Nyquist Capital

Letter to WSJ author Justin Lahart
Re: Ahead of the tape “American Flu”
(Page C1) 19 December 2005
Article Here (WSJ $$$ Link)

Justin:

I don’t know if you are aware that the theory of outsourced volatility is something that is well covered by GaveKal, a small economic research house in Hong Kong. It’s a theory that they outline in their book, .

This was the passage that caught my attention-

One overlooked aspect of companies’ shifting manufacturing to China, says Trilogy Advisors chief investment officer William Sterling, is that through outsourcing manufacturing to China the U.S. has also outsourced a lot of economic volatility.

If U.S. consumers cut back on spending, and inventories of consumer items pile up as a result, it is increasingly going to be Chinese companies that will have to cut production as those inventories get worked off. Because Chinese companies don’t have the same sort of inventory-management technology their U.S. counterparts have, and because there is so much time between when inventory leaves China and when it hits U.S. docks, China’s economy could get an especially sharp jolt from a U.S. consumer slowdown.

GaveKal expands on this concept further by detailing the vast benefits this relationship has for countries that can successfully outsource volatility and the way that new “Platform Companies” can benefit.

I am willing to bet Trilogy got this theory from GaveKal - it would have been nice to see them get credit.

Note I am not affiliated with Gavekal at all- I just read their book. It’s excellent and I think it should be reviewed.

Also - here is a good web article on GaveKal that covers this topic - http://www.moneyweek.com/file/5269/jm-gavekal-0812.html

Andrew