In 1999, a man named Andrew Lawrence (not to be confused with the actor) came up with a very elegant rule describing economic cycles.
He came to be known as the ‘Skyscraper Index’, and in plain English, what this experimental rule of economics states is that if you want to find the region/city/nation where the next economic collapse will strike…
… Simply find where the next tallest building is being constructed.
It might sound funny, but this rule is also intuitive.
Skyscrapers, more than anything else, are physical projections of human ambition, human pride, some might say, even hubris.
And when it comes to measuring a skyscraper, only one thing matters: How well it defies the laws of gravity.
You see, unlike bridges, or roads, or tunnels, whose shape and dimensions are dictated entirely by purpose and environment, skyscrapers go up as high and as fast as technology and investment capital can send them.
And it’s the biggest ones around at any given moment which push the boundaries of physics, as well as the boundaries of economic practicality, more than any other structure.
Think it’s too simple to work?
Well, think again.
Since the end of the 19th century, when the world’s most advanced buildings began to grow upward instead of outward, the wrath of the Skyscraper Index has struck multiple times.
- The Equitable Life Building, finished in New York in 1873, coincided with a 5 year recession.
- The Empire State Building first broke ground in 1930, but was planned well before Wall Street crashed in 1929, and was built as the world sank into the Great Depression.
- The World Trade Center and the former Sears Tower (now the Willis Tower) were both build just before and around the time of the oil crisis in the early 70s.
- Kuala Lumpur’s Petronas Towers, completed in 1998, coincided with the Asian financial crisis of the late 90s.
- Most recently, the Burj Khalifa, the tallest building ever, stood finished, and just about vacant, over a financial collapse which nearly ruined Dubai.
Like I said, it’s not a hard pattern to see once you really open your eyes.
In all likelihood, this pattern goes back to the very start of metropolitan civilization; to the classic era, where things like giant monuments, temples, and other tributes to the human ego far exceeded any practical use they might have.
So, the big question we’ve come to here is: Where is the next big skyscraper?
Well, the answer to this one may be the most significant test, and proof, of the Skyscraper Index yet.
You see, there is a nation in the world right now, which, single-handedly, is building not just the tallest building under construction, but 53% of the tall buildings the world-wide.
What you’re looking at is a rendering of a 3 mega-skyscraper complex currently under construction in Shanghai.
The first, which already stands at 1380 feet, is the Jin Mao building, completed in 1999.
The second, finished in 2008, is the Shanghai world financial center – the 4th tallest building in the world at 1614 feet.
And the third, currently under construction (which in Chinese terms probably means that they’ve built a whole floor since you started reading this article), is called simply ‘The Shanghai Tower’.
When it reaches its peak height of 2074 feet, it will be the second tallest skyscraper ever built.
So instead of building one, they’ve built three, side by side, with a combined height of just under a mile.
And yes, there’s also the matter of the hundreds of other skyscrapers the Chinese are putting up concurrently – many of them within view of these three monsters.
According to one particularly interesting statistic, China will, on average, receive one finished skyscraper every 5 days… For the next three years.
Now what would Andrew Lawrence say about a building boom of that magnitude?
Well, he probably won’t have to say much, because what’s happening now, today, is sending the message loud and clear.
Just last week, data was released showing that Chinese inflation had fallen to a 30 year low, with industrial dropping to the lowest point it had reached in 3 years.
John Woods, Chief Investment Strategist for Asia Pacific at Citi Private Banking stated in an interview with CNBC that: “The numbers were pretty lackluster… there were some signs, in my view of stability, but little in the way of recovery.”
The Economist, however, put the whole phenomenon a bit more succinctly.
A subhead on one of their articles published on August 4th read:
Yes, China actually recorded a deficit in the second quarter of 2012 – something which hasn’t happened in a decade and a half.
Now, that same article cited some interesting statistics about Chinese rich, what they’re doing with their money, and their plans for the future.
For example, 16% of Chinese millionaires (10 million Yuan, or $1.6 million net worth or higher) are no longer Chinese millionaires.
They’ve already left the country for greener pastures elsewhere.
An additional 44% say they plan to follow suit in the near future.
Perhaps most telling, however, is that 85% of wealthy Chinese either are, or are intending to send their kids abroad to get their education.
This fact alone does not bode well for China’s future, and the Chinese themselves are feeling the one-time enthusiasm of being part of the world’s fastest growing economy slip away.
Recent polls show that only 28% of Chinese have a positive view of the future, economically speaking.
That’s down by almost half, from 54% just one year ago.
Now, The Economist can cite all the statistics they want.
They can talk about how rich Chinese take upwards of $50,000 a pop out of the country, every year, without needing to declare it.
They can talk about how China’s own 1-percenters own $2-$5 trillion in assets, and given the mobility of these people, more and more of that wealth is destined to land on foreign shores sooner or later.
But the real heart of the matter is what will truly make China’s meeting with the Skyscraper Index the beginning of the end for the economic superpower.
You see, at its very heart, the Chinese economy is really built on just one thing: Cheap manufacturing.
Yes, they have business interests in all sectors of all industries, but the real money comes from their ability to produce the stuff which Western consumers want for prices which Western manufacturers cannot match… Plain and simple.
And up until now, the balance of volume, quality and price has always landed in China.
Sure, there are places where you can produce plastic laptop casings and Ipod bodies for cheaper, but when it comes to those three variables, volume, quality and price, the Chinese managed to capture the sweet spot.
If there was one thing which always stood in the way of total Chinese dominance, it was, well, total Chinese dominance.
They could only succeed for so long before that success itself made threw off the whole equation.
In short, the Chinese, as a whole, started getting too rich.
In the first quarter of 2012 alone, wages went up as much as 10% – with isolated manufacturers claiming wage hikes of between 16 and 25%.
And this isn’t just a fluke.
Wages in China have increased 20% per year, for the last 4 years.
Comparable rates in places like the Philippines, and Mexico, which would be in direct competition with China for the same manufacturing contracts, were 8% and 1% respectively.
And just like it happened here in the States, the one drawback of too much success, too much excess, too much money, too many options and too many calories, is that you lose the thing which brought it all in the first place.
Standing back from it all, just like the Skyscraper Index, China’s eventual failure will ultimately come not from foreign competition, but from internal changes.
The same way that the US gave up its manufacturing base as soon as it became financially feasible to send it abroad for lower overhead, so too will China.
Only as China rose so much faster, its collapse will seem that much more sudden.
And where will they go once the cheap manufacturing magic bullet has hit the ground?
Will they go high-tech like Japan did in the 1960s?
Will they go into financial services and asset management, catering to all those outgoing millionaires?
Time will only tell, but the truth of the moment is that things are about to get very interesting for the world’s second biggest economy.
Just remember this: Their loss will almost certainly be our gain, so keep your eyes open and your optimism alive.
Yours in Wealth,
Publisher, K Street Financial