by Louis Navellier
August 15, 2023
China is experiencing crippling deflation as its economy struggles with declining exports and imports for the past few months. In July, Chinese exports declined 14.5%, while imports plunged 12.4%. This marks the worst decline in exports since February of 2020 – the month when Covid-19 first struck China.
As a result of China’s collapse, the Commerce Department reported on Tuesday that the U.S. trade deficit declined 4.1% in June to $65.5 billion, as exports remained flat at $165.1 billion and imports declined 1.2% to $253.3 billion. Imports are now at their lowest level in three years. The U.S. trade deficit should continue to narrow in July due to higher energy prices. This should boost GDP growth in both quarters.
On Wednesday, the Chinese National Bureau of Statistics announced that consumer prices declined 0.3% in July, while producer prices declined a much more dramatic 4.4% in July. The unemployment rate for people 24 and younger is now at a record high, despite decades of a one-child policy causing China to have too few young workers to support their aging population. China isn’t exporting much now, since the whole world is doing more “onshoring,” after the trade backlog during Covid-19 revealed China to be an unreliable trading partner, so the long-term economic outlook for China is looking dire.
Complicating matters further, China’s official purchasing manager index (PMI) has now declined for four straight months and is at its lowest level in a year. A prolonged housing crisis from chronic overbuilding is also contributing to the deflationary pressure in China. This is all happening under censorship and the most severe dictatorship since the days of Mao. According to the Financial Times, “Chinese authorities are putting pressure on prominent local economists to avoid discussing negative trends such as deflation.”
Another source of global deflation is that the cost of electric vehicles (EVs) must come down as the inventory of unsold EVs continues to rise, so price discounts will likely persist. Tesla is curtailing its production in the third quarter to lower demand. Besides Tesla’s Cybertruck (designed for the “Zombie Apocalypse,” according to Elon Musk), the only other fast-selling EV is expected to be the VW ID.Buzz when it arrives in 2024; but other than these specialty EVs that look different than most EVs, EV sales continue to struggle.
As more EV production moves to Mexico, GM shut down its Bolt Orion manufacturing plant in Michigan to throttle up their Equinox EV production in Mexico, so the UAW remains worried about job security, since EVs require approximately 70% fewer parts to assemble. The UAW is asking for up to a 46% compensation increase for its 150,000 workers at Big 3 Detroit auto manufacturers. Specifically, that amounts to a 20% general wage increase, plus another 5% increase every September through 2027.
Further complicating China trade, the Biden Administration issued an executive order on Wednesday that banned U.S. investment in China for semiconductors, quantum computing, and artificial intelligence (AI). As poor relations between China and America persist, it will be interesting to see how China retaliates.
Here is what is really happening in that conflict. U.S. onshoring of semiconductor manufacturing and battery production has not been going well. For example, Taiwan Semiconductor has delayed the opening of its new plant in Arizona until 2025, while GM’s Mary Barra admitted that its Ultium platform is having acute supplier problems, so its battery packs are being manually assembled, which is why GM only made 47 Hummer EVs in the first half of 2023. Furthermore, if there is an EV manufacturing boom, it is really in Mexico, as Ford, GM, and Tesla are all boosting their EV production south of the border.
As I reported here last week, ADP reported big manufacturing job losses in the past couple of months, while the Labor Department didn’t report any significant manufacturing job losses. I think it is safe to say that the Labor Department is likely manipulating payroll figures through “seasonal adjustment” formulas.
Essentially, the Biden Administration has nothing to brag about with its onshoring efforts in the 2024 Presidential race and, in my opinion, it is purposely trying to mask recent manufacturing losses after the Institute of Supply Management (ISM) reported eight straight months that U.S. manufacturing activity contracted (meaning an ISM reading below 50). However, if the UAW goes on strike, then the Labor Department can suddenly report the thousands of manufacturing job losses that it has suppressed in recent months, since it can be explained by the UAW strike. I, for one, am expecting a UAW strike, because it will help the Biden Administration manipulate the payroll data via the Labor Department reports.
There may be some other problems brewing on the labor front, since the Labor Department reported on Thursday that weekly unemployment claims surged to 248,000 in the latest week, up from 227,000 in the previous week. This caused the four-week average to rise to 231,000. Continuing unemployment claims declined to 1.684 million in the latest week, down from 1.692 million in the previous week. The four-week moving average of continuing claims declined by 9,250 to 1.701 million, so that was good news.
ESG Was Invented in Europe – And It Also Backfired There First
Environmental, Social & Governance (ESG) started in Europe, and it may now have to be rebranded in Britain. After the British government announced hundreds of new North Sea crude oil and natural gas licenses, banks that followed ESG standards were put in a pickle over whether or not they can fund increased fossil fuel exploration sites, which Britain is apparently doing for national security reasons.
Furthermore, the UK Emission Trading Scheme that was launched in 2021 after Brexit is now pricing carbon trading at a 40% discount to the European Union’s (EU) carbon offset prices. In other words, the price of polluting Britain is 40% cheaper than polluting the EU, so in theory, Britain has a competitive advantage compared to the rest of the EU. The truth of the matter is that Britain’s increasingly green electricity is very expensive, so Britain is striving to provide its citizens with some relief by lowering carbon offset prices. The bottom line is that British ESG no longer complies with Europe’s ESG.
As for U.S. ESG rulings, after S&P Global kicked Tesla out of its flagship ESG index and replaced it with Exxon Mobil back in May 2021, the definition of ESG has been debated endlessly, especially because Elon Musk repeatably mocks ESG. Besides putting an oil company above an EV firm on their ESG list, Musk is upset that the battery waste at its plant outside Reno was cited as the primary reason that Tesla was being booted from an S&P Global ESG index, while the real problem (according to Musk) comes from the part of the plant operated by Panasonic, which has not been booted from any ESG index.
Furthermore, Lucid utilized the same batteries as Tesla and they have not been booted from any ESG indices. The bottom line is that when Tesla was booted from an S&P Global ESG index, it caused a lot of confusion that ESG authorities cannot logically explain. Fortunately, S&P Global finally responded to the growing ESG outrage and dropped its alphanumeric ESG ratings, effective on August 4th.
In other energy-related news, the Ukrainian Sea drone that blew up the Russian tanker “Sig” in Crimea in the Black Sea that was “transporting fuel for the Russian troops,” is temporarily causing shipping costs and crude oil prices to rise. Officially, the Sig tanker was under U.S. sanctions for carrying fuel to Russian forces operating in Syria, according to the Treasury Department. However, whether sanctions can authorize Ukraine to attack is clearly an escalation that is now being debated by NATO authorities.
I should add that Russia unleashed a wave of drone attacks on Ukraine’s ports around Odessa, where grain storage facilities were damaged. Since the agreement that Turkey brokered to allow Ukraine to export grain and Russia to export fertilizer has lapsed, the fighting around Odessa and the Crimean Peninsula has clearly escalated, which is causing both global food and energy prices to rise.
Crude oil prices keep rising as Saudi Arabia threatened even deeper production cuts last week. This is apparently raising some concern within the Biden Administration as the election year approaches, as higher prices at the pump would be problematic. Officially, the Biden Administration has called on Saudi Arabia to pump more crude oil and accused OPEC+ of “aligning with Russia.” However, the real problem is that the Biden Administration has virtually no influence over Saudi Arabia after candidate Biden said the world should make Saudi Arabia “in fact the pariah that they are.” If that weren’t bad enough, Biden added that there is “very little social redeeming value in the present government in Saudi Arabia.”
In late July, the Biden Administration’s National Security Advisor, Jake Sullivan, visited Jeddah, Saudi Arabia to meet with Crown Prince Mohammed bin Salman and senior officials to discuss bilateral and regional matters in an attempt to mend fences. So far, the news surrounding these meetings has been conspicuously quiet, implying very little progress being made. The Wall Street Journal reported last Wednesday that Sullivan’s goal is apparently to get Saudi Arabia to recognize Israel in exchange for concessions to Palestinians and U.S. security guarantees, and civilian nuclear help.
The element of nuclear help was a big surprise, and it is estimated that it will take 9-12 months to hammer out a deal. Obviously, the Biden Administration wants this deal to be wrapped up before the 2024 election. Although a rough deal may emerge, the details will be too complicated to implement that soon.
Overall, the U.S. remains an oasis compared to other economies. My favorite economist, Ed Yardeni, said in one Morning Briefing last week that we essentially have two choices, namely #1, Don’t Worry, Be Happy and #2, Worry, But Be Happy Anyway. I am in the latter camp. All good stock markets climb a wall of worry, but central bank fears will diminish big time in upcoming months, so, in my opinion, investors should celebrate interest rates no longer rising as deflationary forces from China spread.
Navellier & Associates owns Ford, (F), Panasonic Corp (PCRFY), VW Group (VWAGY), and Exxon Mobil Corporation (XOM), in managed accounts. One clients owns Tesla (TSLA), per client request in managed accounts. We do not own General Motors Corp (GM), Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM), and Lucid Group (LCID). Louis Navellier and his family personally own owns Panasonic Corp (PCRFY), VW Group (VWAGY), and Exxon Mobil Corporation (XOM), via a Navellier managed account, but do not own Ford, (F), Tesla (TSLA) General Motors Corp (GM), Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM), and Lucid Group (LCID).