"Mercantilism works" - Paul Krugman
Krugman's call for 25% tariffs on China are based on a profound misunderstanding of how the Great Recession will transform US manufacturing. The US is rapidly moving to a higher-value and sustainable position in global production from an older model of unskilled labor gaining a middle class salary on the assembly line. The greatest threat to this repositioning comes not from China but from within, from policies that hinder innovation and burden production.
I have written how the Great Recession will transform the West by accelerating a drop in core manufacturing and replacing it with high-value jobs in the layer of design, software and services that I call the IP layer (for Intellectual Property). A simple look at how value flows to Apple for the iPhone should convince you. Click on the sidebar thumbnail of a chart of value in the iPhone (courtesy GigaOm, sourced from Column Five Media). In sum:
- Apple gets $579 from the mobile operator
- Apple pays $179 to build it
- China gets $6.50 for core manufacturing
The assembly line manufacturing component is about 1c on the $. Apple gets about 70c, and that does not include the service income from downloadable apps and music. Most the rest of the cost to build it is IP frozen into chips and software. The mobile operator subsidizes the purchase by $351 and gets about twice that in data fees, even before including voice minutes and sms fees. A similar model applies to the new iPad.
The IP and Services layer is where the value is. Traditional manufacturing of the sort Krugman wrings his hands over is no longer what "manufacturing" is all about.
You could argue that Apple is an outlier, but there are a myriad of similar companies in Silicon Valley, Redmond, San Diego, and elsewhere across the US. The web industry is largely centered in the US. The smartphone industry is almost wholly in Silicon Valley (Apple, Android, Microsoft's Danger division, Palm). The social networking winners are largely here as well. And of course the US and Europe have huge bio-tech and pharma industries.
It is passing strange indeed, then, that what passes for industrial policy in the US is to bailout car companies, enable huge profits in financial services, empower increased public sector union jobs, jawbone about green jobs - and continue to pluck the golden goose of innovation with:
- Sarbanes-Oxley, which has quadrupled the price of going public and at least doubled the cost of staying public
- Demonization of stock options
- Imposition (potentially) of more expensive health benefits
- Imposition (likely) of increased taxation on small business
- Increase (likely) of capital gains tax rates
- Worsening (possibly) the tax treatment of venture capital
Certainly China is catching up, but a look at history shows that China is still a paper dragon. When the US went through its period of remarkable growth to become the China of its day back in 1900, US companies were the world innovators in both technology (telegraph, telephone, lightbulb, electric generation and transmission) and process (ruthless efficiency in oil, steel, transportation and retail). When Japan emerged as a world power, it too showed innovation, particularly in commercialization (VCR, walkman) and process (just-in time manufacturing, quality). As China has emerged, it shows neither. Instead, it is a story of cheap labor and rapid flow of capital.
This is all too apparent looking at Chinese profitability. The Chinese exporters are hanging on by a thread,with a profit margin of less than 2%. They are at huge risk of failure if the Chinsese currency rises. As an equity analyst noted:
2% margins on export-oriented businesses is not representative of any sort of real competitive advantage. A real competitive advantage when it comes to exporting would show double-digits profit margins.
If Krugman gets his way, the sort of assembly line manufacturing of China would not come back to the US. If the Chinese currency goes up 25%, or we throw on a tariff, the rise is from $6.50 on an iPhone to $8. Instead, it would go to Vietnam or other low cost areas.
The bigger threat to the US is a continuation of bad industrial policy that hinders US innovation, while China makes great strides to move beyond cheap manufacturing to the IP layer. Already we see R&D moving to China out of the US. Several Chinese companies are gaining world scale and competitiveness with Western companies, such as ZTE in cellphones, Haier in telecom infrastructure, Lenovo in computers, and Baidu in search.
An encapsulation of the problem with the path we are on is that government workers now surpass goods-producing workers in the US.
The last time a transformation of this magnitude occurred in the 1930s when workers left the farms and went to the assembly lines. Farming dropped from 40% of the workforce to a few percent, and yet farm production kept increasing. We had huge gains in productivity, and after WWII were able to absorb those new workers into manufacturing.
We have gotten to the point where the number of public employees in the Agriculture Dept is said to rival the number of core farmer workers. I don't know if this is quite accurate, but the joke is, why was the Agriculture employee crying? His farmer had died.
Yet that old saw misses a deeper and more important observation: while the number of core farmers has decreased, the workforce in the layer above farming - call it Food Processing - has grown dramatically, and adds a lot more value than farming itself. Food processing and the food service industry to deliver it to supermarkets and restaurants has proliferated an incredible assortment of food products. In many respects this is equivalent to the IP layer above the assembly line, and has its own intellectual property in genetic engineering, flavor enhancement, organic products, preservation, packaging and distribution. Sadly, it too is being starved of innovation, and hampered by fears of genetic modification of seeds, while China is moving ahead.
Similar to what happened in the '30s, as core manufacturing has declined, manufacturing output has not, and the jobs have shifted to the "manufacturing processing" layer above, the IP layer:
As with farming, we can promote innovation, or starve it. Right now the punditry seems intent on starving it. The most astounding fount of bad policy is the Economist Who Wants To Be Taken Seriously but says really dumb things - Paul Krugman. In a recent post in his NYT blog, he actually said that "mercantilism works". Adam Smith wrote Wealth of Nations to show the mercantilist fallacy, that the "beggar thy neighbor" policy lowers overall trade and hurts the mercantilists' citizens. The victory of Capitalism over Mercantilism was decisive, to say the least. The errors in Krugman's argument are dissected here and here. He wants us to become China. He says things this dumb:
- Virtue becomes vice: attempts to save more actually make us poorer [comment: tell that to the Japanese and Chinese, who force their citizens to save at high rates]
- Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster [comment: tell that to the Chinese, who are now deathly afraid of inflation scuttling their miracle]
- Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense [comment: really? we grew a whole China in GDP from 2004-7]
- For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies [comment: only in an academic fantasyland]
A much more sophisticated discussion of the topic comes from Professor McKinnon of Stanford, who points out that as long as the Chinese currency is not accepted as a widely-tradeable reserve currency (like the Yen, Dollar or Euro), it cannot be floated without severe internal consequences to China. Simply put, it would rise without much to limit it, as the Chinese themselves would be loathe to recycle their savings by investing in Dollar assets since the rising RMB means their Dollar investments drop. It should come as no surprise then that mercantilist economies tend to force their citizens into huge savings while restricting their ability to spend outside the home market, since that spending would unwind the beggar-thy-neighbor cheap currency. All of this means that the clumsy Krugmanian solution (of the US becoming a mercantilist like China) would fail to change China and would lower global trade whole hurting the US consumer.
In spite of poor US policies, I see a tremendously exciting and lucrative future for the US in remaining the leader in the IP layer above manufacturing. We have already vastly increased the size and scope of our college-educated workforce, and the IP layer can absorb college graduates just as the assembly line absorbed unskilled labor off the farms. The speed of change and innovation in engineering, design and marketing mean that training for specific jobs is less valuable than being broadly skilled in learning, creativity and adaptation, all areas in which the US culturally excels.
We need the patience to ride out the Great Recession, the forebearance to let the transformation work its way across industry, and the wisdom to accept the Creative Destruction of Capitalism, rather than fall into the politically expedient trap of intervening to forestall the change.
>We need the patience to ride out the Great Recession<
Easy! Just convince a few million people to quit eating.
Posted by: Mamma Boom Boom | Tuesday, March 23, 2010 at 01:37 PM
China-mans market looks like it might have a small caliber bullet wound behind the right ear.
Posted by: Mamma Boom Boom | Tuesday, March 23, 2010 at 02:17 PM
Krugman's a piker. Subject all imports of goods into the US that are made in China-and other semi-slave labor lands-but are products of US & other Western companies who have relocated production to said semi-slave lands to a 1000% tariff. More, subject the corporation itself to a 50% surtax on its' income, make all capital gains and income on the corporations securities fully taxable(i.e., sell stock in an IRA-gain is fully taxable), add a 90% income tax surtax on personal income of corporations' 50 highest paid employees and board members, and hit 'em with a 150% tax on any incentive comp-corporacrat gets a $100K bonus, he owes $150K in iax on it.Exempt a true Chinese(or other) corporation(founded, owned, run, funded, etc. by Chinese) for extra tariff, to be fair-maybe 10% of Chinese exports will be eligible. If Obozo truly gave a damn about Americans, he'd have called out Applied Materials, named their top managers and board members and given the public their business addresses, both physical and email, and encouraged Americans to boycott any products that used AMAT products in the production process and all products made by companies that their board members are affiliated with. If they still resisted, he should give out their personal addresses, addresses of children, parents(as well as their business addresses) and encouraged Americans to let these people know how they felt about such insulting treason.
Cold, stark fear, for your financial position and even your very life, is a helluva motivator.
Business must be made to realize that they are only a part of the overall society and they will conduct their activities in a way that is always consistent with society's long term best interests. They will view themselves as American, not global, organizations. If the particular bureaucrats at a firm don't like it, they can quit;they can even give up their citizenship and go to another nation(with essentially only the clothes on their back)and make something of themselves(yeah, right).
Globalism is bad for the vast majority of people everywhere. It must be halted and reversed.
Posted by: Rantly McTirade | Tuesday, March 23, 2010 at 02:56 PM
"http://carlfutia.blogspot.com/"
This commentator is openly calling for gold back down to 875, silver to 10, oil to 50. Not sure what his long term call for S&P is though but it seems like he sees 1200 soon. My enquiring mind would like to know why he can be bearish on gold/silver/oil while bullish on the general stock market. Is he arguing for a return of the goldilock econ???
Posted by: Whitebear | Tuesday, March 23, 2010 at 03:23 PM
The longer the recession is perceived to exist, the longer this leg of the bull market lasts.
I dont think we will know much that is certain until April of 2011 which is when primary 2 should be over.
a long time, but primary 1 is about 1/2 way to a mid august high to spx 1350 to 1440
wave rust
Posted by: Wave Rust | Tuesday, March 23, 2010 at 03:29 PM
Not sure that in times to come the clever stuff is going to come from the US. As David said yesterday, education is at the heart of this - but its not just expenditure on education. In the UK we now have one in every two teenagers going to University; but NEVER has there been such an outcry about the calibre of student and every year we get the same refrain of 'lower standards' when the public examination results are published. The more money we throw at education the poorer the value we seem to get. In the UK our health service is absolutely dependent upon people from the Indian subcontinent - mainly doctors, anaesthetists, pharmacists, surgeons etc. They value education highly and are patiently building reputations in diverse fields such as IT and Pharmaceuticals and (yes, Yelnick) even the film industry! Don't get me wrong. I am a USAophile. BUT --- if I had a dollar to gamble either on the US or on India to emerge as winners in the value added services sector, then I would place my bet East. From where I stand, the US is going the same way as the UK - a great lumbering dinosaur with occasional flashes of brilliance. We have those too in arts, media, music, fashion, technology etc. But even as a small country, this unfortunately is not enough for us to emerge from a long terminal stagnation in which we are suffocated by a MASSIVE and INNEFECTUAL public sector, and fostered by successive inept administrations.
Posted by: Chabazite | Tuesday, March 23, 2010 at 03:59 PM
Well argued, Chabazite. Nice, too, to read something here without lots of misspellings and ungrammatical word-turds.
Posted by: Chariste | Tuesday, March 23, 2010 at 04:18 PM
yelnick. off the deep end. sounds like yuppie heaven. no work. just a few intellectuals at the top collecting their residuals.
the taxman cometh. your IP layer already exists. it is FACISM. where big government and big business dream up schemes and scams to soak the middle class. wall street derivaties, new health care taxes, climate change taxes, carbon taxes, war on drugs, war on terror, privatization, deregulation, tariffs, tarps, bailouts, madoffs, etc..... this is your IP layer. a parasite, not a milk cow.
hogwash... somebody own the hog, everybody else washes the hog. astounding.
Posted by: Born Yesterday | Tuesday, March 23, 2010 at 04:54 PM
Intelectual property - meet PIRACY!
what ever you dream up, as soon as I hear about it, I can do it myself or pay someone to steal it.
Your "new" idea can only be sold once for sure.
Go into any open air market in any second/third worls coountry and count the knockoffs, pirated disc, software, etc etc
and no one country has a lock on inteligence, so if the chines are buying all the raw materials, have the manufacturing plants and we know are engaging in corporate spying to steal your vaunted "IP", (and in the future won't have to steal it) what's left for the USA?
Oh yeah, "a goood guvmint jahb!"
Posted by: newbietrader | Tuesday, March 23, 2010 at 05:21 PM
Born, sure, the gubmint can screw the pooch. Nothing is cast in stone. It has to be earned and fought for.
Posted by: yelnick | Tuesday, March 23, 2010 at 05:43 PM
newbie, the piracy you speak of has been going on for a long long time, and yet the leading US innovators still have a huge margin on unique products. Chinese companies like Haier are now offering competitive products with IP they have developed, and they duke it out on the global arena. THEY now need to protect THEIR margins. The IP layer is much more complex than a few ideas or movies. Just watch how many iPhone knock-offs have been attempted and not gone anywhere
Posted by: yelnick | Tuesday, March 23, 2010 at 05:47 PM
Being in the IP Layer for my entire professional career, I must say I don't share the vision for the U.S. We once had the IP Layer by the balls. Now, not so much - well, I should say - the trajectory is not good. Our universities are largely a joke. The majority that benefit from our university system are the kids from China, India, Korea, etc. The ones that live in the study halls. The ones that don't join the Greek system, go on springbreak or binge drink constantly. Those kids used to stay in the states. Not so much any more. We are largely (becoming) a nation of fat fucking retards.
Posted by: String Larson | Tuesday, March 23, 2010 at 05:59 PM
DG,
Where are you today?... upss I forgot... that you are in the garbage compacting room at Mc Donald's today and tomorrow...
Is it true that they throw the hamburgers to your department (garbage room) after 10 minutes if they are not sold?
Hurry you can still "trade" the asian markets to gamble your paycheck of the week...(75 usd).. ja ja ja...
Glenn Loser Neely
Posted by: Glenn Loser Neely | Tuesday, March 23, 2010 at 06:38 PM
If everyone played fair, liberal free trade is conceptually the most efficient system. If the players depart significantly from this paradigm, then mercantilism is the second best alternative. The reality is that China is eliminating all our manufacturing capability and stealing our intellectual property with impunity. There is no way we or the Europeans can compete with a rigged yuan. Either we stick our heads in the sand or deal with the economic realities of the situation.
Posted by: Diamond Jim | Tuesday, March 23, 2010 at 07:05 PM
"Hurry you can still "trade" the asian markets to gamble your paycheck of the week"
You have such an odd fixation on the idea of "gambling".
I find it funny that you say I'm "gambling" when I have said many times that I didn't make a single trade for over two months while I waited for the right set-up. Yeah, I'm a huge "gambler"!
Posted by: DG | Tuesday, March 23, 2010 at 08:58 PM
My friends, DG is not much of a trader.
He embraces a "sophisticated" theory, yet misses move after move because he is unable to pull the trigger unless his beloved Glenn Neely tells him to. Besides, he spends most of his time on this blog posting one long-winded piece of drivel after another.
It's pretty obvious that he does not trade for a living. Your guess is as good as mine as to how he pays his bills. Perhaps he's in college. Who knows???
But what is perfectly clear is that he is NOT AN ACTIVE TRADER and he does not trade for a living. He is a "wannabee".
Posted by: Glenn Loser Neely | Tuesday, March 23, 2010 at 10:23 PM
SPX headed for 1185 area near-term. Eventual target 1220:
http://trendlines618.blogspot.com/2010/03/last-post-s-sell-in-may-called-for.html
Posted by: trendlines | Wednesday, March 24, 2010 at 12:23 AM
Gold hitting a triple bottom on the hourly chart this AM. Looks more like failure than bottom. Maybe just another spike low and then rally to join stocks. But right now, gold is NOT in rally mode which could forecast problems with stocks.
Posted by: bob m | Wednesday, March 24, 2010 at 04:24 AM
"But what is perfectly clear is that he is NOT AN ACTIVE TRADER and he does not trade for a living."
Please define "ACTIVE TRADER". You (I know that's one of your sockpuppets, 'Michael') sound like you are a scalper. I am not. When I trade, I'm hoping to be part of multi-day or multi-week swings to new highs or new lows, relative to recent market action. I don't live in the 1,5,10,15-minute chart world in which you appear to live. That's not how I want to trade. I average around a trade every two days. I have very specific rules about setups which I have no reason to ignore, especially not so I could meet your definition of an "ACTIVE TRADER". Who gives a flying f*** if you think I'm an "ACTIVE TRADER"? Certainly not me.
"Besides, he spends most of his time on this blog posting one long-winded piece of drivel after another."
Actually, since you guys are so dense and I have to repeat myself over and over before you understand things, I can just cut and paste from one so-called "long-winded piece of drivel" into my next so-called "long-winded piece of drivel". You idiots do half my work for me by making the same stupid criticisms day after day, with the post I am responding to being a great example of that.
Posted by: DG | Wednesday, March 24, 2010 at 05:32 AM
DG,
Analysis aside, I love how you systematically take the bait.
Regards,
Cribrange
Posted by: cribrange | Wednesday, March 24, 2010 at 06:05 AM
Yelnick: Impressive article! Well written and lucid.
Posted by: William | Wednesday, March 24, 2010 at 06:16 AM
"Analysis aside, I love how you systematically take the bait."
I just don't like to let stupidity stand without a response. It's just a principle of mine.
Posted by: DG | Wednesday, March 24, 2010 at 06:30 AM
DG, just ignore the gnats and flies. They don't care about your response. Save energy.
Posted by: upstart | Wednesday, March 24, 2010 at 06:55 AM
Cribrange,
After all of this time, the Glenn Neely shill takes the bait every single time . . . that's because he has so much free time on his hands. He's a poser. A wannabee. A college student that dreams of being a big time Trader who kisses up to Neely every chance he gets as he seeks validation. The blustery ego is a tell-tale sign. Plain and simple.
Posted by: The Truth Hurts | Wednesday, March 24, 2010 at 07:08 AM
GLN:
From your earlier comments I thought you were a Neely subscriber and used to enjoy your sarcastic comments on Neely as harmless fun... do you still subscribe to Neely and have you ever found his stuff useful? Just curious..
Posted by: KRG | Wednesday, March 24, 2010 at 07:14 AM
"Posted by: The Truth Hurts | Wednesday, March 24, 2010 at 07:08 AM"
Don't give up your day job as an "ACTIVE TRADER" to become a psychologist.
Your problem (just talking about on this board, I'm sure you have numerous others) is that you've run into some bad wave traders over the past year and you lump them all together. I guess that just makes it easier for you. The facts don't agree, though.
Here are my SPY trades for the past two months (13 winners, 9 losers. 13 shorts, 9 longs). Total return of 7.8% with 1% at-risk on each trade. Total return on the SPY is 2.7%.
Opening Date Opening Price Closing Date Closing Price W/L L/S
1/15/2010 114.31 1/19/2010 113.86 W S
1/15/2010 113.50 1/20/2010 114.28 W L
1/20/2010 113.19 1/20/2010 113.89 W L
1/19/2010 114.48 1/22/2010 109.21 W S
1/25/2010 110.16 1/25/2010 110.00 L L
1/26/2010 109.64 1/26/2010 110.41 L S
1/26/2010 109.96 1/27/2010 108.91 W S
1/27/2010 108.96 1/27/2010 109.83 W L
1/27/2010 109.07 1/27/2010 109.83 W L
1/28/2010 109.58 1/28/2010 108.48 W S
1/28/2010 108.73 1/28/2010 108.32 L L
2/3/2010 110.01 2/3/2010 110.09 L S
2/4/2010 109.08 2/4/2010 106.61 W S
2/5/2010 105.81 2/5/2010 105.18 W S
2/5/2010 106.62 2/8/2010 106.74 W L
2/9/2010 107.22 2/11/2010 107.60 L S
2/12/2010 107.49 2/16/2010 108.94 L S
2/18/2010 110.96 2/18/2010 110.86 L L
2/19/2010 111.15 2/19/2010 111.35 W L
2/22/2010 110.97 2/23/2010 110.05 W S
2/26/2010 110.38 3/2/2010 112.38 L S
3/2/2010 112.02 3/8/2010 114.44 L S
I can make a living with these numbers, so that's all I care about. I did not become a trader to impress a sh!tstain like you.
Posted by: DG | Wednesday, March 24, 2010 at 07:23 AM
DG may take the bait. And he may be a know it all. But he takes as good as he gives. I think he brings a lot. So keep it coming DG.
To me Glenn Loser Neely (and others), actually drags down the conversation into a spitting contest. Sometimes his bashing can be fun, but GLN rarely if ever makes a constructive contribution.
GLN, while you rag on DG as not being a trader, I don't recall you ever stepping up and saying you are long or short "NOW". It is always after the fact, when you criticize someone ELSE for missing the big move. Start making live calls. Start making constructive suggestions. Give the details about when you entered and why and what happened next. Then I won't feel so compelled to just scroll through the drivel. Thanks!
Posted by: Bird | Wednesday, March 24, 2010 at 07:25 AM
"DG, just ignore the gnats and flies. They don't care about your response. Save energy."
Eh, I'm online anyway, so it's no big whoop to reply.
Contrary to what they seem to think, nothing they say bothers me.
Posted by: DG | Wednesday, March 24, 2010 at 07:28 AM
Thanks, Bird! I also like your contributions and especially that you don't pretend to be the "perfect trader", unlike some of these bozos who'd have us believe they never had a losing trade. Yeah, right. I don't care one way or the other, but it wouldn't surprise me if the whole "you're a college kid who doesn't trade" isn't actually just a smokescreen to hide the fact that that's exactly what they are. I say "they" even though it's all one person with multiple usernames. Gee, if anyone has too much time on their hands, it's someone who pretends to be multiple people. Not only too much time, but some sort of schizoid personality as well.
Hey, we both kind of got run over by a steamroller trying to short in late February. Hope you kept your standard risk management practices in place!
Posted by: DG | Wednesday, March 24, 2010 at 07:32 AM
Yelnick,
Great read. The argument that "we don't produce anything of value in the U.S. anymore" is entirely without merit. The manufacturing sector has been shipped overseas? Good riddance! Progress is made precisely by continually seeking out the best alternative. At one point, manufacturing in the U.S. made all the sense in the world. It was new. There was nobody else to push it down to. As Americans perfected manufacturing techniques, they were able to teach them to the unskilled. Does anyone really believe those people currently on manufacturing lines in the U.S. are our best and brightest? Does anyone want their children to work on a manufacturing line? Or do you want your children to be educated and have a high-paying service-oriented job? These choices create change. And just as we were once an agricultural economy and changed to a manufacturing economy, we've now converted to primarily a service economy.
Posted by: Mista B | Wednesday, March 24, 2010 at 07:35 AM
DG,
No. I got slammed. A big part of it is that I was convinced that I had it all figured out. It's true that when one mark is exceeded, the next, or the next one after is often the "one". But that will destroy you if you hold through it and a major surge happens. I wasn't holding like a desperate gambler, there was rationality behind what I was trying to do. But slammed I certainly was.
My history with trying to trade big moves also influenced this turn of events. In 2008 I was up 60% in the summer, and completely called the 2007 top. But (again) I thought I was a genius and tried to trade IBM north on what was supposed to be a tradeable shorter term wave 2. I miss-played that one and lost all my gains in the ensuing downdraft. So this time I had decided to hold through the retracement. F-----k!
Yes, I am a moron. My 5 year average return prior to 2010 is around 20%, so I guess that makes me a fortunate moron. But I totally screwed up over the last month and it sucks.
Posted by: Bird | Wednesday, March 24, 2010 at 07:58 AM
Sorry to hear that, Bird. I'm down a couple percent over the past month, which isn't bad considering I've had a bearish bias in a blisteringly strong market. Risk management and position sizing is king.
As Livermore says, the trader's biggest enemy is himself.
Posted by: DG | Wednesday, March 24, 2010 at 08:20 AM
'But I totally screwed up over the last month and it sucks.' You and me too, mate. BIG TIME!! Suppose I could blame it all on Caldero's change of heart, but I STILL think he was right when his perspective was more bearish. Maybe I will be saying that when the DOW reaches 20,000 :)
Posted by: Chabazite | Wednesday, March 24, 2010 at 08:36 AM
'... we've now converted to primarily a service economy.' Yup, Britain was there too for a while. Then intangibles. But basically with around one in four (at least one in five) people employed by the public sector, I would have to say that Britain is now largely a Wealth Eroding, Aimless, Government Sponsored economy. What was the line in Ivan Denisovitch - 'we pretent to work, because they pretend to pay us'. Don't let the USA go the same way!!
Posted by: Chabazite | Wednesday, March 24, 2010 at 08:50 AM
Chab et al, the bottom chart in my post shows the US manufacturing as a percent of GDP has been stable since 1947, when we all thought we were a great manufacturing powerhouse. GDP has gone way up, and so has manufacturing output. Let's not confuse a drop in assembly-line workers with a drop in manufacturing. We have been changing our economy for decades, rotating into new products and high levels of value-added features.
You are witnessing a process of Creative Reconstruction, as we constantly rebuild our economic base.
The risk we run is the government using coercion to try to pick winners/loser and upsets the process. Governments will tend to reward incumbent industry structures over new ones, since that is where they find the most votes and can shakedown the most campaign money.
Posted by: yelnick | Wednesday, March 24, 2010 at 08:57 AM
"Let's not confuse a drop in assembly-line workers with a drop in manufacturing."
I have seen stats that show more jobs lost to automation than outsourcing.
As computers get smarter, the gap between what a machine can do and what a person can do shrinks. Since a machine does not require health benefits (the fastest rising cost among the components of labor costs) and can actually be owned by the company, it is no surprise that shareholders prefer capital goods to labor in manufacturing. Plus, it's less headaches for management.
Yes, it's a prisoners' dilemma because if every company does it, there are no consumers to purchase your goods.
Posted by: DG | Wednesday, March 24, 2010 at 09:30 AM
Yelnik,
As the S&P has satisfied your upside target of 1170, are you still looking for a retracement back to the 900's. Why hasn't the S&P reacted more violently to today's rise in the dollar and the problems with Portugal.
I find your articles very educational and thought provoking.
Thanks as always,
Chuck
Posted by: chuck | Wednesday, March 24, 2010 at 09:34 AM
DG, that process has been going on for decades. One of the best successes during the 1930s was IBM, where punchcards replaced back office clerks and calculators (people that were called computers!). It is to be welcomed, as wealth comes from both innovation and productivity. The Great Recession will further accelerate replacing people with machines, including from avoiding government mandates like healthcare costs. The displaced workers will simply move up the value chain of activity to the layer of planning, design, support, marketing, etc. Think of Intel building a $2B fab with only a handful of workers, but requiring scores of new workers to design chips to run thru the fab.
Posted by: yelnick | Wednesday, March 24, 2010 at 09:39 AM
Chuck, I think the S&P has been rising due to the reflation by the Fed. In an environment where the velocity of money drops, meaning banks don;t lend and people don't borrow, providing excess liquidity to banks to get them to lend it is a fool's errand. Instead he excess liquidity flows into speculation. Why lend when you can borrow from the Fed at 1/4% and then use it to buy Treasuries at 3.6%? And some spills over into other areas, like commodities and stocks.
Simple conclusion is that the floating S&P will not fall until the reflation begins to get withdrawn. The Fed is already easing out of QE, and if they really end it, the markets can then reverse. I had expected this to happen in Q1, and I suppose I have a week left to be proven right, but it appears this reversal may wait a few more months.
Posted by: yelnick | Wednesday, March 24, 2010 at 09:42 AM
"The displaced workers will simply move up the value chain of activity to the layer of planning, design, support, marketing, etc."
Some of them will.
I was thinking the other day that one of the unintended side effects of the new health care legislation (I refuse to call it "reform") will be an increase in oil prices as the US military pulls back from its commitments because there simply isn't the money to support both. This could actually change the cost equation for manufacturing here vs. abroad, leading to a return of some commodity manufacturing to the US, which would be good for the employment prospects of those who, due to cognitive limitations, can't exist at the "IP layer".
Posted by: DG | Wednesday, March 24, 2010 at 09:46 AM
>China-mans market looks like it might have a small caliber bullet wound behind the right ear.<
There's now a visible stream of blood, running off the shoulder blade and down the back
Posted by: Mamma Boom Boom | Wednesday, March 24, 2010 at 10:24 AM
Hey Mamma,
Gold is looking might nervous at these lows. What do you think? A little DZZ for the ride to 950? Stocks to follow?
Posted by: bob m | Wednesday, March 24, 2010 at 10:33 AM
Not sure if this is trying to prove a negative, but I will hereby go on record that the high in the S&P and Dow of yesterday is NOT the end of the upmove that began early Feb, based on the 60 minute charts. Reason: yesterday's high is singularly not harmonic to the prior swing, in price, time or diagonally, no matter how you slice it. Now since I have earlier demonstrated that I am really and truly a moron, the market has no incentive to prove me wrong.
Posted by: Bird | Wednesday, March 24, 2010 at 10:37 AM
Yelnick,
You are too optimistic. Walk into any major US university now (at least 1st tier) and look into the Graduate departments of Science and Engineering. Who do you see? American Education raised dummies? or mostly (80%) foreigners?
"We have already vastly increased the size and scope of our college-educated workforce, and the IP layer can absorb college graduates just as the assembly line absorbed unskilled labor off the farms."
Posted by: Sean | Wednesday, March 24, 2010 at 10:50 AM
bob m, the big contraction is coming.
OUCH!
Posted by: Mamma Boom Boom | Wednesday, March 24, 2010 at 11:07 AM
Yelnick
Krugman is about one economic bitch slap away from being sent to econo-rehab for long stay.
wave rust
p.s. several times i have mentioned the 2003 and 2006 persistent rallies as reminding me to stay long.
this pullback should be over by tomorrow's close or sooner. long way to go.
never fade the fat Fed. It's a rich bank. rates rising, dollar rising, market rising. biggest crash is now setting up in the vix
Posted by: Wave Rust | Wednesday, March 24, 2010 at 11:27 AM
Yelnick, I would suggest that QE is a permanent fixture based on these charts.
http://tinypic.com/r/2m7f4aa/5
and
http://tinypic.com/r/t4uzqx/5
That is until the end game arrives.
Posted by: Anon | Wednesday, March 24, 2010 at 12:49 PM
Hear that?
It's the sound of no "sockpuppet chorus".
http://www.youtube.com/watch?v=eZGWQauQOAQ
Posted by: DG | Wednesday, March 24, 2010 at 02:37 PM
Those cut out for ip design work are already doing it! you are not going turn people on the manufacturing floor into chip/software designers. This all just sounds like the gave-kal theory to justify every economic imbalance imaginable back in 2005 - and yes it's not completely wrong, the US does dominate the ip world but it seems to me a better case can be made that this dominance has peaked. I'll admit i'm a little confused as to why some entrepreneurial Chinese professor hasn't rounded up 30 programmers and gone about writing an open source database like MySql to compete with ORCL. I believe U.S tech is actually seeing peak margins right now although many of their stock charts would support your argument.
Posted by: OracleLurker | Wednesday, March 24, 2010 at 03:40 PM
When we had manufacturing, we were strong. Now China has the manufacturing and they, not us, are strong.
We got rid of manufacturing to go IP/service economy and our economy stinks.
You want to sit around and think up new BBQ recipes. while I want to raise the hogs. And come dinner time, which one of us is in the driver's seat? You with you new recipe or me with the baby backs? Yeah, my way of cooking may not be as good as yours but at least I got meat to eat. all yoou got is a fancy idea.
Posted by: newbietrader | Wednesday, March 24, 2010 at 03:45 PM