Will More Companies Seek Bankruptcy As Opening Up Continues?

Before the COVID-19 pandemic hit and the U.S. vs China trade war, JIT (Just in Time) or also known as the Lean Manufacturing method was the way to finish up production of a product line that is fast to bring the products to the market. JIT was made popular by Toyota in the 1930’s “The Toyota Way” production method. This method allows any company not to stock up raw materials and be overburdened with materials and parts in the production chain inventory, but instead, any company that uses JIT can just rely on an overseas or local third party to quickly deliver whatever stuff that a company needs to finish up production of a product line. JIT saves time, cost, and improves the efficiency of manufacturing. Unfortunately, the pandemic hit in early 2020 led to the shutdown of most parts of the world, and JIT isn’t viable as before. Shipping became more difficult, and shipping costs were rising tremendously. Furthermore, companies rather cut costs and shored up cash to protect the business during the uncertainty of the pandemic COVID-19. This pushed the JIT supply chain to the brink of collapse since companies weren’t ordered raw materials and whatever parts so freely as before.

The U.S. vs China trade war is still an ongoing thing, and JIT won’t be taken up favorably by the United States. The United States doesn’t want to be overly dependent on China for crucial and mission-critical materials and parts. One perfect example of this is rare earth minerals. China has cornered the rare earth mineral market, and with such influence, China could always use its power to subdue the United States to China’s demand by not selling rare earth minerals to the United States. Rare earth minerals, although the market isn’t big, these minerals are the absolute must for most electronic stuff that every country needs. To produce an electronic vehicle, smart TV, or just about any other electronic thing — rare earth materials must be present for such a thing to be successfully made. JIT is all about relying on a third partner/country to provide the raw materials and parts, but this could become a security nightmare for the United States in the rare earth mineral example. The pandemic has had only increased the divide between the United States and China in regards to how a global supply chain should be reformed onward.

As the United States and China try to promote different supply chain routes and methods for the globe, locally located companies aren’t yet weaning off the crisis of shortage of materials and parts such as microchip shortage — due to shipping difficulty and countries’ shutdowns across the globe — due to the pandemic is still an ongoing thing since many countries have yet to adequately allow the populations to be vaccinated with COVID-19 vaccines. While the shortages of everything are on the menu, companies are trying to alleviate many shortages as possible by hoarding raw materials and parts. Some companies are trying to overproduce the finished products as these companies have seen the demands of goods rising to an unseen level since the pandemic hit. Thus, rising demands produce rising inflationary prices of finished goods. Shortages of raw materials also push the prices of raw materials to be more expensive such as lumbers. As raw materials get expensive, the expense would pass on to the customers in the finished goods. In general, finished goods are more costly as the demands are high and raw materials’ shortage. With high demands come shrewd business sense, and so companies would go overdrive in producing more finished goods, The question is then when the COVID-19 pandemic slowly goes away and the world is opening up again just like how it was in 2019, services will come back to life, and customers would spend less on goods but more on services — how are the demand bubbles of physical goods would fare in such a scenario?

I think as the opening up roaring back, the inflation would collapse into deflation in how physical goods are being priced — while innovation would continue to drive the costs down of stuff such as electronic — and so many companies that overly produce the finished goods will face the glut of inventory. This could be so inefficient that these companies may wish JIT would become fashionable again. Thus, I think the future earnings of such companies will be way less impressive than most investors would have liked to see. The service sector may pick up again, but companies that are in this sector may still have to face bankruptcy since these companies borrowed a lot of debts during the pandemic COVID-19 service shutdown across the globe. Thus, I don’t think we will see the normal as how we had gotten used to before 2020. Companies with heavy debts should be valued less even if these companies fall into the value investing category. This could be an opportunity or a value trap kind of thing. We could not know an overly burdened indebted company is a bargain or a value trap since such a company could file bankruptcy easily.

I Think China Wants The United States To Impose %25 Tariff on Chinese Goods in March!

I don’t like to get political and hopefully what I’m writing isn’t too political. I’m thinking that even if president Trump is really wanting to have a trade deal with China to avert the upcoming tariff deadline in March on the Chinese goods, China might not want to see a trade deal gets done even the United States concedes something great.

How come? Well, let pretend to put yourself in a Chinese shoe and think about this for a second. So, if you’re Chinese and you know that the Americans will up the tariff on your $200 billion goods in March from 10% to 25% if the trade deal between China and the United States won’t happen, and so the big question is should you concede to the United States in a big way in order for a trade deal to be happening and the tariff to go away? Well, I think if you’re smart you probably would want the United States to impose the 25% tariff on your $200 billion of goods.

I think China knows that the United States economy is not on a solid foundation otherwise the United States won’t have a government shutdown and such. Furthermore, inflation would go through the roof since the interest rates cannot be raised appropriately. To keep the interest rates low the United States has to continue to print more money. Normal people in the United States will continue to see rising inflation which would cost them dearly in acquiring daily things in local grocery stores and so on. A hamburger meal usually costs like $3 but now is like $7 to $8. So, if you’re the Chinese you would think that higher tariff on the $200 billion Chinese goods must be a great thing for China!

Meanwhile, China is weaning off the reliance on American consumers because of the hostility between the United States and China! This could push China to be more aggressive in finding new markets throughout the world such as in Africa, India, Asia, Europe, South America to replace the North American consumer base. Some other regions might see this as a good opportunity to negotiate with China to get a great deal so they could enter China’s huge growing middle-class consumer base. China may pretend to resist this but could end up agreeing to concede something to these players so they could diversify away from the American consumer base.

I think the long term picture is what China is sought after because China wants to better itself in the overall big picture. This means China doesn’t care if the United States is upping the tariff to 25% or even to 75% or to 100%. When the United States is upping the tariff on Chinese goods, the Americans have to pay more for daily things in their lives. This would put even more stress on the Americans and make the Americans go into debts even more. More Americans in debts could mean a weaker market overall for the United States in the long run. This means more Americans will have to be more prudent on what they will spend so they could have money to pay off their debts. This means the American market will soon see a big cut back from spending by the American consumers. Either this or the Americans who are already in too many debts won’t have money to spend anyway!

Meanwhile, China could just sit pretty and wait out to see another financial crisis that will hit North America. So, in a Chinese shoe, do you think you want to have a trade deal done with the United States? Meanwhile, president Trump may not even want a trade deal done with China since president Trump thinks that he will get more votes for the next presidential race if he goes anti-China even more. In summary, I don’t think by the end of February we will see a trade deal between China and the United States. So, if you’re on the side of wanting to see a trade deal done, you should hope that I’m wrong. So, if you’re on the side of not wanting to see a trade deal done between China and the United States, you would probably want that I’m right. In my opinion, a trade war between China and the United States is not a good thing for the long term economic health of the United States.

Could Trade War Be A Blessing In Disguise For China?

What I’m about to write could be controversial for the time we’re living in now.  As we all know president Trump’s tariffs on China are the means to push China to negotiate a fairer trade — at least this is how the president promotes to the public.  So far China isn’t willing to be a pushover and so they decide to retaliate pound for pound.  This means whoever blinks first would lose a lot more in the long run, but in the end, both the United States and China would lose in short-term — well, at least this is how the news programs promote this.

I’m thinking that could tariff be a blessing in disguise for China?  How come?  China has been known as the factory for the world since they opened up their market and joined the World Trade Organization.  This means China can ramp up production of almost anything!  As Trump’s tariffs hit China, companies that want to avoid tariffs from the United States and still want to export to the United States would move their operations out of China.  Nonetheless, there are Chinese and foreign companies in China that produce the same stuff but have yet to export their products to the United States would find the vacuum suddenly is a lot more pleasant to navigate and do business.

The Chinese government could also be more lenient toward companies that decide to keep their operation within China, thus allowing these companies to prosper while China’s internal consumer market ought to grow bigger in time.  Remember Google?  Google left the Chinese market a long time ago but now Google has shown signs that it wants to grab a chunk of the Chinese’s huge consumer market.  Unfortunately, Google isn’t making much progress in this front and allowing similar Chinese homegrown companies to grow unchallenged within China.

Since Chinese companies that are going to stay in China could ramp up their production unchallenged as the trade war between the United States and China heats up, these companies ought to grow bigger in a more empty but lucrative Chinese consumer market.  Perhaps some European companies may want to open up their operations in China to give the Chinese companies some competitions.  Anyway, I think Chinese companies could grow unchallenged in their home market and mass produce even cheaper products to saturate the world market even more.  In the end, I think trade war could only harm a weaker foe who got no means to fight back and could not ramp up production.  In the case of China, I think trade war could be a blessing in disguise for the reasons I surmised thus far.

 

Could The Yuan’s Sliding Allow China To Unload Treasury Bonds?

I’m just wondering!  Lately, the headlines are screaming that China is devaluing the Yuan to help cushion the blow of Trump’s tariff on China’s exports to the United States.  Although this is a legitimate concern that the headlines raise, I’m wondering if there is another hidden motive for the Yuan to slide.

Could it be that the Chinese government is letting the Yuan slides so the treasury bonds that the Chinese own which Americans are in debt to China could stay valuable?  This way China can begin to sell the treasury bonds while the treasury bonds are still valuable.  Once China unloads enough of the treasury bonds onto the market, whatever value China receives from such transaction could then be converted to other favorable assets, investments, and currencies.

Of course, China could always convert the selling of treasury bonds into Yuan and then raise the Yuan’s buying power back up to stave inflation — but then it could begin a deflation.  How?  Well, if too many Yuans that are chasing the same thing could raise the price of whatever, but when the buying power of Yuans get push up the Chinese government then could lend out these Yuans to other countries and International projects such as Belt and Road Initiative projects to stave inflation.  A more powerful Yuan could also allow the Chinese to get more bang for the buck whenever they use the Yuans to acquire whatever.  Thus they also have to be careful about the deflation.

I’m no economist and so I could be wrong on what I’m suggesting.  Nonetheless, I would love to hear other people’s opinions on the suggestion that I’m suggesting.  Am I wrong?  Am I even close?