The cliche expressing the experience of being "the canary in the coal mine" may
be famous, but that doesn't mean it's all glory and accolade for the poor bird.
The expression refers to the practice of coalminers taking live canaries down
into their mineshafts, sometimes in little cages attached to the miners'
helmets. With the birds possessing less capable and robust cardiovascular
systems than humans, the thinking is that anything, any silent gas leak or
interruption of the oxygen supply, will be felt and experienced by the bird
first, through its coughing, wheezing, eventually, its dying; the hope is that,
if a miner or a group of miners start seeing their birds dying, they'll have
enough time or sense to escape the danger or acquire
an alternative oxygen source.
Well, that's the theory. It presupposes at least two things: one, that the
miner notices the dead bird; and two, that he knew what to do upon seeing it.
Will investors in international equity markets have the same prescience, or
will they just react in the same way they did to the market top in autumn of
2007, with denial, ignorance, and reliance on hoary old hidebound cliches in
place of facts? The facts being that the bird in question is actually and
indisputably dead - or in the words of the Monty Python's Flying Circus dead
parrot sketch "passed on.. no more....ceased to be… expired and gone to meet
'is maker! ... a stiff ... bereft of life ... if you hadn't nailed 'im to the
perch 'e'd be pushing up the daisies! 'Is metabolic processes are now 'istory!
'E's off the twig! 'E's kicked the bucket, 'e's shuffled off 'is mortal coil,
run down the curtain and joined the bleedin' choir invisible".
As for now, investors, very much unlike coalminers, are ignoring the evidence
of their eyes, as world monetary liquidity, which stocks rely on as much as
miners do oxygen, slowly thins, and equities cough and wheeze in response.
So there I was a few weeks ago, on the afternoon of January 11, trading stocks,
keeping off the streets and out of trouble, at least out of as much trouble as
I can avoid while all the time risking having a leveraged stock or option
position that could blow up in my face and put me out on the street. I look to
the screen, and one of my babies is crying out for help.
The "baby" involved was US Steel, ticker symbol X. The day before, the stock
had finally pushed above US$60, territory it had not seen since it and most of
the other 5,000 or so odd (some are very odd) American stocks went screaming
down the back end of the roller coaster in the autumn of 2008.
What a storied legacy and history US Steel has had this past century; indeed,
if it can be said that if it was American power and strength that girded the
earth through much of the 20th century, it was US Steel that provided the
cables.
Created in 1901 by JP Morgan through the merger of three other steel companies
(one of them Andrew Carnegie's), its initial $1.4 billion capitalization made
it the world's first corporation valued at over $1 billion. The company
employed 340,000 people building the Arsenal of Democracy in World War II; it's
1953 production high of 35 million tons, composed of all those refrigerators,
washing machines and Cadillac tail fins, meant that it had about an identical
impact in building up America after the war as it had in destroying Japan and
Nazi Germany during the war.
But it wasn't the company's storied history that made me interested in the
stock. It was its much more recent history as a profit generator. Soon after
China's accession into the World Trade Organization in 2001, it became obvious
what the decade's best stock investment strategy would be - if the Chinese want
to buy it, you should be the one to sell it to them.
What China wanted was anything any rapidly industrializing country would want -
in huge quantities. Crude oil, aluminum, bauxite, platinum; shipping, along
with the other transport services to bring it all to China; and steel,
especially steel. Steel for houses and skyscrapers and highway overpasses built
with rebar to survive the next earthquake, cars made of a lot more steel for a
population transitioning from bicycles.
In the case of US Steel, this meant a stock that in mid-2003 broke out of the
tight, under-$20 range that had contained its trading for years and continued
to go on to rise another 10-fold, to almost $200, in early 2008. The growl of
the bear marker sent the stock down to $16 in early 2009, but then it started
to rally, and I, hoping for lightning to strike once more, was watching it all
the way.
After topping out at $60.08 the previous Friday, the rally continued early on
that Monday morning, the 11th, soon reaching its high for the day, at $66.45.
Then, in the afternoon, something happened. The stock would close at $62.93,
down over $2.50 from Friday. For the next seven trading days, the stock tried
to regain its footing, but on January 21 it got hit by the deluge and was down
almost 10% that day, to $57.64. Over the next six trading days until the end of
the month the carnage would continue, down to below $44 on the last trading day
of the month. All in all, from the high on the 11th to the 29th, at a time that
the overall S&P 500 index lost just over 5% in value, US Steel lost over
34% of its value - an over $3 billion loss of capitalization for this stock
alone.
It wasn't just US Steel - a lot of its industry competitors were suffering as
well. Steel Dynamics was down 24% over that same period, Olympic Steel down
23.7%, Nucor down 20%.
Nor was it just in the steel mills that the canaries were croaking. Arch coal
was down 26%, Peabody Energy down 20%. Finally, CSX Transport, a railroads and
rail services company, came in with an almost 24% decline since January 8, and
Seacor, a shipping company, was down 10%.
The message here seemed pretty clear. If your business model is to manufacture
or grow something in middle America then pay someone to ship it out, the stock
market has not been looking at you recently with all that much favor. That's
certainly a change from 2003-08, and from much of 2009 as well.
US president John F Kennedy once constructed an economic policy metaphor by
stating that a rising tide lifts all boats. Here, the mechanism seems to be the
exact reverse, in that a falling, receding tide, in this case of world monetary
liquidity produced by the Bank of China, is beaching and sinking many boats,
particularly the ones carrying steel, coal, and most of the other natural
resource sector as well.
Would that Americans, particularly American stock investors, look to the East
for something other than the next Anime pornstar; if so, they would be seeing
some absolutely critical events coming out of China this past month. There, the
economic crisis that started in the West through excess leverage in the banking
system was primarily experienced as an export crisis that devastated the
country's trading partners.
An export crisis is far more easily corrected than the cancer of a financial
crisis; after the pep shot of a US$586 billion fiscal stimulus prescribed in
late 2008, the Chinese economy seemed to be regaining its footing late last
year, and, like central bankers everywhere, the Chinese central bank, the
People's Bank of China, decided it once again had the policy luxury to worry
about inflation.
Beginning in mid-January, Chinese economic officials started to give every
indication that they, even if alone among the world's economic and monetary
officials, had finally decided, in the words of former US Federal Reserve Board
chairman William McChesney Martin, to "take away the punchbowl" from a party
moving just a bit, or way too much, merrily along.
In came new limits on stock market leverage, increased reserve requirements,
moves to mop up excess liquidity, even raising the one-year Treasury Bill yield
to just under 2%.
On the other side of the world, US export-based stocks tanked. Displaying a
remarkable gift for howling understatement, analyst Yuan Tuck Siew of Axia said
the tightenings would result in "Import orders for commodities and machineries
[that] could be affected most".
As the US Senate last week debated the re-nomination of Federal Reserve
chairman Ben Bernanke, whom one solon called "the most important monetary
official in the world", one wondered whether an aide rushed into the office
(or, considering the time change, the bedroom) of People's Bank of China
governor Ziao Xiaochuan, informing the central bank chief that they were
talking about him on American TV.
The situation with the China-directed exporters would not be so critical if the
rest of the US economy was truly recovering, but this is clearly not happening.
Recent releases of US Federal Reserve data clearly indicate just how much of a
stranglehold the financial sector, and its wicked stepchild the credit crunch,
still pose to the economy as a whole.
Federal Reserve data release "G19" shows the pullback in the banks' provision
of consumer credit to be continuing and expanding. Release "H.6" shows that
growth in both M1 and M2 measures of the money supply was about half of what
the same indicators showed in 2008, even with sharply lower short term interest
rates.
Charge-off and delinquency rates for commercial loans are still reaching for
ever-more stratospheric heights; at America's 100 largest banks, they're almost
eight times what they were in the middle of 2007. Commercial, industrial and
real estate loans continue their relentless decline, down over 7% year over
year to December. Commercial paper, the short-term finance facility that was
said to be most in danger from the crises of September 2008, still apparently
exists, at half the issuance levels common before the crisis.
At the time of the crisis, the economic mandarins of the time, Henry Paulson,
Tim Geithner and Ben Bernanke, said that paychecks would not get written or
cashed if the commercial paper market evaporated - I suppose that the answer to
that has been to have American employers now writing a lot fewer paychecks.
So, still, the signs, the birds, meant to provide warning gasp, pant, wheeze
and choke their way out of existence. The public takes no notice - it's all
just another American Idol spectacle to them.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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