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Is China the New United States?

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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

10 Comments – Post Your Own

#1) On November 24, 2008 at 5:42 PM, guiron (20.54) wrote:

There is a long and sordid history of civilizations/economies which have failed due to lack of one critical resource. Guess which one we're all depending on now?

Even if we diversify energy, it will throw the whole global economy off, because oil is what propels it. It will be a long time before we see gains like we did (if ever) when we thought energy was cheap. China is positioned well, but they are just as dependent on oil as we are. This is not a good long-term solution and will require some real pain to correct.

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#2) On November 24, 2008 at 5:45 PM, oldfashionedway (35.51) wrote:

 A very thought -provoking post.  Also an interesting example of German architecture.  Another rec for the Deej!

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#3) On November 24, 2008 at 6:13 PM, johnw106 (57.04) wrote:

One major difference that will de rail China.

Peasants. Millions of them. And they have been forced off of family farms and out of the country into citys by the thousands upon thousands. This is not a static group that is rooted in place by owning property and having familys. This is a migrant group in the truest sense of the word. They have been shuffling them around from factory to factory to keep them empployed and fed.
Unless China makes a sudden shift to a Republic or Socialist/European type government they have a rebellion on their hands. It has already started and will grow worse by the day. And being mobile they will move rapidly as they riot and loot in a search for food.
This is the main difference between the USA in the 1800's and China today. If they were a free captalist society we could be in trouble. But they are not. Regardless of the what people see on main stream media China is still a country of two classes. The ones have most of it and the ones who have a very small part of it.

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#4) On November 24, 2008 at 8:53 PM, Tastylunch (29.24) wrote:

I read that article too Deej.

I do think China has the 1873 ish edge on us, we are a debtor they are a creditor, they are a producer we are a consumer, etc etc.

What's different this time is that their economy isn't as free market as ours was so they may not be able to maximize their psotion as much as we did.Also China is natural resource poor whereas the US was natural resource rich. I dont think they necessarily supplant us as the dominant power,as I think hey will have to use up a lot of their gains domestically to deal with their severe agarian poverty, but I do think they will grab a share of the title.

My guess is the chinese will be trying to acquire cash rich US tech and software companies there are some that are trading near cash on hand right now, that's a sector they badly wish to control (see their recent struggle to dictate frequencies for RFID tags...) and they are behind in the R&D. When we do get another official bull they should be some of the early stocks out of the gate anyway.

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#5) On November 24, 2008 at 9:01 PM, devoish (98.63) wrote:

I do not believe China is the United States of 1873. In 1873 we were discovering new natural resources, new mining, new farmland. Hell, we were still exploring Utah and fighting the Sioux. Anyone who read my "Canyons of the Colorado" post should have that reminder. I didn't post that just for the beautiful writing.

China is a resource importer, and that will be expensive. Their water supply is shrinking due to pollution and global warming. They import metals, food, oil and coal. I am sure there will be some excellent investments in some companys in China but it will be tough going for them, and if it gets bad enough they may fall out of love with capitalism.

If capitalism survives in China, the companys that do best will probably be ones that deal with the resource problems. And they will not neccesarily be Chinese.

Chinese water is supplied by quickly shrinking glaciers. When the glaciers are gone there will be no regulated water supply. It will be wet when it rains, dry when it doesn't. No rivers of glacial melt in the summer. The Yellow, Yangtze, Mekong rivers all come from Tibetan glaciers and supply China's water.

China also gets some water from the Himalayan glaciers, as does India, Pakistan, Nepal. Hope the kids can share. Thailand, Burma and Laos water is supplied by rivers that pass first through China. I would not want to be Thailand, Burma, or Laos and dependent on the charity of China (or anyone else) to not interrupt my water supply.

I believe this all means infrastructure and cement. Dams to replace glaciers as water regulators, and clean energy investments.

China and other countrys are buying farmland outside their borders to ensure food supplies. I guess that is like taking Kansas from Native Americans.

 

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#6) On November 24, 2008 at 10:01 PM, russiangambit (29.16) wrote:

Two points on China, which are widely known but get lost in the shuffle:

1) China population is aging fast. Therefore, the threat of overpopulation and resource scarcity is not as dire in China, as in India for example. If there are going to be riots, those will be in India. Though, those are hard to imagine, indians are very peaceful. Chinese, due to their culture, are very respectful of authority, so I don't really think they are as prone to riots as an average european or African. I think, there will be a seismic shift in the structure of Chinese family, even now there are al ot of cases where older chinese "adapt" adults leaving away from family, providing shelter in exchange for care. This is because there are more older people than younger ones and the situation keeps getting worse.

2) Chinese are very agressive in aquiring resources in Africa. They also heavily invest in infrustructre. I am guessing that in 20-30 years, half of Africa will be owned by Chinese. And if they manage to stabilize it, think of the pent up demand for all kinds of projects in Africa, to bring it in line with other continents in terms of development. Africa, could be the next "emerging world" powered by Chinese.

Now, I am not Chinese, so it is hard for me to tell how Chinese are likely to be shaped by those two factors. But we got a lot of recent Chinese immigrants in Russia, the hungry kind, not the adapted and educated ones we see in the US. They have such a driving force to survive, even compared to russians, that I wouldn't underestimate them. China is the next superpower, I have no doubt about it.

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#7) On November 24, 2008 at 10:14 PM, EScroogeJr (< 20) wrote:

China's main problem: they keep $2 trln in US bonds. When America defaults on them, the loss of illusory wealth will be too painful. I sure hope they will understand what's going to happen to that dollar hoard and spend it on roads or whatever before the Americans understand that they understood. 

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#8) On November 25, 2008 at 12:13 AM, dexion10 (27.51) wrote:

very thought provoking. I wish I knew more about the period.

I'm not so sure China's lack of true capitalism is a deal breaker - but I suspect it is. 

But everyone who has commented on this blog needs to remember that the average american in 1873 barely had a pot to pe* in.  

The US became a major force in the world long before it had a middle class. China may do the same.

Very thought provoking.

 

Near term I'd be short China though... I see china as a collection of low margin / high capital intensity businesses that will see gross margins fall quickly on slower production volumes.

Additionally many of their financial statements may be fictional to various degrees. 

 

SHORT CHINA SHORT TERM / LONG CHINA LONG TERM

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#9) On November 25, 2008 at 6:19 AM, TMFDeej (99.43) wrote:

Excellent points everyone.  Thanks for sharing your thoughts.

You're definitely right.  China's lack of natural resources will definitely hurt it.  However, if it has enough money left over after its stimulus package China might be able to buy all of the resources that it needs by purchaing them on the cheap while prices are low.

Water and pollution may end up being a bigger problem for China than a lack of natural resources.  I highly doubt that China can import water.  It will have to heavily invest in clean water technology to fix that one.  That could bode well for VE and GE...if it doesn't just try to develop a solution on its own.

I wish I knew more about the "Long Depression" as well.  Of course, with multiple jobs and multiple children there's only so much time in the day to read about this stuff ;).  Besides, I ran a quick search on Barnes and Noble and I didn't come up with any books on the subject.  Is anyone aware of any? 

Deej 

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#10) On November 25, 2008 at 2:04 PM, jgseattle (34.08) wrote:

I just came back from living in China for 2 years.  I would say China is more like the US in 1950 and growing at warp speed.  If you look at the US at that time we did not care to much for the environment, we did not treat employees great, and most were chasing the buck.

Now in China you have a large group of haves and have nots.  I think the government is doing as much as it can to create jobs for the workers.  If you look at the stimulus package proposed by China, $600B, as a percentage of GDP it is huge.  Also, the package is aimed at western China that is not as prosporus as eastern China. 

Russiangabit - china is making huge investment in Africa and providing huge aid to Africa.  The aid has a lot less strings than US aid and it seems that African countries are embracing China and the demand China provides for natural resources.  Example, China built a harbor so the natural resoucses could be shipped with more efficiency as part of its aid program, smart.  China built a railroad to the port, smart.   China built a road across Tialland reducing transport times for chines goods going to market.

China understands that it needs raw materials and is building the relationships that it needs to get them.  I would also expect large purchases of African companies by China in metals, and other areas.

A funny story about how China is very much like America in 1950's or 1960s.  Everyone thinks Chinese are very conservative.  Yet today is the "Chinese sexual revolution."  Most of the none western hotels in china will rent a room for 3 hours, yes some is for prostitiution but most is for people that have family at home, and nowhere to go for privacy.

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