There’s scarcely an economy right now that is giving a “thumbs up” on the year.
Everyone is still struggling with the lasting effects of the initial COVID pandemic lockdowns and supply-chain disturbances.
To add insult to injury, almost every country is enduring some version of a bear market.
We’ve all lost patience with the stock market, with losing money, with waiting on the sidelines, with inflation and the corresponding interest-rate hikes.
And across the Pacific, China is having an equally hard – if not worse – time as the U.S.
According to The Washington Post…
China’s central bank unexpectedly slashed rates Monday after data showed economic activity slowed broadly in July — including consumer spending and factory output — sending oil prices down sharply and reigniting concerns of a global downturn.
The underwhelming performance signaled that the recovery is tapering off amid an array of economic challenges…
… Chinese policymakers are closely tracking inflation and rising debt levels. But a sputtering domestic economy appeared to take priority…
The [Chinese] central bank “seems to have decided it now has a more pressing problem,” said Julian Evans-Pritchard, an economist who covers China for the economic research firm Capital Economics. The July data shows lackluster economic momentum and a slowdown in credit growth, “which has been less responsive to policy easing than during previous economic downturns.”
The tale unfolding in China is something of a warning – a prelude, perhaps – to what happens when companies fail to deglobalize.
“NMIC” or “Not Made In China” is a trend that I’ve been keeping a steady eye on for the better part of two years (I identified it in the September 2020 issue of Fry’s Investment Report). Though it’s not necessarily one of my “megatrends,” it is an undeniably powerful force that will come to shape the U.S. economy – and the world – in the coming years…
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Over the past few months, corporations across the Americas and Europe have been rejiggering their supply chains to deemphasized Chinese suppliers, while simultaneously ramping up production and sourcing from friendlier regimes of the globe.
Then Ukraine happened, which caused Western supply chains with Russia to rupture completely.
Now that most of the Western world has exiled Russia to an economic outer darkness, “localizing” supply chains has become “Job No. 1.”
To quote the aforementioned September 2020 issue of Investment Report…
… there’s no mistaking the direction the political winds are blowing. And these winds are stirring up a powerful new investment trend that I’ve been calling “NMIC” – Not Made in China…
In the wake of the coronavirus crisis, we Americans have become more alert to the vulnerability of foreign supply chains, especially those that originate in places like Russia and China…
In the case of 5G, NMIC is an explicit, foundational directive from the U.S. government’s new “National Strategy to Secure 5G of the United States of America.”
This strategy statement spells out clearly that the U.S. government will guard the domestic 5G rollout against cyber threats by banning “high-risk vendors” of 5G infrastructure.
According to the statement:
“The U.S. will ensure that 5G and future generations of information and communications technology and services will be deployed in a manner that protects the national security interests… [by prohibiting] certain transactions that involve information and communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary that pose an undue or unacceptable risk to the national security of the U.S.”
In other words, “Goodbye, Huawei. Hello, Ericsson and Nokia…”
[The bottom line is] NMIC is not only an American trend; it is also a global trend.
Over the nearly two years that have followed this observation, numerous Western companies have shifted portions of their supply chains away from China, while also adding production from domestic sources.
But NMIC is entering a new phase – “Deglobalization 2.0.”
Sourcing products from home, or close to home, is no longer a casual corporate pastime; it has become a political and economic imperative for every major U.S. corporation.
Or to express the same thought differently; no U.S. CEO can “play dumb” any longer about supply-chain issues or be caught flat-footed by the next supply-chain “surprise.”
As the old saying goes, “Fool me once, shame on you; fool me twice, shame on me.”
So rather than being “fooled twice,” most U.S. companies will begin erring on the side of “localizing” their production and sourcing. They will accelerate plans to deemphasize relatively unreliable and/or distant supply-chain sources while emphasizing relatively reliable and/or local ones.
In some industries, these supply-chain shifts will proceed incrementally. In others, the changes will come fast and furiously.
As the astute financial writer James Grant observed…
Bigger than Charles and Diana, messier than Brad and Jen is the potential breakup of the world’s conjoined trading nations into hostile blocs. The quarreling parties have all but declared their differences to be irreconcilable. The economic and financial consequences of the threatened divorce hang over every market and nation.
The energy markets, in particular, are about to wrangle with a “messy divorce” from Russia. The consequences of which will produce both jarring dislocations and powerful new investment opportunities.
As the deglobalization megatrend cavorts with the “Energy Swan Song” megatrend, which we discussed in the first weeks of this year, they will conceive what could become a truly mega-megatrend.
Hyperbole aside, I expect the deglobalization trend to light a fire under the already explosive energy markets…
And now that we’ve seen the “dark” side of deglobalization with China’s story, on Saturday, I’m going to dive into a rapidly unfolding success story… and the opportunities that may arise with it.
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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.