Is China the New United States?
November 24, 2008
– Comments (10)
An image of a German building which was constructed during the "Gründerzeit," the massive real estate boom which preceeded the "Other Great Depression."
I received a number of responses to my blog post about how what we are experiencing today is not like the Great Depression. Several people have instead compared it to the "Other Great Depression," the one that started in 1873 and lasted for many years. I didn't know much about that event, so I did some research on it and came up with a fascinating article that compares it to our current situation:
The Real Great Depression
The depression of 1929 is the wrong model for the current economic crisis
"The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period."
Sound familiar? As the same time that real estate was blowing up, a new, cheap producer of goods was emerging, exacerbating problems for Europe. Is China to the U.S. today what the U.S. was to Europe over a century ago?
"But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life."
Now admittedly, I am far from an expert on this period of time, but if the facts that are outlined in this article are indeed true two lessons can be taken away from it.
1) Cash is king
"The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun."
2) Despite their recent, precipitous fall, companies in China and India will be outstanding investments.
I would love to hear others' thoughts on this subject.
Is anyone familiar with the economic downturn of the late 1800s. If so, I'd love to learn more about it.
Do you see the similarities as well? I see some, but I do not believe that this downturn will be nearly as dramatic or painful as that one was.
If so, what sectors do you think will benefit? I personally believe that this would be a boon for cash-rich U.S. companies, or ones that at least generate a lot of cash flow, not to mention Chinese companies (I'm not as sold on India).
I also believe that the rise of Chindia versus the U.S. would be bearish for the U.S. dollar and bullish for commodities, both in terms of demand and in terms of value relative to the dollar.
I currently personally have very little exposure to China in my personal portfolio and investing in Chinese companies, with a few exceptions, goes against my new policy of investing in companies that pay large dividends. However, I still have positions in both oil and nat gas. I plan on using the next year or so to gradually increase those positions.
Deej
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