Commentary on the Economy

Marci Rossell, Ph.D.

We’ve had a “very rough start” to 2016, according to SQUAWK BOX Co-host and former CNBC Chief Economist Marci Rossell. No one attending the 2016 annual LAC meeting seemed to disagree.

Marci was a keynote speaker for the General Session, riveting an audience of more than 200 Northwest Farm Credit Services owner-producers and their guests (spouses, adult kids or partners), and Northwest FCS staff with her insights on the U.S. and global economies, politics, consumer and producer behaviors and the Fed.

She began with an explanation of how our currently tough 2016 economy came to be. “The world is waking up to the Chinese economy,” she said. It’s slowing more quickly than anticipated and their GDP is actually growing 3 percent or less (as opposed to their public pronouncement of 6 to 7 percent). Then she laid out why, and why it matters to us.

When China joined the World Trade Organization in 2001, its 7th-largest economy was smaller than South Korea’s, with real estate accounting for 5 percent.  Then its economy ballooned. China’s debt crisis, when it hit, was tied to real estate. Like the U.S., China established its own economic stimulus. The state directed its state-owned banks to loan to infrastructure projects. However, when those loans inevitably soured, China’s resultant “zombie financial structure” was left with no ability to make new loans. Consequently, without the will to address their issues, they’re letting their financial system slowly bleed to death. This is in contrast to the U.S. fix, which had the guts to let weaker banks fail and take the needed steps to ensure the strength of the surviving financial institutions.

Hence, China’s current situation (similarly played out in Greece and other European economies) and the global economy’s stubborn malaise.

During her talk, Marci also noted the price of oil has permanently declined, with Russia and Saudi Arabia the big losers. To make their budgets, Saudis are depleting their wealth. To shore up their reserves, they’re also selling their stocks, depressing the market for everyone (which we see reflected now).

She predicts the biggest winner in the future will be India. In the next few years, India will have 20 percent of the world’s younger working-age population. They’re educated and speak English, the global language of business. Too, India’s political system is fairly open and their culture is compatible with the West’s.

Addressing growth in developing and emerging economies: “Anybody can grow by moving people off the farm to the factories.” (Except, she said, for the U.S., whose farm census comprises only 2 percent of the population.) For growth to continue in the U.S., and citing Apple as an example (inventing products in Cupertino, producing them in China): “We need to move out of manufacturing into ideas.”

Marci remains bullish on America despite the political rhetoric of the election season. U.S. fundamentals are the strongest in the world. We have stronger lenders and lower interest rates than most around the globe. Another interest rate hike is not likely soon; the Fed reacts to volatility and our economy has been stable.

Marci ended her talk with observations about agriculture. “U.S. farmers feed emerging markets,” she told the audience, who was in unanimous agreement.

Currently, farming is strong. Total indebtedness of the American farmer is $387 billion with a debt-to-asset ratio at 12 percent (and the bulk of their assets in land).  Even if land values fall by 25 percent, that ratio rises to only 17 percent. A ratio of 40 percent, last experienced in the 1980s, indicates distress.  And distress indicates a farm economy in deep trouble. We’re not there.

She ended by speculating about “the next big thing.”

We don’t know now what that will be, but in 10 years, most of us will look back and wish we had.