The legendary bond fund manager has been warning about this for nearly a decade. In light of recent events, his warnings seem a lot more real, even if their inflation implications are only starting to surface.
Fuss said these fears are increasingly apparent in the financial markets as money continues to flee Asia for the Western Hemisphere, notably North and South America. If you are a wealthy businessman in Southeast Asia, do you want all your investments “standing in the way?” Fuss asked.
It’s “no wonder emerging markets have been weaker than fundamentals would suggest,” he said. But while global investors have been focused on Russia’s war with Ukraine, the U.S.-China relationship provides another illustration of why caution is warranted in portfolio construction and design.
At present, China’s ham-fisted management of Covid and its refusal to use superior Western vaccines have forced it to re-impose lockdowns of its citizenry, threatening its political stability. While the rest of the world wrestles with inflation, China is still experiencing deflation. But if the world’s most populous nation can manage to extricate itself from Covid in 2023, its reopening is likely to trigger another wave of global inflation just when other nations are hoping to finally tame it, he said.
Meanwhile, the first round of post-pandemic inflation has taken hold and much of it is already baked in, Fuss said. In the western world, most workers have received 3% or 4% wage increases, but their cost of living has climbed 8% or 10%, translating into a 5% reduction in living standards.
Worker dissatisfaction is global and ubiquitous. America and Europe may not be experiencing the violence that Foxconn facilities are seeing in China, but the unionization movement at Amazon, Starbucks is displaying labor power in America for the first time in 50 years. Although layoffs are beginning to appear in America, Fuss believes that as key parts of the supply chain return to North America, chronic unemployment is not going to be a problem here.
It could be different in China, however. The violence among Foxconn workers and state police is giving Apple a black eye, he noted.
It’s likely to only encourage them to shift more production out of China. Other manufacturers were already making moves to “near-shore” or “friend-shore” manufacturing facilities away from China, even if it means accepting higher costs, he said. The ramifications for global inflation are only beginning to play out.
What really worries the top brass in China’s Communist Party (CCP) “is that these Foxconn jobs are good jobs,” Fuss said. Providing continual increases in living standards is the key instrument with which Xi Jinping and the Communist Party have retained their legitimacy in the eyes of the populace. If good jobs leave China, that could change
Fuss takes some degree of comfort from what appears to be a decent relationship between President Joe Biden and the Chinese leaders. But he regards efforts by American politicians to inflame the simmering tensions between China and Taiwan as reckless.