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The other ‘face of demand’ (as opposed to investment demand) you’ll find in the real economy. And by all appearances, that demand is as robust and sturdy as red wheel barrow. For example, we read the other day that U.S. auto-parts maker Delphi (DPHIQ) became the latest in an eager bunch of Western firms to begin supplying high-end parts to a Chinese car maker, Chery. Global firms crave access to China’s market.

–The story is interesting in that Delphi is one of the few American industrial manufacturers that may successfully survive competition with lower-priced Asian manufacturers by doing what it has to, namely moving up the ladder of value-added products and selling the Chinese what they can’t make themselves, at least not yet. It’s also interesting because Delphi finds itself in a bidding war between private equity groups who crave, above all, real tangible assets on sale, which Delphi happens to have.

–But the story is most astonishing because it shows just how rapid Chinese domestic demand is growing, and thus, how the shape of real demand in the global economy is shifting away from America and towards Asia. Keep these figures in mind when you read about rising oil inventories in the U.S. taking the steam out of oil’s bull market. Chery, the Detroit Free Press reports, produced 50,000 cars in 2002. Four years later it produced nearly 300,000 cars.

–That’s growth of 500 per cent in just four years. And the company would like too increase production to and sales to 1 million units by 2010. Granted, GM alone sold 350,000 cars in December of 2006 in North America, and 4.1 million for the year. Chery is no GM, at least not yet. Who knows, maybe some day Chery will buy GM, if private equity firms don’t get their first.

–And keep in mind that GM and Ford both sold 14% fewer cars in December on a year-over-year basis than Toyota, which increased its sales by 13% during the same period. Toyota now sells more cars in America than Daimler Chrysler. Chery has a deal to begin selling at least one car in North America through Daimler Chrysler in a few years. Perhaps in a few years, cheap Chinese imports will pepper American traffic jams the way Japanese imports did in the late 1970s. China has quite consciously imitated Japans export-driven, manufacturing-based growth model.

–We know, we know, you probably have heard it before. The market for everything in China is huge because, well, because there are so many Chinese. But we’ll repeat it just to make the point that demand in the real economy—the part driven by China—is chugging along just fine, regardless of what the financial markets do today and tomorrow. J.D. Power and Associates reckons that Chinese auto sales grew by 25 per cent last year to a total of 6.8 million units. The forecast for 2007 is for 7.6 million cars and trucks. Think of what that will do for oil demand—which by the way has not fallen with the oil price (as any student of economics knows, falling prices lead to greater demand, not less.)

–Between its industrial development, its development as a producer of raw materials, and its development as a consumer economy with strong domestic demand, we see a lot of zinc, copper, and oil in China’s future. And that makes us rather bullish on commodities, even if the money shufflers are selling. We are forty-two per cent more confident today than we were yesterday, give or take 10 per cent.

–It really comes down to distinguishing the real economy from the financial economy. In today’s Wall Street Journal you’ll find a story reporting that the total value of global stocks, bonds and other financial assets was $140 trillion in 2005. It was an all time record, and more than three times global GDP of around $40 trillion (see below).

–Yes, it’s true that stock and bond prices are based on future value and not present value. But the growing divergence between the real economy and the financial economy reflects exaggerated expectations about the future in financial markets. Plain and simple. People are paying too much today for future earnings, or for assets whose value can quickly change over night. The size of the figure simply reminds us that buying assets of real, tangible value, though not in fashion, is a much safer and proven long-term bet.
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