More About China/U.S. Economic Risks

Fund Manager Concerned About Linkages Between the American Consumer and China

Here is what Charles M. Ober, Manager of the T. Rowe Price 'New Era' fund had to say in an interview in Barron's on 7/10/06:

Barrons: So this commodity boom could continue for a good while longer?

Ober: We've got, in some cases three to five years to go. With energy, it's going to be very tough, even to get a reasonable cushion to offset the supply scarcities...The cycles vary from commodity to commodity.

Barrons: Could the onset of a severe global slowdown, a hard landing in China, upset the whole scenario you've laid out?

Ober: That would be the primary risk.

Barron's: You don't see signs of this?

Ober: Well, I am concerned about the linkages between the American consumer and China. Right now, the dollars from our yawning trade deficit get largely recycled by the Chinese into U.S. debt instruments. This process has fueled much of the U.S. residential real-estate boom by keeping nortgage rates restrained. But now, mortgage rates are rising and housing prices are starting to wobble. This figures to get worse as all the adjustable-rate mortgages made at low initial fixed teaser rates begin to reset over the next several years.

Strapped consumers could materially cut back on consumption. That, in turn, would result in lower Chinese export sales. As a result, fewer dollars would end up going to China to be eventually recycled back to America.That would further weaken U.S. home prices, and both nations would be hurt by the break in the financial daisy chain...