Bush, will be lucky to survive if
he chooses to recontest the governorship. Charlie Cook, a non-partisan
political analyst, noted in a recent column that Republican operatives had “both
arms around the toilet bowl”, such was their concern about a rout in 2006. …Bush must also contend with
other widening ripples of disaffection, including his dispute with Senator John
McCain over whether to remove the weapons of torture in Central Intelligence
Agency-administered prisons. McCain, a victim of torture in Vietnam, would seem
to exert unique moral authority on this issue. To date, 44 prisoners have died
in US custody in Iraq and Afghanistan, many under circumstances consistent with
torture, according to recently declassified army reports”.
Tony Walker, Washington, AFR Nov. 11 2005. “(Richard) Engelhardt (writer for Salon) also makes the perceptive
journalistic point that the clearest possible sign of a politician in trouble
comes with the way in which newspaper headlines and lead paragraphs frame the
story…Thus Bush and the administration are more frequently depicted as
“embattled” or “beleaguered”…”lashing out”. Richard Cohen, a Washington
Post columnist who supported the (Iraq) war but is now a critic, wrote a
scathing piece this week under the headline: ‘Did Bush Lie?’ Cohen concluded that it was
not clear whether Bush lied or was simply the “useful idiot” of those, like
Cheney, who alchemised the case for war. Either way, he bears responsibility
for a “blunder without peer in American history”.
“What is both amazing and
appalling about Bush is that he seems not to care,” Cohen writes. “The way things
look now, he will go down in history as an amiable dunce - Clark Clifford’s
scathing and misapplied characterisation of Ronald Reagan – who took his
country to war for reasons that did not exist.”
Tony
Walker, Washington, AFR Nov. 25 2005. Anxiety in Europe The recent explosion of violence and
arson across France has shocked Europe and
highlighted how dramatically globalisation was exerting pressure on
industrialised countries. Globalisation has opened the flood gates
to the global labour market as 3 billion people from the developing world
strive to modernise their economies. The riots
on the streets of Paris are in large part due to the fact that, while
unemployment in France is almost 10 per cent, among under 25 year-olds it
hits 24 per cent. Of greater concern, in some of the high rise satellite
suburbs which house many of France’s 5 million African and Arab Muslim
minorities, the unemployment rate is a horrendous 50 per cent! Decades ago
immigration programs brought “guest workers” to Europe and to these areas which
were then sited near factories and industrial plants. Back then, work was
plentiful for low skilled immigrants willing to do the laborious jobs the
locals didn’t what to do. Now, many of those jobs have vanished off shore to
low-wage, developing countries in Asia or in Central and Eastern Europe. Germany faces similar problems with unemployment
among its Turkish immigrants estimated to be around 25 per cent.
Meanwhile, youth unemployment in Italy, Spain and Belgium is over 20 per
cent, and among British Muslims hovers around 15 per cent. It would appear
that religious and racial tension that have long been simmering away during the
past decades are rapidly reaching boiling point as the pressures of
globalisation turn up the heat. Other Ingredients in the Bubbling Pot A few
other ingredients might be added to U.S. Deputy Secretary of State Robert
Zoellick’s “cauldron of anxiety” as well as China. How
about: ·
The affect of rising oil prices, ·
The possibility that real estate prices may
stop rising or even fall, ·
The Fed will keep pushing up interest rates, ·
A deadly bird flu pandemic, ·
Perhaps you can add a few more?  Cheers,
Joe (aka Dr. William R. Swagell). Disclaimer: This newsletter is written for educational purposes only. It
should not be construed as advice to buy, hold or sell any financial instrument
whatsoever. The author is merely expressing his own personal opinion and will
not assume any responsibility whatsoever for the actions of the reader. Always
consult a licensed investment professional before making any investment
decision. Favourite
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