China’s problems may become ours

China has an inventory build-up. Supply and demand says prices should go down and manufacturing should slow in response (basic economics). Chinese government and manufacturers seem to be ignoring those signals for domestic political reasons. Signals can be ignored for just so long before something has to give.

You may read about it: “China Confronts Mounting Piles of Unsold Goods” By  Published: August 23, 2012.

So what may this mean for the U.S.? Reduced prices as that inventory (intended for Europe but Europe’s recession means those consumers have cut back buying) spills over here. That may sound good, but that means price competition for U.S. manufacturers (and other manufacturers elsewhere in the world facing the same problem). Some manufacturers may need to slow or shut down their U.S. production since they can’t sell their inventory due to 1) prices lower than their costs and 2) they’d add to the surplus and further cut prices. Of course, there are many unexpected things that may happen too … either positive or negative.

You see, here in the U.S. price signals lead to changes in the economy. Those signals are not being allowed or followed in China, leading to this problem over there which may become a problem over here (and in Europe and the rest of the world too). When it comes to economics, things do not occur in a vacuum or in isolation … they’re global.

Layoffs from U.S. manufacturers may lead to consumer spending cuts which then may lead to a U.S. recession. However, nobody knows this until it happens. Another however, this means it is a good time to really have a “truth session” with yourself about your asset allocation.

Don’t go about your assessment with fear … that would lead to an excessive adjustment (the same occurs, in the opposite direction, when the emotion is greed). Go about your assessment thinking and frame of mind that everything is unknown (which it always is when we’re talking about the future) … how would your portfolio look no matter what happens and when it happens? Be honest.

You see … it is better to go through the emergency procedure when it is “just practice” than wait until it is a real emergency and your brain can’t function due to increased chemicals from the emotions getting in they way.

 

More on how to deal with your emotions when it comes to your portfolio and money.

 

 

 

, , ,

2 Responses to China’s problems may become ours

  1. Larry Frank, Sr. August 25, 2012 at 8:22 am #

    PS. This post is NOT to say avoid China when I talk about evaluating your allocation. The point of the allocation evaluation is about the broader implications of your comfort level with the overall risk in your portfolio. Not a narrow view about country, region, or specific stock allocation.

  2. Larry Frank, Sr. August 30, 2012 at 5:38 pm #

    Here’s another article, this time from the Economist.com

    http://www.economist.com/node/21560890

Leave a Reply