For those of us who live in the United States, shop on Amazon and eat French fries at McDonalds, the world feels pretty flat. But the world economy is trembling underneath us every day.
Ten years of pouring sand and water into fracking wells in Williston, North Dakota, and what were once thought to be played out Texas oilfields where they played football on Friday Night Lights has changed our world by bringing back $2 gasoline.
Ben Bernanke’s contrarian approach at the Federal Reserve stabilized a busted banking system and helped rejuvenate the emaciated American economy, which easily could have gone the other way into Depression.
Now in 2015, we have a timid fearful Europe with pathetic neo-fascist parties vying for power, a good chance England will exit the European Union in 2017, and Japan becoming a country of old people. America shares the stage with China as the world’s superpowers. But who would want to live in China where kids go to school with smog masks?
So it is not shocking that money is gravitating to the U.S. and propelling the U.S. dollar to levels not seen in a decade.
In 2012, 82 yen could buy a dollar. Today it takes 119. Last year, a euro was worth $1.35. Today, it is $1.19. The Canadian dollar was worth more than the American dollar last year, but today it is worth 85 cents. But the weird thing is that the changes have come so quickly that other than for gasoline, we do not easily see the shifts. Good Italian olive oil will cost you more than it did six months ago, while airline fares are sticking at last year’s rates. Car prices are not budging even though the yen has devalued by one third in two years.
What’s going on is not really a conspiracy of sellers, but people playing for time while enjoying a price cushion which feels both unbelievable and fleeting.
One of these days, Costco or Amazon will puncture the bubble of the suppliers and sell sneakers for $10 a pair. Nucor or another minimill will hack 40% off a price quote on sheet steel to Ford. Then the war will be on. Inflation, don’t make me laugh. Price wars will be rampant. We might see 99 cent gas as a loss leader.
I’ve been talking to many smart people in the machinery and machining business lately about pricing. People seem to have an underlying sense of disquiet but seem happy to loll with the status quo for as long as it lasts.
Folks, I hope it lasts through 2015, but frankly I do not think it will. The dike will show holes and we will not have enough fingers to plug them. The Japanese have made the first big move by shrinking the yen. The 20 years of malaise plus Fukashima five years ago have pushed them to take actions that a few years ago would have seemed radical. Fanuc, with its production without people, would seem like a company that could cut prices in half if it was inclined. It has a powerful market position and makes a ton of money, but what if the company decided to go for a virtual monopoly in machine tool controls by killing the price or adding features without raising prices? What would Siemens do to combat Fanuc’s market hegemony?
We could see a price war among Japanese machine tool builders, which could challenge Haas and Chinese builders. We have not seen this yet, but customers and distributors may eventually force a showdown. The situation is complicated because production is spread all over the world. A lot of “Japanese” machines are made in China. Japanese car companies have factories across America and Mexico, but the yen devaluation is eventually going to upset the status quo.
IMTS could have been the first salvo in price reductions, but it did not happen. There is social pressure to keep the lid on pricing, but I can imagine Gene Haas looking at a 100 machine order from a General Electric for vertical machining centers and Japanese and European builders eying the same order. The purchasing lady at GE wants to make a career move and low-balls an offer.
Game on. It could be an exciting year in the trenches.
Question: Do you prefer a strong American dollar or weak one?
5 Comments
Since most quality machining centers are foreign built, either in Europe or Japan, how could a purchaser in the US not benefit from a strong US and weak foreign dollar?
A strong currency usually goes hand in hand with a strong economy. For all the problems associated with a strong dollar, I think they are preferable to the the problems associated with a weak dollar. However, these situations don’t last forever, and there will be a time when the dollar settles down, or even drops in value. Invest wisely.
We are in a global economy. A strong dollar makes it cheaper to buy imported goods. This is bad for many US manufacturers. It a catch22. I prefer gradual shifts in monetary valuations. Rapid ones create turmoil.
Forget deflation, they will raise the minimum wage to ignite inflation, (under the guise of “helping the working class”). It’s the only why they can pay off the bloated government debt and increase tax revenue.
I have been in the machinery/manufacturing business for well over 40 years and I have dealt with foreign machine builders much of that time. Every time the dollar got stronger, I was always optimistic, since the prices of our expensive European machines would come way down–and supposedly easier to sell.
Yet I always noticed that when the dollar was weak, European machine sales were good and vice versa. Why, when you would think just the opposite was logical.
Finally, I realized that when the dollar was strong, the incentive for out-sourcing became increasingly strong–which hurt my American manufacturing customers. When the dollar was weak, out-sourcing became less desirable, and my American manufacturing customers got more business.
My concern right now is that we have had a relatively weak dollar and manufacturing in the US has been gaining as companies pull out-sourced jobs back the good old USA. The sudden strengthening of the dollar will put pressure on OEM’s to outsource and in the long run US manufacturing will suffer!!