Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Lean Hogs
- Live Cattle
- Taiwanese Equities
- Australian Equities
- Japanese Real Estate
Last week’s reversing trends:
- Canadian Government Bonds
- German Government Bonds
- US Government Bonds
- US Equities
- Soybean Oil
What we are taking note of:
Last week brought us the entertaining spectacle of a large container ship stuck in the Suez Canal. We were treated to much handwringing about the risks to global trade, but thankfully, the authorities performed a sort of Heimlich maneuver on the Canal, and the ship came out flying into the Mediterranean Sea. Global trade can resume its normal circulation. However, the long-term health of global trade is not what it used to be.
The invention of containerization in the 1960s transformed maritime shipping. Loading and unloading times were reduced from days per ship to a few hours, even though ship sizes grew more than 100 times. Modern containerships cut the cost of transportation across the world to a pittance. A few years ago, a shipping company executive bought me a Heineken beer and asked me to guess how much it cost to ship the bottle from the brewery in Holland to a bar in America. I thought it would be 50 cents. My estimate was too high by an order of magnitude. The true cost was less than 3 cents. At this level, shipping costs become immaterial.
When it becomes so easy to move goods across the world, production will naturally move to the cheapest location. The container revolution transformed the world. The rise of China and the rest of the developing world would not be possible without cheap transport. Whole industries migrated from the US and Europe, first to Japan and Korea and then to China, bringing the benefit of lower prices to Western consumers and sparking economic development in emerging markets. Global trade has been growing faster than the global economy for decades as this process accelerated.
Economic recessions often caused a sharp contraction in global trade, but recovery always came quickly… at least until the Global Financial Crisis in 2008. At first, few people noticed that trade did not resume its usual growth. By 2016, however, the data was loud and clear. Global trade, instead of growing at 1.5-2x the growth rate of the global economy, was barely able to match it since 2008.
We may be coming to an end of the secular trade growth cycle. All manufacturing that could be outsourced to China has already been outsourced. Chinese domestic demand is absorbing more and more of Chinese production, leaving less to be exported. Labor costs in China are rising fast and the gap with Western wages is closing. No other country has the same potential to become the workshop of the world.
For decades, global trade has relieved cost pressures in the developed world and acted as a powerful deflationary force. But the future could be quite different.
Global Trade Volume Index (2000-2021)
