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?