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

In May 2007, we wrote an article in the HS Dent Forecast titled “What About Canada.” We suggested that, despite the country’s abundant natural resources, Canada would “go down with the ship” when the United States sank into recession. This would be due to Canada’s reliance on exports to the United States, which accounted for more than 84% of total Canadian exports at time of writing — not to mention 27% of Canadian GDP!

Our words proved to be prophetic. We read this week in a New York Times press release that,

“Falling exports to the United States caused Canada’s current-account deficit to swell in the second quarter to a record high of 11.2 billion Canadian dollars ($10.4 billion), cementing expectations that the economy contracted in the quarter… In a striking sign of the impact of recession and a strong Canadian dollar, the quarter was the first time since 1976 that Canada imported more goods than it exported, resulting in a deficit in goods trade of 1.71 billion Canadian dollars.”

Canada’s trade surplus with the United States has declined by 17.6 billion Canadian dollars in the last three quarters as a result of America’s plummeting consumer spending, investment, and construction. And given that Canada’s Spending Wave is in the process of peaking, the country cannot expect its domestic consumer to come to the rescue. We estimate that Canada has many years of slow growth in front of her.

Charles Sizemore, CFA

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

We try to keep this blog focused on economics and away from politics, but alas, sometimes you can’t separate the two.  Political decisions — be they good or bad — can have a real impact on the economy.   And unfortunately, many of the decisions made by our leaders have been poor and — sadly — driven by a crude, cynical populism that preys on voter fear and restlessness.  How else can you describe some of the recent moves taken by the Obama Administration and the Democrat-led Congress, such as the “Buy American” provisions — viewed by many to be in violation of our trade treaty commitments — and the gross violation of contract rights and the rule of law, such as in the case of the unfortunate GM and Chrysler bondholders.  (To be fair, George W. Bush and the Republicans did much of the same during the prior recession, giving us steel tariffs and farm subsidies that were shameless attempts at attracting Rust Belt votes.  These shortsighted moves crippled Bush’s attempts at promoting free trade later in his presidency as he was then viewed by many as a hypocrite.)

With other world leaders taking similar actions,  many economist fear that protectionism will get out of control — as it did during the Great Depression.  It took a world war and five decades of hard negotiating to give us the free markets we have today; it would be sad to see these gains reversed.

Though it’s difficult to be optimistic about the future of free trade, we are glad to see at least one world leaders vigorously defending it.  As the New York Times writes, “Australia Resists ‘Buy Australian’ Union Pressure.”

Prime Minister Kevin Rudd said Australia’s wealth depended on its access to export markets, which would be compromised by protectionism.

”We need to avoid any form of protectionist measure, which invites retaliatory protectionist measures from economies around the world, and that’s what would happen,” Rudd told reporters.

”The mistake of the Great Depression in the early 1930s was this: economies believed that the way to get themselves through was to shut their economies down and close their borders to imports from abroad,” he said. ”The entire global economy shrinks.”

We find Mr. Rudd’s comments encouraging.   Here is a leader — and one from a left-of-center labour party at that — who is strong enough to resist the siren song of populist protectionism.  He will lose votes for his stance here; he might even lose the next election.  But he is doing the right thing.  Let us hope that other world leaders follow suit.

Charles Sizemore, CFA

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

 We have an ongoing commentary on India, a country with almost unlimited potential but also with a LOT of problems that have to be resolved first.  Among emerging markets, we are attracted to India primarily for:

1. Its sheer size
2. Its orientation towards domestic consumption vs. exports (this makes the country less susceptible to contagion from global economic crises and weak demand from Western importing countries)
3. The country’s youth — with such a young population, Indian aggregate demand will only grow.

But, as we said, India is not without its problems, which include vast rural poverty and illiteracy, an antiquated caste system that still seems to linger on into the modern age, stifling governmental bureaucracy, a vast educational and wealth divide between the “haves” and “have nots,” and — the focus of this post — truly horrid infrastructure.  

The odd thing is, most of these complaints, including that of poor infrastructure, have been heard since the early days of the British colonial period! Read the rest of this entry »

It’s always interesting to get an international perspective on the state of American economic affairs.  Germany’s Der Spiegel published a rather scathing article on the United States’ fiscal management (”Chancellor Merkel Visits the Debt President“), outlining the Obama Administration’s “Five Errors.”   We’ve condensed Spiegel’s criticisms below (though we recommend you read the whole article):

#1.  ”The US amassed much more debt during World War II, it is often said. That, though, is not true. According to conservative forecasts, Obama’s policies could end up being three times as expensive as US expenditures during World War II.” Read the rest of this entry »

The FT had a small headline that we might have easily missed had we been scanning the newspaper quickly: “Gulf rift exposed as UAE quits monetary union.” The monetary policy of the United Arab Emirates is not something that would normally catch our attention.  But viewed within the larger context of globalization and economic integration, the UAE’s decision is quite a bit more significant. Read the rest of this entry »

In early 2007, HS Dent published the special report Changing Global Demographics.  One of the central themes of the report was the gradual decline of the West relative to some of the younger emerging market countries with more favorable demographic trends.  In some ways, our views are similar to those of Fareed Zakaria, CNN host and author of the insightful 2008 book The Post American World, which we quote extensively in the July 2008 HS Dent Forecast.   Zakaria believes that the era of overwhelming economic dominance by the West–and particularly the United States–is waning, not necessarily because the United States is in decline but because the rest of the world is catching up.   We have a lot of respect for Zakaria’s work, and we highly recommend his book.  But if anything, we thing he may be a bit too optimistic.  Read the rest of this entry »

A picture can be worth 1,000 words.  The Economist has managed to summarize everything we’ve written about the antiglobalization movement, the rise of protectionism, and the punitive assault on the rich all in one cover: 

 Notice the Blackberry on top of the dead guy in the front?  And the skyline of London’s Canary Warf financial district in the background?  Absolutely classic.  

We wrote in a prior post about the assault on highly-skilled foreign workers, specifically the restriction on the hiring of HB1 visa holders for companies receiving federal bailout money under the TARP.  Bank of America had to actually rescind existing job offers to foreign students who had received their MBA degrees in the United States.  Today, we see the trend continuing, this time to seasonal workers.  

The Wall Street Journal reported today:  

As more Americans lose their jobs, the U.S. government is actively discouraging the recruitment of foreign workers, from dude ranchers and fruit pickers to lifeguards and computer programmers.

At least three avenues of legal immigration have seen roadblocks erected. In the most visible and controversial move, companies receiving federal bailout money now face extra hurdles before they can hire highly skilled guest workers on an H-1B visa. On Friday, the Labor Department will close a public-comment period for a proposal to suspend an agricultural guest-worker program, known as the H-2A.

The State Department is asking some sponsors of the J-1 visa–seasonal employers such as hotels, golf resorts and summer camps–to reduce dependence on foreign labor.

  Read the rest of this entry »

In the early stages of the housing bust, the myth of “decoupling” could be found on the pages of virutally every financial magazine and newspaper.  There was a genuine belief that somehow the economies of East Asia–which depend heavily on exports to the West–could somehow continue to thrive with the West mired in recession.This has, of course, been proven to be patently false.   Not only have the East Asian nations failed to avoid a slowdown of their own, but in some cases–such as in Japan and South Korea–the East Asian economies have gotten hit even harder than those of the West, where the crisis began.   Read the rest of this entry »