INDIANAPOLIS: The major US indices are down some 20% in a month, a dip so big, so fast unlike any seen since October of 1929. Worse than 2008, too. But this time the downturn has lessons for the long term. And those lessons are courtesy of China and the Coronavirus.
This time, markets are down because of a long-neglected factor called “fundamentals.” Whereas 1929 and 2008 were caused directly by financial meddling and manipulation by governments and central banks, this current market crash is caused by something else. And it cannot be “fixed” by government and central bank interventions.
So traders are confused and worried.
They haven’t looked at fundamentals in decades. Even as the 2008 fall was managed by throwing money – TARP, QE1, QE2, “shovel-ready” and “green energy” subsidies and giveaways, fed funds rates near zero – at the greater economy, this one can’t be addressed with money.
Something is fundamentally in the way.
What is wrong this time is that the world has awakened to changes that have been changing the fundamentals of manufacturing and distribution for decades. First, it was the idea of reducing raw materials inventories, followed quickly by the craze created by MRP – materials requirements planning, and its sister, JIT – just in time delivery. In isolation and during peacetime, all these ideas worked well, freeing up capital for further investment.
A host of other forced added to today’s fragility.
Rather than fight burdensome regulations that have piled on US manufacturing, companies found China welcoming. With the heavy Chinese financing of the Clinton re-election campaign in 1996 and the victorious administration’s designation of Red China as a Most Favored Nation trading partner, the rush to build US-designed factories in China to replace strangled manufacturing facilities in the States was on, and it gained momentum nearly every year.
It wasn’t all one factor, of course.
Disparate groups like unions and OSHA, the EPA, and trial lawyers had been stifling U.S.-based factory activity, but usually resulting in higher prices and thus opportunities for market fragmenters in the US. What changed 25 years ago, with virtually all trade and technology restrictions’ being lifted from China, was that it became increasingly more profitable to build manufacturing where it was invited to be. This in comparison to having to fight regulations every step of the way. To try to get approvals to break ground, to hire, to train, and then, to actually produce something. So manufacturing moved to China. Flat out, manufacturing left America for China.
And it left many other countries, for many of the same reasons, for the welcoming arms of China.
So, China became the production house for the world.
And then another new virus popped up in a major Chinese city, and it spread before China either discovered or admitted it, and it started killing people at a rate that looked alarming. So the world reacted in an effort to stop the spread. And a lot of that reaction involved stopping shipments of things – all sorts of things – out of China.
Another reaction in China was to close factories, to let the virus run its course. More shortages, even if shipping resumed.
Financial impacts of Coronavirus
People stopped traveling, either because travel was governmentally restricted or because they themselves decided not to expose themselves to the virus. The cruise industry is virtually stagnant. Oceangoing cargo ships don’t have anywhere they’re welcome, nor can they fill their decks with containers.
Airline travel is down significantly – people are putting off travel. Conventions and vacations are being canceled. The demand for oil is down and its price is crashing – great for those still traveling, or for those who can store quantities of fuel, but the reason for the price reduction isn’t positive.
So, oil companies are losing money. Airlines are losing money. Shipping, trucking, cargo-hauling of all sorts; vacation destinations, trade organizations – everybody’s losing money.
Worse, even when demand for goods is strong, if the goods aren’t available, nobody’s making any money selling them.
None of these things can be blunted by using the usual monetary tricks.
They can be fixed only by realizing that having all the world’s manufacturing eggs in one basket is a bad idea. Furthermore, that manufacturing has to be invited back into today’s lands of high regulations and hostile governments.
Which President Trump has tried to do, welcoming American companies back and other countries to America.
What’s to come of this?
Perhaps the over-regulating, manufacturing-hostile old-industrial-world countries will again invite manufacturing. Perhaps countries without significant manufacturing will build modern infrastructure and support new investment, reform their political hierarchy to reassure investors and allow their own people to join the modern world.
Whatever happens, the seeds of change are now sown. The next twenty years will reflect that.