Memorial Day is next Monday, May 29th. Originally known as Decoration Day to remember and honor soldiers that had been killed in the Civil War. Please take the time to attend a ceremony to honor those who have sacrificed so much for our freedom. We have regularly attended the ceremony at a local cemetery that actually has a soldier that fought in the War of 1812. That is highly unusual in Minnesota.
Time to keep an eye on China. There are some interesting things in the market that are going on. First, in the agriculture industry. Through March China was buying US corn in huge contracts. In the last month they have shifted to buying cheaper Brazilian corn. Still, the amount of corn that China currently holds is well in excess of anything they need to maintain food security. That is raising some questions as to exactly why.
It is not just corn, but also soybeans. China purchased a record level of soybeans from the US last year and are on track to exceed that in 2023. China continues to stock pile soybeans, buying from other sources beyond the US. China has invested heavily in crushing plants in the past couple of years. Even with the massive purchase amounts of soybeans, a number of the crushing plants had to be sidelined due to lack of beans to crush. Why China needs so much in terms of crushing production is only speculated at.
Related to the above or not, Warren Buffett sold all his shares in TSMC in Taiwan and moved his investment holdings to Japanese firms. He also expressed concerns over the future of Taiwan. The geopolitical issues over China and its claims on Taiwan are of major importance. We will have to see what happens this Summer.
China has quietly become one of the largest lenders to emerging countries. Kenya, Uganda, Pakistan, Zambia and others are on the brink of default on debt that they have taken out from both the IMF and China, among other sources. As negotiations have dragged on to determine how to resolve the debt issues, China has made it clear, they will not charge off hundreds of Billions of dollars to the poorest nations on earth. They borrowed to countries over the past 12 years for a variety of infrastructure projects. Some of these were poorly planned. Some were never finished. Some were plagued by corruption. What ever the cause, most never made enough money to remotely repay the debt.
We do need to recognize, these loans were approved by the Chinese government and put in place by Chinese Banks. If the loans are written off by the Chinese Banks, it would cripple the Chinese economy and likely collapse a number of the banks. The question becomes, who will be hurt the worse in what appears to be a Mexican standoff. Again, we could be looking at a very interesting and disconcerting Summer.
In the US, manufacturing had a tough April. Both the New York and Philly manufacturing reports were in negative territory. However, May seems to be showing some improvement. Inventories are low, new orders appear to be rising. Industrial production is up .5% and capacity utilization improved. While the May manufacturing numbers may not be in expansion territory, they are not declining as significantly as in the past 6 months.
As a commercial banker I often asked by clients about their sales and how things were going. I would also inquired what kind of price increases they had passed along to their customers in the past year. The major retailers released their earnings numbers this past week. Target touted a 1% increase in revenues last year. While the market seemed to think that was great, when you consider the inflation on goods in the past year, actual unit sales had to have declined by more than 5%. Not so impressive. Home Depot experienced a sales decline of 4.2% last year. Adjusting for inflation, unit sales were down over 10%. This gives some perspective into why inventories late last year were piling up and manufacturing was soft in late 2022.
It does appear that inventories are low, the supply chain has returned to a level somewhat normal and while demand is still soft, we are reaching some sort of market equilibrium. While we might not see inflation fall to 2%, 3-4% for an extended time, is not out of the realm of possibility.
Have a great week. I will be taking the Memorial Day weekend off, my next update will be June 5.