Today I read an article that Chinese manufacturing is slowing further. With North American economic recoveries stalling and Euro nations struggling to recover at all, this is expected. What I find significant though is that Chinese manufacturing should be stalling much more in tandem with developed nations, but this is not the case hinting at underlying strength in the global economy and the strength of developing consumer nations.
I hear many people calling for deflation because of a whole bunch of factors including decreased spending in developed nations, a tapped out consumer that has changed habits, and a China bubble because of tapped out developed economies, I don't buy it. Here is why...
I think there is a dynamic shift happening in the global economy, I can see it, I think by US policy, they see it, and are trying to line up their cards to profit from it and not become a dinosaur. Here is the big card that people don't understand and can't see more than 6 months into the future. There is only 1.3 billion people in what we call the developed world that is cutting back and changing household behavior. The rest, 4B+ live in the developing world with 2.5B living in 2 countries, China and India.
The developing world, especially in those 2 fast growing economies are starting to develop voracious consumer appetites of their own. A blatant example of Chinese materialism and consumerism is their plastic surgery reality tv show. This is an example of how these 2 economies are starting to shift from manufacturing and selling cheap goods abroad to becoming much more consumer like nations. This is just the start of a shift to consumerism that has started after creating many wealthy individuals in their respective countries. The trend for economies such as India and China is to continue to grow at a rapid pace and fill the void that the developed nations are leaving in the global economy, and in most cases expand the global economy.
This is why the Chinese are buying up commodities and investing in mining and energy projects around the world. Because their own economy is starting to develop a voracious consumer component that is going to grow and they will need the raw materials to supply this growing segment of their economy.
The arrangement of unhinging the Yuan from the USD has a mutually beneficial arrangement for both countries as the Chinese will be able to take advantage of a strong Yuan to basically horde the worlds resources to satisfy future consumer demand that will continue to grow as more and more people are demanding the 'Western Lifestyle', especially among the younger generation in the developing world. For now it will give the US a break by paying back its debt at a much cheaper rate and give US industry a chance to reinvent itself on a global scale with a cheaper buck, but ultimately we will all be dependent on China as they continue to buy up the world's resources.
There may or may not be a lull depending on if the growth in developing countries doesn't keep up with lagging demand in the developed world, but with a 2:1 ratio in China and India alone to the developed world, I doubt that the demand loss will be significant, especially over an extended period. Major consumer cultures are developing in these countries, especially among the younger generations.
I expect that if the global economy stays strong (indicating the the developing world is starting to drive the global economy), US earnings will be good although the economy may not recover at the same rate. Which will put me in the camp of a market correction this fall but not double dip. If global numbers start to decline badly, indicating that the engine still is the developed world, depending on how badly those numbers dip and don't pick up, we could see a double dip and a bit of deflation.
The Baltic Dry index is a great key indicator to watch and it took a huge break downward recently. If t continues to break below 1700 then I may be worried about the global economy.
A very negative outcome if developed nations can't grow their economies and add value is if the developing world continues to grow at a rapid pace and developed nations who can't adapt will be facing declining currencies and economies in the face of rising prices for raw materials. Not a great scenario if developed economies continue stagnant over an extended period of time.
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