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Stock market bottoms, China and ‘creative destruction’ in a changing world

Posted by Adrian on July 30, 2008

As global stock indices fall into bear markets, the world economy is slowing at a synchronized pace. To what extend the world economy slows into a prolonged recession or a deep sudden recession (depression), or years of a crumbling depressed economic system is still speculative. But never the less the market unwinding has only begun, with the credit markets, bank systemic failures, corporate defaults and insolvency.

One economist who works for a big investment company mentioned on a business report that ‘if’ a recession takes place, it will be a consumer based one not ‘corporate’, as he then went on to reminded us of what occurred in the 90’s (corporate defaults which lead to a recession). Of course this is incorrect and he works for a corporate entity that does not want to admit weakness (profit losses). The truth is a global recession will be from both sides, both consumer and corporate. We have already seen the banks write down 400 billion+ of losses, this could extend into the trillions as the credit crunch continues on; the consumer that has been fed credit and in turn over leveraged, is also going to lead onto losses and bankruptcy’s – individuals, small business, medium size businesses. Refinancing of debt will be hard to arrange and credit lines on maxed out credit accounts will be cut.

Investors are now trying to determine the ‘bottom’ for the markets, for both housing and the stock market. Some have prematurely called bottoms recently for example the US Dow and S & P 500; and the US dollar. All in which are oversold, but to what extent that will show signs of recovery is still uncertain and risky. I am bearish still on the US dollar, because I fear that the USD will be de-pegged from middle eastern currencies and China may sell off reserves. So I still feel the USD will fall further, unless the Federal Reserve in an emergency meeting raise rates. This could happen, but unlikely, unless Chairman Bernanke resigns.

I saw a documentary the other day called ‘The Cars That Ate China’, it was well done and informative documentary in regards to the consumption for motor vehicle’s in China and the motor vehicle consumption (metaphorically speaking) of China. The immense pollution from cars, the ancient Hutong neighborhoods being destroyed for roads and developments. The car giants like Mercedes/Daimler Chrysler (making cars in China), advertising firms making car ads (for the huge Chinese market). All Interwoven with a hyper driven Chinese economy that still in all retrospect is a restive country, both individual and politically. Great interviews and profiles of various Chinese from young Chinese males involved in a VW car club, the ad hoc staff of ‘car beautification’ cleaning stations by roadsides and the son of a peasant farmer that has bought a new car. The appetite for cars in China is astounding, they want we have or had, there is a fascination with western wealth. Even though they do not seem that connected to individual wealth creation, but an emulation (of western Individual wealth) in a collective and mass hysteria sense. China is actually frightening in their level of consumption. A colleague of mine went to China two years ago on a business trip, it was her first time and she told me was blown away with the level of development and activity – not to mention also the level of pollution. According to the documentary (The Cars that ate China) 25% of California’s pollution is blown in from China.

Like I mentioned the ‘frightening’ aspect of a mega consumer economy like China is the appetite for resources. It doesn’t appear that China is trying develop a new energy source, it still relies heavily on oil, coal and Nuclear. The China boom in a lot of ways did not involve innovation, just consumption and development of infrastructure. A person that I know that worked in advertising pointed this out, China’s not innovating anything. It’s a country that is buying commodities, and selling cheap goods to Americans (of course that is slowing dramatically via a US recession).

The point is as markets begin to drop lower, the chances of investing in distressed market’s will begin to present themselves. Which is fine, but if we step out of an economic perspective and shift into sociological and philosophical perspective. The headwinds of global change could be dramatic, despite that idea that markets will be cheaper; the energy (oil) that drives markets could become problematic. if China does not slow down on consumption, particularly for raw materials and stays constant. We are going to have a problem. With global inflation and dwindling recourses to fuel that consumption, one analyst who lives in China made that estimate that China could consumer the resources of four earths if it continues at the ‘warp speed’ of its economy.

So if four earths are enough for a booming China, and we only have one. This one. How is oil ever going to decrease in price?

So stocks globally (including developing economies) could continue to fall lower, we may see creative destruction among a slew of companies of the old. New energy resources, say geothermal or advance solar could come into play, if by an ’11th hr’ scenario or a dramatic climate event occurs – governments could pour billions to fund/or partner a renewable energy company/s.

Biotech could gain some recognition as a sector, especially if Bird Flu eventually mutates to human to human strain.

The airline industry will continue to downsize and try and run on higher oil costs. If Boeing, or Virgin are able to develop smaller faster planes that eat up less fuel – there could be some long term investment options there. If Zeppelin can reinvigorate sustainable airship fleet (low emissions) for freight and people that would prefer to travel at a slower pace and possibly cheaper (low fuel, or no fuel driven). We may see airships in our sky’s again.

The markets are clearly changing, even when markets bottom out after a prolonged recession, energy, global warming and peak oil scenarios will offer little reprieve.

In the meantime continue watching the markets and the global economy.

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