Causes of slow economic growth
If it does not rain the plants will not grow and the land will become barren.
I had always imagined that the funds held by fund managers trading stock and futures as rain clouds holding a lot of water. If the water is not released back into the land, the plants will dry up and fail to grow and bear fruit. Water in this description is money as money behaves like water. The plants are the people and businesses in the land. The land is the real economy.
This article is about the slowing economy worldwide and I was trying to understand why it is becoming more and more difficult to recover from recessions as the years go by. Sometimes it feels like recessions are building up some immunity against recovery but I don't think this is true. Let me explain something about my previous commodity and stock predictions before I delve into the slowness of economic recovery.
My predictions done around 2012 and earlier
It may appear that some of my stock market predictions were off to some degree. Furthermore, my Gold price prediction may have been a bit late. Looking back I believe that these are due to the fact that having published my predictions many fund managers went all out to 'distort' the actual trend to make my predictions invalid. This is clearly shown in the Silver price trends. In hindsight it appears that my charts really affected the markets and as in Gold price trends many began to sell of gold before the expected peak. Gold has not recovered as I had warned many people that it would not after the peak. Having said this there may be fund managers trying to prove me wrong again but this does not matter to me anymore as I discovered something new.
What I discovered is that there are two types of Demand. Perceived Demand and Real Demand. Stock markets are moved by perceived demand. If someone thinks that a stock is worth buying everyone rushes in to purchase some before the price rises. The one thing about shares is that if you do not have any you will not die. That is what I meant by perceived demand, it's not real. This is the reason billion dollar fund managers can move stock trends their way. On the other hand commodity price trends are moved by real demand. If you do not have any food you will die and that's real demand. So commodity raw materials and food are much more difficult to manipulate as real demand and supply factors come into play.
It is amazing how much my predictive charts have affect the world perception of fund managers and speculators. Just search the internet and you will observe many financial institutions having a go at predicting the market trends. In 2009 when I first published charts on my website the internet and Google search results were flooded with American articles stating that the markets could not be predicted. No wonder the American public were clueless as to this predictive technology. Today, 7 years later, almost every major financial institution and brokerage firm, in Europe and America, are trying to predict the markets. I wonder what would happen if I had not published any of my prediction charts in 2009 to 2012? Would the actual stock and commodity trends have been exactly as I predicted? Should I work out a set of predictions and hide them for the next 5 to 10 years and then publish them to see how accurate my predictions are?
Slowing economic growth
Slowing economic growth is a malady unwanted by all. It is interesting in that no one wants to experience it but it may be the outcome of our experience. We may be carrying out activities that slow our economic growth without understanding the repercussions of our actions. If the money is not there then there will be no economic activity generated. So I tried to trace the flow of money? Where else was it going, was it being diverted from the real economy?
1.Where is the money going to?
I tried to follow the money trail using published data of USA. I showed housing data, S&P data and population growth. All data was obtained from multpl.com sitemap & indexmundi.com and am grateful to them for publishing a lot of data as this saved me a lot of time spent searching for the required data.
Did you notice how the S&P has climbed exponentially after the 1980's? From the 1980's there was excessive advertising and promotion by fund managers and brokers to get rich quick by trading on forex, stocks and commodities. The general public became crazy about making quick money as speculators. Everyone was speculating on everything. The banks were lending money to those who did not have any so that they could speculate too. The speculation frenzy became so bad that everything was up for re-sale, houses, forex, commodities and stocks. Flipping became the in-thing and more and more get rich schemes materialized.
Pensions and savings were and are caught up here. There is so much money here that just one trigger could wipe out a nation. This exponential climb in prices was meaningless, where did the money come from. It's probably a shift of funds from the Real Economy into Financial Markets. Who needs a job when one could flip anything for a profit with less effort and no hard work?
This phenomena was probably resulting in slower and slower growth in the real economy and job creation. Why work hard and take risk if you can get free money in the markets. Just stash some money with your broker and wait for him to tell you that you have made 10% or 100% or 500% return on investment. Dream on because for the last few millenniums the world grew by hard work and risk taking.
In Malaysia lately, the banks were suffering from Gold Fever. They had Gold accounts in which you could place your money and make your millions. This was some kind of trading in Gold without going through a commodity exchange. You deposit and withdraw money from your account as the price of Gold changed. Many people asked me whether they should open Gold Accounts. I told many of them not to as none of us knew if there was any real gold held by the banks. Please do not trust the banks or the banking system in Malaysia.
Jump in S&P Index after the 1980's
I tried to look at this jump in S&P index from a personal or household income point of view.
I tried to look at it from how much more money is moving into funds then before. I must admit that these figures are approximations as I could not take the total value of funds held in stock and commodity exchanges.
I guess what I am try to say is that if 30 years ago a person earning $100 per month invested $10 then he would have $90 to spend in the real economy. Today of that $100 he is possibly investing $30 which means he has only $70 to spend in the real economy even though the population has grown and a lot more jobs are needed. What is driving people to invest more in fund managers? Is it a fear of having no income in their old age? Is it a fear that medical bills would be too expensive and most of their income will go towards medical bills?
Are funds in stocks and commodity exchanges productive?
Many years ago the number of people speculating on these exchanges were limited as there was no internet. Today, you will see, even in Malaysia, people sitting down in coffee houses, trading on forex, shares and commodities. Just walk into one of these international coffee shop chains and you will see at least 2 or 3 people trading with their laptops. Really, is trading a useful and enlightening skill? I tell you what some of the exchange brokers had told me many years ago. It's a secret they do not reveal in their advertisements and training documentation. 99% of all retail traders will lose everything within 9 months of opening a trading account. When the money is gone there will be nothing left for these guys to spend in the real economy for years to come. There is too much speculation in the world and not enough real jobs.
Worst still there are some blocks in the trading accounts to stop you from making easy money as most of these brokerage firms are thinking of how to earn money from every trade you make. They have no interest in whether you can or do make money.
2. America recovering form the Great Recession
One would have thought that this is not a very important point many years after the Great Recession but the Great Recession of 2008 was almost a Depression. Even though the American economy has made huge progress against unbelievable headwinds, you would realize that a great many businesses would have failed during the 2008 recession, more so than a normal recession. Many would have lost hope and given up. Many would have lost all their savings and funds, in 2008, and could not carry on.
This means that recovery would be slower than from a normal recession.
Many other nations did not realize that when the American economy slows the world economy slows too. This is because everyone wants to sell to America.
3. Bad exchange rate mechanism
When there is a fear of economic slowdown many countries around the world lower their currency with respect to the US$. What's with this? Isn't this wrong or incompetent philosophy?
When America slows why do other nations lower the value of their currency? Demand has dropped in American, hasn't it? Is it because they still want to sell to America even if Americans cannot afford their products temporarily? A really dumb philosophy. Shouldn't it be the other way? We have to maintain or raise our currency so that we can import American goods? Look at Malaysia today. Look at our exchange rate, the value of the Ringgit has dropped from RM3.30 to RM4.10 with respect to US$1. Actually, what has really happened is that most goods in Malaysia have increased in price substantially because many of them are imported. This results in many of us consumers unable to afford these goods. Who benefited from the undervaluing of the Malaysian Ringgit to the US Dollar? Neither the Americans nor the Malaysians.
Personally, I can't afford many good quality products. If I need them I have to borrow to pay for them or I have to wait a few years before I can afford them. For example an Avocado costs RM5.00/- before our currency devaluation but now it costs RM15.00/-. If there are millions of people doing as I am doing then our economy will slow down too. In a slowing economy who will borrow?
4. Wind chasers
Ecclesiastes 11:4 "Whoever watches the wind will not plant; whoever looks at the clouds will not reap."
Worst still if they predict the wind and cloud movement wrongly everything will fail. Many are watching the winds and the clouds and nothing happens on the ground. No work on the ground means no jobs.
5. America slows the world slows
The Engine of Growth for the whole world has been America. No other country has generated so much Demand that it could drive the world economy. Personally, I think China, without American demand, may end up a failed state as it is not an engine of growth. It is an exporting nation and very dependent on exports to generate growth. Without exports their internal economy will collapse too. Just look at this situation - people around the world want to migrate to America but who wants to migrate to China.
Relationship between Brent Crude and S&P Index
I went back to look at the energy consumption trends with respect to the S&P Index.
The chart above shows the historical relationship between S&P Index and Brent Crude prices. It appears that ever since petroleum prices rose to high levels and since then, whenever Brent Crude prices climbs too much, the S&P Index tends to fall later. Is this an indication that historical petroleum prices, above $50 to $60 price range, were too high to spur growth in the USA and the rest of the world?
6. China's unwanted influence on the world market.
I had taken 30 year historical commodity data supplied by indexmundi.com and normalized it. By normalizing I mean that I took the average value between May 1986 and April 1987 and divided all 30 years of data with that average value. I did this for each commodity shown. This was done so that I could compare how each commodity moved with respect to another and whether they all moved together at the same time. The chart shows that each commodity has some variation in movement but by 2001 all of them climbed to astronomical peaks. Iron ore climbed by x16.48 its 1986 average. Brent Crude climbed by x9.53 times its 1986 average. That's not inflation is it?
By 2016, inflation would have raised the price of commodities 1.78 (2% inflation) to 3.12 (4% inflation) times the 1986 average. This would indicate something else was pushing up prices to ridiculous values.
If we assumed a 4% inflation rate (x3.12) then the price of Brent Crude should be around $46.68 in 2016. A 2% inflation rate (x1.78) would result in the price of Brent Crude at $26.63 in 2016. My guess is that in the long term it would be best if Brent Crude is around $26 to $46 per barrel.
If you look at the chart provided by FT Alphaville at ftalphaville.ft.com on devaluing the yuan you will see that China's economic success is entirely dependent upon America's growth and economic success. You will see that its imports and exports dropped when the US economy went into a recession. And what's worse is that according the author, Neil Hume, China had been creating a huge stock pile of raw materials. I have heard stories about China importing every raw material they could get their hands on. What appears very interesting is that China was causing the increase in raw material prices too by hoarding.
So when you put two and two together you will come to realize that two factors made commodity prices exorbitantly high.
1. Excessive speculation in the markets. If you want to buy something, all the speculators watching you will dive in and increase the price so that you, the real world buyer who takes delivery of the goods, ends up paying a huge amount of unnecessary money. Then these speculators (fund managers) will be applauded around the world for their massive profits and increases in pension funds while all of us pay exorbitant prices for fuel and food.
2. China's stockpiling and hording policy forced prices artificially high.
When food & raw material prices are too high many consumers cannot afford the goods and many companies go out of business and the economy slows further.
7. Cheap China products that are a waste of money
Let me show you how bad the Chinese products are:
This is a deep fryer and the brochure showed that there were temperature settings, in Centigrade, marked on top of the buttons. The product its self does not have temperature markings. I do not know whether this is a manufacturing fault or the product is too unreliable to have temperature markings next to the buttons.
IKEA baking tin. Since this was a European brand nonstick baking tin I thought it would be a good buy. I went home and baked some garlic in the tin. The garlic stuck to the tin and the so called non-stick surface came off after washing. The IKEA baking tin was made in China.
This was a nonstick pan that I bought at Giant Hypermarket. Since it was nonstick I bought an expensive slab of beef and began cooking the beef on this pan. When I turned the beef over all the nonstick material came off the pan and stuck to the beef. Now I know what the Chinese mean by nonstick. It means the nonstick coating will not stick to the pan. I kept it for a few years and you can observe how badly rusted the pan became. It is really cheap low grade material sold at high prices.
This was a Phillips pressure cooker I bought in Bangsar. The salesman assured me it was made in Malaysia so I bought it. When I went home and unpacked the pressure cooker I saw a white sticker near the electrical socket indicating that it was made in China. My regret with this machine is that the hour timer buttons never worked. China is selling as spoilt equipment.
I bought this pouch, in Puchong, to attach to my belt for me to keep my hand phone and small change safely. I took it home to try it on and it tore. I tried to sew it back and hide the stiches but to no avail. It did not last even 2 hours. Just pure rubbish is being sold in Malaysia. Most of these China products end up in the landfill. My friend bought a drill. It looked exactly like a BOSCH drill but the name on the drill was BOOSCH and it was very cheap. I think my friend knew it was made in China. When he took it home to do some drilling it broke down and smoked. The next day he went back to the shop where he had bought the drill and they told him there was no warranty or guarantee. Wow, our importers know that they are bring in low quality rubbish and deliberately selling them with no warranties. These are the people who are running their own personal get rich quick schemes.
Many years ago my notebook computer seemed to be getting very hot so I bought a cooling device on which the computer sits on. The first device I bought lasted 6 weeks then it broke down. It had a CE logo stuck to the surface. The CE logo is "Conformite Europeene" which literally means "European Conformity". It is very common in Malaysia for retailers to print their own CE logo and stick it on all types of appliances. The CE logo is supposed to indicate the product is exported to Europe. Here the retailers copy the CE logo to make their China products look like they are of higher quality and being shipped into Europe. There is too much fraud going on here and people buy such low quality products thinking it is genuinely exported into Europe. The seller first of the cooling fan told me there was no warranty so I went to another shop and bought another cooling fan and that failed within a few months. That seller replaced that with the one shown in the photo and told me that there was a one year warranty on the product. This too failed within 6 months.
I bought a new car alarm for my car, a few years ago. It worked fine in the shop after the technicians installed it. Unfortunately the next day it failed to work properly. Normally when you activate or deactivate the car alarm the indicator lights will flash. In this particular case they did not flash the day after the installation.
Its rubbish that is being imported from China and all our money goes into the landfills. The Chinese think that by selling low quality they can make 10 times the money as these products have to be replaced every few months. Chinese products are of very low quality. By exporting cheap junk to unsuspecting buyers China is creating a huge demand for raw materials which causes huge climbs in raw material prices.
There are many more low quality items coming out of China. Almost everything is really bad. The Chinese copy and pirate everything. They don't care if your business ceases only their products must be allowed to be on sale, no one else's product should be sold. They do not believe in a free market and will try to monopolize every business. I saw, on Shark Tank, a venture capital and funding TV program, that an American lady had sent her product to be manufactured in China. She later found out that her product was pirated by the same manufacturer and manufactured under a different brand. The Chinese were making millions out of her product while she was making a pittance.
8. China is dumping
Actually, if you look at what China is doing you will realize that they are trying to corner the world market by importing as much raw materials as possible and then dumping them as exported finished goods at unbelievable prices. I looked at the rubber car mats coming out of China and I wonder how they could price their goods so low. It was as if they had costed the products without including the cost of the rubber content. I won't be surprised they do this to kill the competition. Once the foreign competitors, like American and European companies cease operations they will bring back the prices to normal. All countries must place import duties on Chinese products or else the world economy will be decimated.
Be careful if you have to deal with the Chinese
Nobody can compete when the Chinese lie, cheat, steal and pirate other people's products. They come in droves into visit product exhibitions around the world to copy other products.
It happened to me. My financial systems book was pirated by the local Chinese. They just do not care if you die or go broke, only they must prosper. In 2011 I sent my document for printing to a Chinese printer. I did not realize I had made a mistake in the book. A few days later some Chinese guy quoted that exact passage in my book and it was published by a Chinese controlled English newspaper. Shocking wasn't it as the local Chinese were trying to take credit for my work and the Chinese controlled newspaper only wanted to give credit to the Chinese. They did not care that I had spent 18 years developing this Alternative Theory of Economics without any funding. I was broke most of the time while I was developing this technology. The Chinese don't care for the truth, they don't care if you spent a lifetime developing technology. They will pirate your work and they will take the credit for it. Actually, they are very desperate to take credit for other people's work. What is worse if they think "What can you do about it? Nothing".
What is truly amazing is that the Lord God knew I had made a mistake and He knew the Chinese would pirate my book. After that, I corrected the passage and I believe that the Chinese controlled English newspaper have removed that 'praise to the Chinaman' from their archives! The Lord God knows how to disgrace these crooks. This means that pirated copies are in circulation. Don't allow the Chinese to print and publish your books or they may tell you they sold 10 copies when in fact they sold a 100.
In Malaysia, the Malays think they rule this country but actually the Chinese control everything. You cannot buy or sell anything without their approval. You cannot get a job in the private sector without their approval. Their priority is to hire Chinese only. Malaysia is totally controlled by the Chinese and worst things are coming once China rules South East Asia.
Do you remember what they did in the 1960's or early 1970's? A Chinese scientist working in the USA copied all the NASA rocket design drawings and gave them to the Chinese government. The Chinese government then used these drawing to develop rockets and missiles to shoot back at us. They will steal anything and everything.
Don't buy from the Chinese. Be very very careful when dealing with them.
So now you have some understanding that the 2008 Great Recession began with excessive mass speculation and when the money ran out everything collapsed. The world was going mad with speculative endeavors on everything. Energy prices must be kept lower to enable world growth. If Brent Crude price trends below the $50 mark it would help world economic growth. China's unquenchable greed and bully tactics are aimed at cornering the world market.
This article on slowing economic growth was researched and written by Dr. Peter Achutha, 16th June 2016.