"Kee" Points with Jim Kee, Ph.D.

  • Topical news
  • Avoid “Investment by Data Release”
  • Three Cheers for Supply Chains

 

Topical news 

 

Last week Hong Kong leader Carrie Lam announced that she would fully withdraw the extradition bill that has fueled massive protests in Hong Kong. Hopes are a little higher for U.S./China trade talks, which resume next month, following Treasury secretary Steven Mnuchin comments that the U.S. and China have a “conceptual” agreement on trade enforcement concerns (a key issue). China has also loosened its monetary policy by cutting reserve requirement ratios again, which makes three reductions this year. Banks in China (as elsewhere) hold a portion of their deposits as reserves (i.e. required reserves), loaning the rest out. Friday’s cut lowered reserve requirements for China’s larger banks by ½ a percentage point, to 13%. That means these banks can lend out more of their reserves — an estimated $127 billion more. These positives have somewhat offset concerns over slowing growth in China, and global markets were up for the week. Other positives include some U.K. legislation aimed at preventing a no-deal Brexit (i.e. preventing a hard exit), as well as expectations of other central banks (including the Federal Reserve) tilting more toward stimulus than tightening (WSJ).


Avoid “Investment by Data Release”

 

Also last week, the Bureau of Labor Statistics (BLS) indicated that Nonfarm payroll employment increased by 130,000 jobs in the month of August. I thought that was a good number; it indicated good growth, albeit at a slower pace than a year ago. The media talked about this all day on Friday, but most real experts agree that monthly data (labor, housing, industrial production, etc.) is just too volatile to draw any strong conclusions from. For example, the UCLA Anderson Forecast Center points out that Friday’s 130,000 number was lower than the 164,000 new jobs reported in July, and way below the January estimate of 312,000. But it was a lot better than February and May, which produced a mere 56,000 and 62,000 jobs respectively. If you study those numbers for a second, you will see that they had little relevance as to whether the next month’s number was likely to be higher or lower. So monthly payroll data are of limited value to investors, and that’s also true of other data releases, like quarterly GDP growth numbers. That is, one quarter’s GDP growth number has little ability to predict what the next quarter’s is likely to be. The key lesson from all of this is that it is foolhardy to follow a strategy of “investing by government data release,” even if that is what business news reporters seem to be encouraging you to do.

 

 

Three Cheers for Supply Chains


Finally, UCLA economist Jerry Nickelsburg, while discussing an expected exodus of manufacture from China (hoping to escape 25% tariffs), pointed out in a recent paper that this exodus was already underway due to increasing wages in China relative to other parts of Asia and even Mexico. But more sophisticated supply-chains are probably here to stay. In fact, in a great article titled, “Why U.S. China Supply Chains Are Stronger Than the Trade War,” Wharton Business School Dean Geoffrey Garret argues that U.S. and Chinese firms are far more integrated (and mutually dependent) than they used to be. This began with containerized shipping and intensified with the internet. The result, says Garret, is to make a true, full-blown 1930s-style trade war less likely. As evidence, he cites the fact that, despite numerous threats to cut off both Huawei and ZTE from doing business with America, U.S. firms are still selling to them. “Here are my three cheers for supply chains,” writes Garrett:

  • Supply chains are at the core of the modern global economy.
  • Supply chains will help resolve the China-U.S. trade war.
  • Supply chains will make a new Cold War less likely.