HS Dent | Some Geopolitical Musings

Some Geopolitical Musings

By Charles Sizemore⋅ December 17, 2009 ⋅ ⋅ Post a comment

Index Universe had an interesting interview with Stratfor founder George Friedman: “Stratfor’s George Friedman: Long Turkey, Short China”

We’ve commented on Mr. Friedman’s work before, and we reviewed his latest book, The Next 100 Years: A Forecast for the 21st Century, in the March issue of the HS Dent Forecast. We don’t always agree with his forecasts and analysis, but we always find them thought provoking. So, what is Mr. Friedman saying about emerging markets today?

Friedman has a long-term bullish outlook on Turkey, Poland, Mexico, and Brazil and a decidedly bearish view on China and Russia. Following the theme of our recent posts, he’s also quite negative on Greece, calling it a “Balkan country,” not a European, and saying that Greece “has far more in common with Serbia and Croatia than it does with its own history.” Harsh, but fair.

We found his comments on China particularly interesting:

The macro problem is bigger. According to the Chinese government, there are 1.3 billion Chinese, and 600 million live in households whose income is below $1,000 per year. Another 440 million live in households earning between $1,000 and $2,000 per year. That means slightly more than 1 billion Chinese have a standard of living equivalent to sub-Saharan Africa.

There are 60 million Chinese with household incomes over $20,000 per year, the global standard for the middle class. Out of 1.3 billion Chinese, the “surging” Chinese middle class is 60 million. That’s the size of France, which is impressive, but looking at the whole country, China is extraordinarily poor.

The Chinese factories produce things that cannot be consumed in China. Therefore, they are completely hostage to the American and European markets. The possibility of them refloating the yuan is zero. China’s biggest customer is Wal-Mart, but Wal-Mart also has the option of buying in Pakistan or Vietnam. China doesn’t have another option of where to sell its products. Withdrawing their investment in American government paper would be an interesting way for the Chinese to cut their own throat.

Interesting. Even after all of China’s spectacular growth, the middle class is only roughly the size of France. Friedman doesn’t discuss it in this interview, but China also has some horrid demographic trends with which to contend. Due to the One Child Policy, China is one of the fastest aging countries in the world. And in less than a decade, China will most likely follow Japan into a long deflationary abyss.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

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4 comments for “Some Geopolitical Musings”

“Following the theme of our recent posts, he’s also quite negative on Greece, calling it a “Balkan country,” not a European, and saying that Greece “has far more in common with Serbia and Croatia than it does with its own history.” Harsh, but fair.”
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>>>I’ve never heard Greece’s status as a European country questioned before. For that matter I always thought of Croatia and all them over by there as European also. So by his reasoning, if say France’s population went 51% ethnic Arabic it should no longer be considered European? What is the criteria? Is it race/ethnicty and culture that determines European-ness now instead of geography? Fine, if that’s the way you want to do it, but don’t presume others know what you are talking about unless you tell them.

Posted by Neophyte999 | December 18, 2009, 11:45 am
“Friedman doesn’t discuss it in this interview, but China also has some horrid demographic trends with which to contend. Due to the One Child Policy, China is one of the fastest aging countries in the world. And in less than a decade, China will most likely follow Japan into a long deflationary abyss.” - C. Sizemore
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I don’t think the China Japan comparison is apt in this regard. Unlike Japan, China has a ton of reserve population which it can bring into the workforce. China’s aging population problem is way way offset by this enormous reserve population in the hinterlands which they can bring in as required.

Posted by Neophyte999 | December 18, 2009, 11:55 am
Neophyte999,

China’s excess population from the countryside will help for a while, but not forever. There is a relatively small window of time in which people make major life moves. And as the population of the countryside ages, they will be less willing and able to move into the cities. China might hold out a little longer than the Japan comparison would suggest, but not not by much.

As for Greece, let’s not get too wrapped up in terminology. Yes, absolutely, Greece is European in that it is a part of the European continent (in this sense, even Turkey is partially European) and has a long common history. But culturally, Greece has a lot more in common with the old Ottoman Empire, which included most of the Balkans. This is no insult to Greece, of course. It’s just an acknowledgement that living under Turkish rule for most of the past 500 years left a large cultural imprint. Greece is also as “Eastern” country in the sense that the dominant religion is Eastern Orthodox, not Western Catholicism or Protestantism.

CLS

Posted by Charles Sizemore | December 18, 2009, 2:43 pm
CLS,

“China’s excess population from the countryside will help for a while, but not forever.” - CLS

>>>Just using the numbers you yourself cited in your initial post, there are 600,000,000 earning under $1000/year. I assume they would qualify as reserve population. That’s two USA’s (albeit two older USA’s). Nothing is forever but that’s many in excess of what they’ll need for a very long time even if their economy continues growing very fast.
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“There is a relatively small window of time in which people make major life moves. And as the population of the countryside ages, they will be less willing and able to move into the cities.” - CLS

>>>But how free is the individual in China? They still have an authoritarian government.
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“As for Greece, let’s not get too wrapped up in terminology.” - CLS

>>> Correct terminology is vital if one wants to be understood. If you’re only speaking to people who all know exactly where you’re coming from and who use the same shorthand lingo, then of course, go ahead and save time and energy by using it.
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“But culturally, Greece has a lot more in common with the old Ottoman Empire, which included most of the Balkans. This is no insult to Greece, of course. It’s just an acknowledgment that living under Turkish rule for most of the past 500 years left a large cultural imprint. Greece is also as “Eastern” country in the sense that the dominant religion is Eastern Orthodox, not Western Catholicism or Protestantism.” - CLS

>>>Two points. First, if the Turks had such a lasting cultural influence on Greece, then why aren’t they mostly Muslim? For example, Spain was occupied too, but it’s still European, isn’t it?……………………..
Second, Russia is mostly Eastern Orthodox, but is it not considered European? It extends to the Pacific but the population is mostly in its’ west.

And just for the record, the Protestant sects and Eastern Orthodox and Catholicism are all Christianity.

Posted by Neophyte999 | December 18, 2009, 5:50 pm

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