How The Great Recession Will Transform America

Warren Buffett bought a RR anticipating a major change in America driven by high energy costs. The article Warren Buffett vs the Soccer Moms lays out the thesis that "Buffett is betting on higher energy prices and a different transport focus." In effect, Warren is betting that the American Dream is over. Instead of living in a suburban McMansion with a green lawn, an SUV, and suburban schools, the middle class will be force to re-huddle in cities and rely on public transportation, with trains rather than trucks moving goods between city cores. 

I think America will be transformed by the Great Recession, but not in such a dispirited direction. 

Let's start with Warren's energy bet. The bet seems plausible, given fears of Peak Oil and Obama's intent to regulate and tax energy under Cap & Trade or similar schemes. The bet reminds me, however, of the bad policy and misleading extrapolation of the '70s: 

• Then, as now, we had a weak Dollar policy which led to rising commodity prices, especially oil. 
• Then, as we intend now, we regulated oil prices, which led to shortages. 
• Much doom & gloom was extrapolated from those bad policies, including the demise of the American Dream.

But the story ended the other way. For those too young to remember, in 1971 Nixon first took the Dollar off gold, leading to a terrible decade of inflation; and Nixon tried to stem inflation with ill-fated wage & price controls, which he had to soon remove, except inexplicably he kept them on for oil & gas. We had lines at gas stations, capped wells, and increased dependence on imported oil. When Reagan stopped the price controls, the shortages vanished, the lines disappeared, and perhaps most paradoxically for central planners, oil prices began a long slide lower, to $10/bbl in 1999. Even with Bush's weak Dollar policies, oil was still at $16/bbl in 2001, and was around $25/bbl after the quick Iraqi strike in 2003. Only when Greenspan's Indian Summer of monetary stimulus took hold in 2004 did oil began to rise, reaching $147 by July 2008. Near the peak policy makers once again wrung their hand over Peak Oil and extrapolated a dismal future of high energy for American soccer moms and their despised SUVs. 

Seems to me investors are once again are in grave danger of being driven down the wrong path. Policy changes create high prices and (potentially) shortages, and drive extrapolation of transformation from high energy; but those policies can and likely will be reversed if we have another decade like the '70s. Anyone investing in high energy in 1980 found their plans were busted by the continued drop in energy prices, and the gradual loss of government subsidies. Governments are always the last to react to a change in underlying conditions, and relying on them to hold dis-economcial policies for long enough to get out is fraught with risk for investors.

Yet it is likely that America will be radically transformed by current economic conditions. The Great Recession is of a kind and scale seen three prior times in American history: 1929, 1873 and 1837. Each of those had a serious depression following a credit bubble, and led to rapid transformation of American business and power centers. You could see glimmers of the future change extant already, but the entrenched power centers were able to withstand the tide and hang on. The crash and subsequent depressions seemed to break open the constrained forces. Here are the prior three transformations:

1837: Andrew Jackson broke the Bank of the United States (the Fed of the day) and in doing so broke the power of Philadelphia bankers. The financial center shifted to NY, which has held it ever since; and the food processing center shifted from St. Louis to Chicago, where it has remained. 

1873: German reunification led to a global bubble and crash, and also came with a global shift from silver to gold, bringing about a long grinding "long depression" of over 20 years. The mill towns of New England, which were the foundry to the Civil War, gave way rapidly to the new manufacturing powerhouses in the Midwest. Cities like Pittsburgh, Detroit and Cleveland became the foundry for the world. 

1929: A poorly-designed return to gold in 1925 by England led the Fed to loosen credit to bolster the Pound, and the Roaring '20s were off. Hoover's meddling after the crash exacerbated the problem, and a global banking crisis in 1931 led to the Great Depression. The US was dramatically transformed from agriculture (40% of employment before the crash) to manufacturing. After the recovery, power shifted from the Midwest, soon called the Rustbelt, to the suburban splendor of the Sunbelt. 

If the pattern continues, I would expect a step function down in manufacturing, much like the vast shrinkage of agricultural jobs last time; and a shift away from the Sunbelt to a new power center. If we shrink in manufacturing jobs, what will the basis of production shift to? It won't be services, nor construction, nor 'green jobs' which tend to be temporary construction projects, not permanent new factors of production. (Spain provides a good case study in green jobs being a mirage for a new basis of production.) 

Instead, the US will drive for value in encapsulated intellectual property (IP), embodied in drugs, software, chips, web services (like Yahoo), data (like Google) and products (like the iPhone). We already see this happening in technology products, and now that the floodgates have opened will become the new factor of production across all industries. One of my favorite thinkers, Will McDonough, is the leading thinker of ecological architecture. Among other achievements, he rebuilt the famed River Rouge plant of Ford, the very model of a modern major assembly line, into a sustainable model with pavers instead of asphalt, natural lighting, and grass on the roof. He is urging a technology cycle similar to a biological cycle, where manufactured products can reduce back into the ecosystem. An example is to redo plastics based on organic carbon, not petrochemicals. These plastics look and feel like petro-plastics, and yet dissolve when thrown away.The whole plastics industry can transform itself into a new range of products. With a little extension of thinking, this approach can go into architecture, autos, food processing and across many other industries. Rather than the lame green jobs of Obama, to build wind farms and similar, this is the real green revolution. 

And this is but one example. Similar revolutions are occurring in pharma, biotech, entertainment, telecomm, lighting, marketing-media and other industries. 

What therefore changes is a drop in blue-collar manufacturing jobs and a rise in high-value-add knowledge jobs. While manufacturing flies overseas to China and India, we retain the marketing, design, control systems and materials science that goes into those products. It is no accident that the center of smartphones is now rising in Silicon Valley (Apple, Android, Palm), and the web world is also centered there (Google, Yahoo, Facebook, Twitter). This is but a sampler of what is likely to happen across the whole US. 

How will this change the power centers in the US? One of the most interesting thinkers of this potential transformation is Richard Florida. His view of the coming transformation is set forth in his books, and is most accessible in a recent Atlantic Magazine article. He is a proponent of the 'agglomeration effect' first popularized by a brilliant economist, Jane Jacobs. She is best known for saving Greenwich Village from a debilitating freeway through its heart, ending Robert Moses's remaking of NYC and starting the NIMBY movement to preserve the charming and inviting city centers of major US cities. I discovered her work in an Atlantic article that reprised her book, Cities and the Wealth of Nations. 

Simply put, "agglomeration" means a city-region becomes the center of a technology and holds it for a long time. Detroit for cars, Pittsburgh for steel, Chicago for food, NY for finance, LA for entertainment - these were the prime US examples. Today, we would say Silicon Valley for technology, Shenzen for contract manufacturing, Tokyo for cars, Milan for design, and London for finance. Birds of a feather flock to the center to be part of it. The efficiency and networking of being in the center lead it to get stronger. With globalization, the centers are no longer within protected boundaries. Where we had three car centers - in Stuttgart, Detroit and Tokyo - it appears the center is accreting to Tokyo. This also happens within a country, as the venerable Route 128 around Boston has given away to Silicon Valley. 

The implication of agglomeration is a shift from the Sunbelt to Knowledge Centers, denser areas in semi-urbanized settings such as Ann Arbor, Austin, Palo Alto and Cambridge. This is not the RR dream of Buffett, back to the urban core; but neither is it the continuation of suburban sprawl and transplant factories in far away cities. 

This transformation-by-innovation will not happen quickly. In another inestimable article, Houses of the Future, The Atlantic provides a model of how this will come about. The article looks the burgeoning housing innovation in New Orleans, post Katrina. First, the government had to get out of the way. After a failed stimulus and political squabbling between FEMA and local authorities, grandiose schemes with no follow-through gave way to bottoms-up innovation. A number of competing visions are emerging throughout the city, from Will McDonough's zero-energy green homes to much simpler "Caribbean" homes linked to the lifestyle of the locals. The key message seems to be for the government to back off gold-plated regulations and attempts to "help" and let innovation thrive. 

Similarly, after yet another Stimulus bill and continued attempts to impose costly regulations across our economy (healthcare, energy, autos, etc.), we should see these efforts peter out due to their own failure, to political squabbling and lack of follow-through. At this point (2014? 2017?) the ground will have been prepared for innovation from the private economy to emerge. 

For investors, the key is to invest in the leaders of the new knowledge industries. For society, the key is to promote the rise of knowledge industries. Until then, we will have to suffer through a self-destructive decade of high taxes, hostility to small business and venture capital, false promotion of ebbing unions, and malinvestment in the wrong priorities. Caveat investor. 

Comments

[David Taylor]

Yelnick,

Why don't we get real here and stop using the term Recession?

This is clearly a Depression and we should start saying so.

[Greg]

Yelnick, very well organized piece. Thank you.

[Super Duper Compulsive Genius]

To Whomever Annotated My Post Below:

I think you and I are spending too much time on this garbage. This is really compulsive, masturbatory stuff that doesn't do you or me or anyone else much good. I'm going to try to stay away from this site for a while. Good luck,

A Super Duper Genius with a Compulsive Side

I understand opportunity cost.

Then you should write your posts as if you do, instead of the tripe you posted.

I also understand that $50,000 is a pretty small figure.

You can't write "I understand opportunity cost" and then "I also understand that $50,000 is a pretty small figure" and be taken seriously. It's "pretty small" for whom? Certainly not for the guy whose other opportunities max out at $49,999.

Anyway, small as it is, nobody here makes $50,000 annually year after year by trading. I just cannot believe that.

Again, it was a number used to make a point. What if it's $25K and the person in question is making an opportunity cost decision between making $25K and spending his leisure time reading books, which he only values at $24,999. Maybe it's some guy who's trying to make a few thousand extra bucks to go on vacation. Point being, who really cares what you believe, think, assume, presume or whatever other term you want to insert in there?

The people who make money in the markets are privy to inside information or at least very, very fresh information or make lots of tiny arbitrage driven profits.

Yes, very, very few traders who start out trading can make a living from it, just like very few people who play basketball as a kid will make the NBA. However, there are, what, 20 or so regular posters on this blog? Certainly the number of people outside of what you think are the "only people who make money" is larger than 20, no?

It's not that you don't have a point, it's that you've massively overstated it out of some misguided belief that you are clever. You're not. Actually, your point, such as it is, is quite banal.

[Hockthefarm]

Interesting piece Yelnick, thanks.

My view of the 70's is that we were stuck in the vertical section of the aggregate supply curve (fixed supply at any price). Wage and price controls were just an overt admission by the gubmint that they had lost control of the economy.

The global labor pool makes it hard for me to get there again. The world you describe makes a lot of sense. A much more dangerous world, but probably an inevitable outcome. Heavy manufacturing will be gone from the US within 10 years. This little ditty with GM is just that and I think everyone knows it.

Best ,
Hock

[The Super Economics Genius]

I think you and I are spending too much time on this garbage. This is really compulsive, masturbatory stuff that doesn't do you or me or anyone else much good. I'm going to try to stay away from this site for a while. Good luck,

A Super Duper Genius with a Compulsive Side

You will not be missed.

[rc]

Fewer people were employed in Agriculture as manufacturing gained, but Agricultural production in the US didn't decline -- it just became more efficient.

IF fewer people are now being employed in manufacturing because of robotics and automation, then that'd fit a natural scenario of progress, but this is _not_ what is happening.

Manufacturing is not moving to China (and elsewhere) because they are more efficient. It's moving because of unfair trade practices and cheap labor and less regulated for the common welfare overhead. Which more closely fits the progress of mankind: an environmentally clean factory using robotics to replace low-skilled, repetitive human labor? Or a factory employing a multitude in an overpopuated country where labor is cheap and with reduced costs due to lack of regulation?

The loss of manufacturing in the US isn't progress; it's regress. And, when you no longer make stuff, you will, soon enough, lose even more value added control.

[twitter.com/DrBubb]

A Response to Yelnick's Great Transformation

An interesting and optimistic take on how America might be transformed by a Great Recession. It is good to be optimistic, since that can be a call to action, while pessimism tends to lead to inaction. America will need plenty of action and solid planning if it is to pull itself out of a likely Depression, and maybe a Greater Depression than we saw in the 1930's.

I would like to share your optimism, but I dont see a transformation starting until AFTER a big Shock hits the US suburbs, and then I fear that the US may lack the capital and the access to cheap capital it will need to transform itself quickly. So even if we do see the results you expect, I think it will only come after a long and very painful period of adjustment, which could last for 2-3 decades. We already see that Washington is suffering from the "psychology of previous investment", as JH KUnstler has called it. Politicians are wasting money trying to save old, dying industries rather than encouraging a process of transformation. How do you see a new politics of transformation emerging? Obama ran on a platform pf "Change you can believe it." He won a big mandate for change, but so far has failed to deliver it. Instead of making fresh plans, he leaves the details of "his" program initiatives to the old hacks. (I believe you have identified the problem of inept planning in your description of the Porcullus program.)

Here are some important differences between the US situation of today, and the 1930's, which will make a rapid transformation difficult:

+ The US gets about 2/3rds of its oil for foreigners, while in the 1930's, the US was the world's largest oil producer, and a exporter

+ America consumes 25% of the world's oil, and has only 5% of the world's population. Menatime, wealth is falling in the US while rising in emerging countries like the BRIC countries, suggesting that the US is going to see some serious competition for scarce oil resources

+ The US was a large creditor nation then, and is by far the largest debtor country now. The american currency will be in constant danger of collapse. If a collapse comes suddenly, it will make imported oil far more expensive than it has ever been, and that may completely shut down the US economy

+ The American economy is highly dependent on cheap energy, especially within "the suburban project" that about half of our citizens have bought into. They are mostly blind to their dangerous vulnerability to oil supply problems, and/or a dollar collapse. Adult choices, requiring compromises on living space, car sizes, and local density are little consider, and mostly denied. I fear that a severe price shock is needed to wake people up. And even then the likely response of the average citizen might be, "Let's go to War... after all, cheap oil is an American birthright."

This arrogant attitude needs to change, if we are going to have any hope of a positive transformation.

[DG]

rc,

I actually think that automation has caused the loss of more jobs than the labor price arbitrage.

It is simply not possible for US-based manufacturers to make profits manufacturing commodity products. Period.

It's like the quote, "When you're halfway through Hell, keep walking". The US can't go backward because now the Chinese have capacity in place to manufacture all of those things that the US used to manufacture, anyway. The only way out is forward to higher value-add manufacturing, but that requires a labor force that is educated in ways that our labor force is not, at least at this point.

[cloudslicer]

I think economic troubles we are in are a symptom of a larger problem.

What we really need is innovation in systems of government. Humanity has made amazing strides over the millennium in technology and science. But in terms of systems of government we still support political structures that have been in place for centuries. I think along the lines of Alvin Toffler (Third Wave, Future shock) that the obsolescence of our systems of government represent the greatest liability we have. Or as Winston Churchill once said that democracy is the worst form of government imaginable, except compared to its alternatives.

It was America's system of government in the 19th century that gave us a competitive edge over the rest of the world, and in my opinion was the prime reason for our success in the past. But, unless we modernize this same system it will be the source of our ultimate demise in the 21st.

[P.W.B.]

Just one point that I would contend. I think that you'll actually see Tokyo in decline as the center of the automobile world and the emergence of South Korea (not sure what city is the manufacturing hub there). Toyota is now what GM was 15 years ago and Hyundai is now what Toyota was 15 years ago.

[yelnick]

DG, RC - DG has it spot on. We need to transform to high value add and let the gadgets be built overseas where energy, labor and taxes are low. It may be that our quantum of manufacturing stays constant or rises on much lower labor inputs; but we will lose share to BRIC nations. Wouldn't matter if we pick up the rest of the value chain. Since 1965 when Kennedy changed immigration policy (Teddy's first great act of substituting passion for logic), we have been hostile to talent coming in and encouraging to unskilled labor and dependents. H1B's are hard to get but illegals can flood the borders. A sop to unions no doubt, but those H1B jobs were no threat to organized labor; they have been eaten alive by low end unskilled workers.

I believe we will pull this off, but it will not happen fast. A lost decade of the '10s seems inevitable, much like the '70s. This will be the second lost decade since we have made no progress since 1999 (Dow was at 10K, total employment was about what it is now on a smaller labor force).

[yelnick]

Nathan, I agree with much of your comment but want to clarify a few things.

First, in the past 3 transformations, the new technology/power-structure was already out there, just held back. In our case Silicon Valley and other tech centers provide a model for high value-add. Apple designs iPhones, puts in the software, manages the apps store, provides the content, and markets it. Taiwan designs the hardware and has it built in China. The portion of each iPhone that goes to CHina is really teeny, and the contract manufacturer gets none of the service/content revenue. A lt to like about this model. Apple now makes more profit than Nokia on the iPhone! Extraordinary, but shows why the new model is so powerful. Nokia has huge capital invested in low value added operations.

Yet in the past decade under W we have pushed policies to hamper the Silicon Valley model:

Options were demonizedOptions had screwy accounting addedSarbanes-Oxley quadrupled the cost of an IPO and doubled the carrying cost each year of lawyers and accountantsTech leaders were demonized and harangued (Gates/antitrust, Quatronne/insider-trading)H1Bs were made hard and limitedFinancial engineering trumped real engineering, and the kids ran to Wall StreetFederal support of research was reducedBusiness schools got way off track into social engineeringSmall business has been left to drift in the windPolicies support old line industries over new ones (eg FCC pandered to large telecomm)Tax cuts heled mature cash-generating businesses and hurt emerging growth industries

I am sure I could go on but you see the point. Even the stated goal of Obama in education seems more targeted to promote teachers than students. Science/math get short shrift in unionized schools since every teacher marches to a time-based lock step. Makes it hard to attract good science teachers (they need to be paid more) and to promote them. They languish in a politically correct swamp of social experiments and pandering. They feel compelled to support questionable science like Global Warming and pine over polar bears in order to get along, get promoted and get budget. 

So your points about how slow this will be & how Washington favors the oldline industries is spot on. 

It will take a new candidate with a true understanding of this dynamic and a mandate to change to move us forward, but I expect that after the '10s end up as a Eurosclerosis decade of slow growth and visible decline. If we are lucky, we get that person in 2017. We might see a change in 2012 but I doubt it. 

[DG]

Yelnick,

I think the tough thing is that we are asking a nation of 300 million people to each become the equivalent of Thomas Edison and invent the new "machines", when most people are more suited to the role of cogs in the machine.

In a world where software/hardware combinations can nearly fully replicate human activity, most people will have neither the ingenuity nor the stamina to add value.

[yelnick]

DG, yes, but the high value add engineers drag a lot of other jobs with their success. Think sales dudes in Apple Stores for example. What will disappear are unskilled middle class jobs (assembly line type). It will take an attitude something like we had post WWII of getting serious and working hard, vs. feeling entitled.

[DG]

Think sales dudes in Apple Stores for example.

Problem is, there will probably be a software program that can replace the sales dude! Plus, it will probably be attached to some kind of virtual reality application that enables the sales dude/dudette to be a virtual reality copy of your favorite sexual fantasy partner, to soften you up for the sale. Imagine a virtual reality Heidi Klum selling you an Iphone accessory in her lingerie. Beats some pimply kid.

It will take an attitude something like we had post WWII of getting serious and working hard, vs. feeling entitled.

Absolutely. Ironically, we have been in a war and we just lost it. It was the 'War on Reality' that our government has been fighting since the end of WWII.

[TJ]

Interesting discussion, but did any of you posters come into today's session LONG U.S. EQUITIES???

[Ross]

With all this strength in the market. S&P new highs, Transports breaking out, copper breaking out, Baltic Dry index showing incredible strength. Has Prechter changed any of his forecasts or is he currently bearish. Is this still a bear market rally or the beginning of a tremendous bull market? I don't get his newsletter so ignorant of his STU updates. Thanks for any info. -Ross

[da bear]

this article sounds soooo 2003.
ok we did that stuff too. and it got us where we are now.
so what is next?
if our country is totally broke ass how can we add value down the line?
why the hell can't the Chinese and Indians add value?
best case scenario: we are the sweat shop of the world, with some bells and whistles.
worst case? don't wanna go there...

da bear

[DG]

da bear,

I am certainly not saying the Chinese and Indians can't add value and move beyond commodity manufacturing. Someone mentioned Hyundai as an example of a company that had gone from commodity manufacturer to value-adder. As I recall, they brought in the former head of quality at Toyota to lead that transformation.

My point was that there is a window of time (in microeconomics, there are short-term and medium-term and long-term constraints and that's analogous to the "lead" which the US has in manufacturing more complex goods) in which the US can establish itself as the highest value-add manufacturer. As Yelnick points out, and I agree, "we" (to the extent that a country as divided as the US can be spoken of as a "we") are wasting time propping up old industries and methods, primarily because those are the industries that have the political connections to siphon off money that should be utilized for the good of the nation as a whole. Most of our human capital is completely outdated and that's the crux of the problem.

[Hockthefarm]

"DG, RC - DG has it spot on. We need to transform to high value add and let the gadgets be built overseas where energy, labor and taxes are low."

And today, 70 percent of Los Angeleans cannot read a bus schedule. I think that puts the challenge into perspective. The high value add you speak to requires a population about the size of Canada's. Still, I agree that indeed it is where we are headed if we want to compete globally. I'm just not sure that the 90 % of the population that will be left out, will go along. One can only consume so many fries.

[Hockthefarm]

Yelnick's lost decade:

http://tinyurl.com/ydfa7p5

Makes a lot of sense to me.

Hock

[Anon]

Yelnick, did you say Great Recession or Great Inflation? You may care to read these...

http://www.marketskeptics.com/2008/12/how-deflation-creates-hyperinflation.html
http://www.marketskeptics.com/2008/12/nightmare-german-inflation.html

I'd be curious of any comments you may have.

[yelnick]

Anon, saw them and am not impressed. Bernanke can launder (sterilize) his excess money via many techniques, including paying interest on bank reserves held in the Fed, which he is doing. His bigger worry is a determined run on the USD to force him to protect it. It might have started today after his remarks. Remember how Soros made his Billion Dollars in one hour - by forcing the British central bank to back down off trying to hide what they were doing.

[Greg]

Too much complacency at the fx-equities correlation trade. It feels so easy and lately it got …easier. I am nervous to be on the same wavelength with Prechter but I sense we …are getting very close to the turn.

[Hank Wernicki]

Did EWT cover their shorts from August ? ouch ....

Pretty quiet there lately

Just curious , thanks

[twitter.com/DrBubb]

"Silicon Valley and other tech centers provide a model for high value-add." Wishful thinking perhaps?

A worthy goal, but China has the same idea. They may lack the creativity (so far), but they have the determination. Have you heard of a Hong Kong company called Imagi? They make animated films. Their latest was called Astro Boy, and as released last month. They have a creative team based in California, and their hard core animation work is done in HK. They can make a Hollywood-style animated film at about 1/3 the cost of a US studio. This sort of Chinese controlled entity with a bolted-on creative center in the US can carry the job migration to a whole new level. And longer term, the Chinese are determined to become more creative.

Personally, I think we will see a resurgence of manufacturing in the US, and maybe even in the US. My hometown of Detroit may rise again. But if manufacturing starts growing again, it may come after a dollar crash, when labor costs between the US and China come closer together. Then the cost of transport may make it more sensible to manufacture goods closer to the customers. But companies, workers, labor unions, and governments will need to realize that they must work together to figure out how to bring jobs back to the US. I think this change is inevitable, but only after currency changes, and a transformation of attitudes. Otherwise, the US will just go on getting poorer and poorer.

Right now, the US exports its dollars to get the products (and commodities) that it needs from abroad. If the Chinese revalue their Rmb, the US will get less Chinese product for the same amount of dollars. The value of dollars we are sending abroad is already too big. So the US will have to do with less imported goods, and that will mean manufacturing more at home, and/or simply doing with less. The frugality that we have seen in 2008/9 is likely to become a national habit, lasting for decades.

The big problem for the US is its oil imports. (For some reason, you do not want to discuss this.) The US will have to learn to live with less imported oil, and this will hit those who live in the suburbs very hard, because oil use is an addiction that America is unwilling to face. If that usage is not brought down voluntarily, it will have to be reduced by rationing and high prices. I see oil hitting $400 and gasoline $10 before the end of the next decade, and if the dollar's fall picks up pace, maybe within 3-5 years. This will devastate those who are unprepared. And there will be big knock-on impacts in the price of food, which requires big energy inputs.

Perhaps the US will need to start turning all those empty shopping malls into factories, and rezoning, so the suburbs around the malls can be densified into high rise accomodation for the workers. Hong Kong's old model may come to the US, whether you want it or not. Survival needs force change on people, even the self-styled "richest and most powerful country."

[yelnick]

Nathan, whoa! A lot of thoughts in your post. Let me try to cut to the chase. The US is 25% of the world economy, and China is around 5%. It will be a long time before they catch up, and even longer before they get to a per capita income like ours, if ever. They cannot increase their RMB nor we decrease our US Peso enough either way to equalize wages for manufacturing for a long time, especially fully burdened. It is more likely that China loses out to even cheaper manufacturers than we ever gain commodity manufacturing advantage back. I don't think oil is going to $400/bbl (absent hyperinflation) nor do we need fear the rise of the RMB, since we can move offshore manufacturing to cheaper countries faster than they can move up the value chain. The high-value-add company has much more leverage than the contract manufacturer.

Where we have gone wrong is to build an Entitlement Society. Kids get passed to higher grades without merit; people buy bigger cars and houses hen they can afford; everyone wants healthcare with someone else paying; banks are too big too fail; the moral hazard of being bailed out of risk is ever present; etc. We have not yet been "shocked sensible" by last year, since we too quickly engineered another bubble to cure the last bubble. But these rolling bubbles will simply make the eventual disaster worse than it would have been. After the recognition that we cannot gimmick our way out of the mess, we will finally roll up our sleeves and deal with it. Then China et al. need to watch out, because we have a huge reservoir of talent, passion and confidence when that mindset change occurs.

Sadly, rather than being that catalyst, Obama has turned out to be a bust, pandering to the Entitlement Society rather than changing policies to make us earn our way

[twitter.com/DrBubb]

There are two main Chinas:
+ The China of the interior, where the main livelihood is subsistence level farming
+ The China of the coast, with major cities like Beijing, Shanghai, and Guangzhou, where living standards are rapidly catching up with the US, as US wealth slides. Hong Kong is part of that too, and I think that living standards here will soon exceed the US, for many of its citizens (but not all.) But I hasten to add, life is different hear, and the suburban living arrangement, such as it exist in Hong Kong is very expensive. But if you live "the Hong Kong way", in a highrise you can live well and use little oil. I sincerely hope that China copies the HK model, or something close to it, rather than the US suburban model, or the world's oil users will be in big, big trouble.

I made my oil price forecast in a published article in 1990, and updated it to $400 about 18 months ago. I am still looking for a peak at near that level within a few years, maybe higher. 2010 was the cyclical peak level I identified back in 1990. (I find it interesting that Harry Dent now agrees with that approximate date.) Personally, I am expecting a deflationary swing, and a stronger US dollar for several months, before the Fed panics, and drives the US economy towards much higher inflation. That may get oil up to $400 by 2012-13.

My Manic Swings articles:
#1: http://financialsense.com/fsu/editorials/2009/0914b.html
#2: http://financialsense.com/fsu/editorials/2009/1008.html

I agree with your comments that the US has not yet been "shocked sensible." That will come someday, possibly within 2010. Meantime, there is a marvelous opportunity, for those who have "seen the light" to put their lives in order before the needed shock arrives. People should:

+ Get out of debt and sell investments in real estate,

+ Downsize their living arrangements, and move somewhere that they do not need a car for everyday living,

+ Sell many stocks, in anticipation of a possible deflationary swing, while maintaining some gold or gold equities, in case the downswing is delayed longer

+ Think deeply about who grows your food and how vulnerable that food growing process is to disruptions from a weaker dollar and higher oil prices,

+ Consider that the ultimately security in the difficult years to come may be in living in a sustainable local community, where your own contribution to the wellbeing of that community is valuable and recognised. (I call this "joining a healthy tribe.")

[yelnick]

Nathan, with all respect, we are not headed to such a debacle. Bernanke flooding the financial sector with liquidity has corrected a great mistake of the 1930s.

[twitter.com/DrBubb]

Okay. You may be right, Yelnick. In fact, I WANT you to be right. I will not enjoy living through such a period.

For me, the jury is still. The bounce we are seeing may be part of a bigger pattern, a "W" if you will. Or it could be even worse, a "y" pattern, were the second leg down in the economy is so big, that it dwarfs the first leg down.

For me, the W or y is unavoidable, because of the huge US vulnerability to rising oil prices. Why do you think I live in Hong Kong? This risk was one of my considerations (but not the only one.)

This morning's Hong Kong newspaper, the SCMP, has a column debating whom is responsible - not for last year's crash, but for the present excesses of over-stimulation and the resulting speculative boom in asset prices. The days of a the Fed's "money flood" are limited, just as the days of China's own massive bank lending stimulus are limited. The excesses are apparent to officials in China and Hong Kong*, whether or not Bernanke and his collegues can see them. I hope BB gets religion fast, or we may see a collapse in the dollar sooner, rather than later.

== ==

HK's CEO, Donald Tsang has been complaining about how a flood of cheap US dollars has artificially inflated asset prices (property and stocks) in HK. On Froday alone, the HKMA had to buy a massive HK$25.6 Billion worth of foreign currency to maintain its peg to the US$. (People are "getting the 'ell out of dollars", think the HK$ may be a better bet. I agree!)