The Global Shift To Services And High Tech

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by: Scott Sumner

One of the popular theories of low interest rates is that demographics are reducing the need for physical investment, and that investment which does occur is skewed more and more toward high tech. Because prices of high tech investment goods are falling fast, growth in dollar spending on investment is reduced below what people want to save at "normal" interest rates, which puts downward pressure on interest rates.

The Economist has a recent article on a major industrial power in East Asia, which seems to be rapidly shedding its heavy industry. See if you can guess the country:

FOR an export juggernaut, XXXXX's losing streak is alarming: for 14 straight months its exports have fallen in value terms compared with a year earlier. In January they plummeted by 18.8% to just under $37 billion-the steepest drop since 2009. Petrochemical products are a key XXXXXXX export, so low global oil prices partly explain the numbers. Still, the country's longtime engines of growth, including steel mills, shipyards and car plants, appear to be running out of puff.

Now suppose I told you that this country was expected to grow in 2016 at roughly the same pace (2.6%) as it has over the past decade. Might you be skeptical of the official figures?

The country is South Korea, and I've never heard anyone question the accuracy of their GDP numbers. Here's why they keep growing, despite the depressed conditions in heavy industry:

Other businesses are thriving despite the downturn. Seven of the ten best-performing stocks last year in the MSCI Asia Pacific Index, a benchmark followed by big investment funds, were South Korean, among them pharmaceutical, cosmetics and aerospace firms.

Media stocks have been buoyed recently by the success of CJ E&M, a subsidiary of CJ Corp, another chaebol.

Do we have any evidence that this is also occurring in China? If high tech were booming, it ought to show up in housing prices in the centers of high tech, especially Shenzhen - which is the Silicon Valley of China.

Here are recent trends in housing prices:

Hmmm, Shenzhen looks kind of like Palo Alto. I suspect that much of what we see in global trade figures is part of a general worldwide trend from producing things to producing experiences. That China recession people have been predicting? Maybe 2017.

PS: The Economist article on house prices is entitled "For Whom the Bubble Blows". Let me know when the Palo Alto bubble bursts, I'd like to buy a house there. I'm willing to pay prices from the peak of the 2006 housing "bubble". Here's Zillow: