Saturday, April 12, 2008

China syndrome

After a bad first quarter, the stock market rebounded sharply on April Fools Day. But this week the major market indices fell sharply in the wake of news that can only be described as the same-old, same-old. This time, the news that gave a bad taste to the end of the week was that General Electric missed its earnings targets, and missed them soundly. It was the unanticipated extent of GE’s under-performance that most unnerved the market. Over the past weeks, the market has been struck by new sectors of the economy being infected by the sub-prime mess. First the banks. Then the brokerages. Then the insurance companies. And so on.

GE’s suggestion that it fell short due to the impact of “disruptions in the capital markets” on its financial services businesses should not have been a surprise. But what was shocking was that this company that rarely misses guidance by more than a penny or so should miss the target by such a wide mark. After all, what has made GE an icon for so many years has been its ability to manage both its earnings and investor expectations. The fact that GE directed full-year guidance on earnings growth down from “at least” 10% to near zero was a further wake-up call for anyone who has managed to sleep through the ruckus in the financial markets of late.

Last week’s April Fools Day rally––which came in the wake of optimism that the financial sector had hit bottom and a correction in surging commodity prices––suddenly seems a long time ago. After rallying 6.6% in the prior week, the S&P financial sector dropped 4.6% this week.

This was a significant week in the currency markets, as China’s currency, the yuan—the renminbi to some—rose to new heights against the dollar. The yuan, pegged at 8.2 to the dollar until the Chinese allowed their currency to float in July 2005, has appreciated 16% against the dollar since then.

This is important on the home front for several reasons. First, and most directly, it will make Chinese-made goods more expensive over time—indeed the 16% appreciation acts no differently than a 16% tariff or tax on imported Chinese goods. But more important, an expensive yuan—and the prospect of a more expensive yuan to come—offers the most effective deterrent to the outsourcing of jobs to China.

Trade has been an embarrassing item on the political circuit these days. After all, during the NAFTA debate in Ohio, it should have struck most observers that America is not losing many jobs to Canada. And, I dare say, Colombia is not the risk that it would seem to be from all the press attention to a trade riff between Hill and Bill. It is understandable that candidates have foresworn speeches on the impact of floating currencies on long-term investment and competitive advantage, or for that matter on international stability, but hopefully the surviving candidate’s policies will be better informed than their political strategies.

Like Japan before it, China may be on a trajectory away from being the source of cheap consumer goods. And this has both good and bad consequences that the political class should be focused on. The risk to America in the future will not be a China that is a source of low cost labor, but rather, a China that is becoming a source—and a very large source indeed—of well-educated and disciplined workers in engineering and the sciences. Someday we may wish for the days when we lost our low-end jobs to China.

The American worker listening to pandering politicians and pundits, they should be looking for only three things: portable pensions, portable and affordable healthcare, and affordable and lifelong access to education. Political-speak continues to be dominated by language that views American workers as passive agents. “Government needs to retrain workers… We need to retrain you…” The reality of the world today is that a politician or government worker is increasingly unable to understand the skills, attitudes and aptitudes that any given worker will need to learn to get ahead.

Twenty years or so ago, Peter Drucker described a future in which every worker would be a free agent in a competitive marketplace, with the need to seek out new skills and new knowledge on an ongoing basis to succeed through several careers in the course of their work life. Well, as George Allen—the coach, not the Senator—liked to say, the future is now. It is time for our candidates to talk less about the solutions from the 1950s and 1960s, and try to imagine what solutions will work in the 2020s and 2030s, when today’s children of Pennsylvania will be in the middle of their third or fourth careers.

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