Juggling Dynamite

I think it is clear that Western consumers are in the midst of a generational downshift in consumption. “Spend less and save more” is the new religion of the west and this behaviour is likely to continue en mass for the next several years while debt is slowly paid down and equity grows back.
For the over-built, over-levered retail sector (shopping, restaurants, travel) I believe this trend will demand a much leaner business model. Only those businesses that can slash costs, close stores and find there way to profit within the “new normal” revenue numbers will be able to survive.
My friends at Tech Ticker interviewed retail analyst Howard Davidowitz this week, and despite signs of improvement in consumer confidence and retail stocks, Davidowitz believes that consumers and retailers are now in a death spiral that will be a drag on world growth long into the future.
After a decade of over-building, we are now in the midst of a massive downsize that is needed across America and Canada as well as most other countries in the world including exporters. It will mean smaller profits, more job losses, more bankruptcies, more loan losses, depressed rents, lower commercial property values and less demand for new construction and all of its trades and materials. This is a seismic shift that will continue to impact most sectors of our economy. Those hoping for a miracle cure to the “correction” needed here are sadly deluded.
Davidowitz: “We are going to close hundreds of thousands of stores and thousands of shopping malls.”
The good news is that living people will still consume some things. And the destruction of the present over-supply will eventually lead to tighter supply and the next wave of demand expansion. But first we have some years of clean up to do…

Aggressive increases in government spending and investment by state-owned enterprises has cushioned the impact of weak exports. But those gains have not been matched by comparable increases in private consumption. Spending by Chinese households as a percentage of GDP is roughly half the US consumption ratio and remains significantly below private spending levels in Europe and Japan. And despite rising sales of items such as automobiles and household appliances, the ratio of private spending to GDP in China today has actually fallen relative to Chinese spending levels of a decade ago.
Why do Chinese consumers spend so little relative to counterparts in other nations? What can be done to change that? Is boosting private consumption in China’s national interest? How would that contribute to global growth?
In this interview, conducted by McKinsey director Jonathan Woetzel in June 2009 in Shanghai, four distinguished members of the McKinsey China Council of Business Economists explore these questions.
Realistic, knowledgeable discussion on China's economy is in short supply these days. This panel discussion is worth watching. Bottom line: “Expecting Chinese consumers to fill the void of western consumption is not very realistic”:

Source: China's Consumption Challenge

The trouble with virtually-zero interest rates and free flowing government money is that “dumb capital” finds its way into wild speculation. This eventually causes imbalance and risks for those that would be legitimate investors and consumers. This article from the Globe and Mail today is revealing:
“Forget the sluggish U.S. economy. The biggest threat to the stunning rebound in base metal prices could come from Chinese pig farmers.
Easy access to credit from Chinese banks has apparently inspired hog producers in Guangzhou province, investing-astute citizens in Zhejiang province and residents of the northern scrap metal trading hub of Anxin county to speculate on the price of copper and nickel.
Regular Chinese citizens are mimicking the government's decision to aggressively stockpile metal supplies amid the global economic crisis.
According to a recent report by China Central Television (CCTV), residents in rural areas have been accumulating physical copper in recent months, in quantities ranging from a few tonnes to a few hundred tonnes.
The new breed of base metals speculator is cause for concern, according to commodity experts. Na Liu, China strategist at Scotia Capital in Toronto, said local observers estimate that the non-institutional Chinese speculators could account for stockpiling of some 200,000 tonnes of copper and 50,000 tonnes of nickel.
“These stockpiles are in ‘weak hands,' as speculators have no real use for base metals,” Mr. Liu told clients in a report.
“When the market sentiment turns, they are very likely to turn into quick sellers, especially when the bank's money is involved.”
Such selling could put pressure on the price of copper and dampen the strong rebound that Canadian copper miners including and have enjoyed in recent months.”
See the full article: What do Chinese farmers have to do with the price of copper? Plenty
Me thinks copper is not the only thing that speculators have been stock piling the past few months… Speculators are not known for their patience and long-term holding periods. A prolonged period of soft world consumption is very likely to flood these stockpiles out on to world supply again not too far ahead.