I Just Don't Get It

So here is what I don't get. The United States economy is slowing down, the extent of which is unknown, but certainly below its trend line growth of 3%. The consumer, which powered the economy, is stretched, suffering from the effects of the housing bust and high oil prices.

Oil, however, continues to strengthen in price, reaching $100 a barrel, based on continued strong demand from emerging economies, particularly China. Yet China is America's "factory floor" as one pundit put it. So how long will it take for the slowdown in spending to work its way through the supply chain. The conversation I suppose would go something like this:

Executive: Hey Li Shao...how are things?

Li Shao: Great...how is U.S doing?

Executive: Good. The reason I am calling is about the order we have pending with you guys.

Li Shao: Yes, we are working hard on it.

Executive: Well the thing is, we are going to have to cut it back by 50%.

Li Shao: What?

Executive: Well you know, the American consumer is stumbling a little with the housing crisis, high gas prices so we just wanted to be a little prudent about our inventory this year.

Li Shao: What? You can't do that.

Executive: Well actually we can. Why do you think we outsourced our manufacturing?

So here is the current consensus on Wall Street - the bull markets in emerging economies and therefore by extension commodities will continue despite the Housing debacle in the United States because these emerging economies have "decoupled" from the United States due in part to those emerging economies developing their own domestic consumption markets.

The rest of the world is no longer "dependent" on the U.S. economy. Not only will Commodities and emerging economies continue to boom, but all the domestic stocks that feed that boom will continue to grow. This would include the Energy Sector, most Basic Materials, Industrials and any other company that sells to export markets, dry bulk and other shippers that serve Asia, etc.

If this is true, then all power to them I say, but if it is not and the old saying "when the U.S catches cold, the rest of the world catches the flu" is still true then the short of a lifetime is developing here.

China exported $ 287 billion in goods to the U.S in 2006. This was 29% of its exports to the world, which totaled $969.1 billion. Although the conventional wisdom is that the slowdown in the US will not impact China because they have other markets now to sell to, this is not true. We are their largest customer. Also, if you look at the top export categories, they are the categories that are slowing down the most in the U.S:

Exports to U.S from China in 2006 (Billions)

Toys & games $20.9
Apparel $19.9
Furniture $19.4
Footwear & parts $13.9


Source

Oil finally cracked a little on Friday after the jobs report, but it would seem that there is a huge downside still to come on it and other commodities.