Se Extiende a Europa y Asia La Recesión

miércoles, 14 de mayo de 2008

The crisis rotates from America to Europe, and Asia

After taking sedatives, wiping away the foam, and breathing deeply for an hour on the floor, I am calmer now, and ready to answer a great clutch of posts on my Monday's View, which was perhaps a bit - well - bearish.

Chinese people riding bikes
China's long-term prospects look grim

Like others, I have been waiting and watching since the Fed went nuclear with emergency rate cuts in January, and even more nuclear in March by invoking Article 13 (3) for the first time since the 1930s to save Bear Stearns - and by extension to save the derivatives system.

I briefly shared a degree of "market infantilism" about a recovery. After all, the Fed has never acted quite so dramatically before. But it has since become evident, at least to me, even if it was already evident to Nouriel Roubini, Michael Panzer, and other Stern bears, that rates of 2 per cent cannot stop an ugly debt purge, and nor should they do so.

This is not to dismiss the latest Fed actions as a "failure". The Bernanke rescue has averted a downward spiral that risked ending in depression. There will be no depression now, but nor will there be an easy recovery.

By using the term Global Slump, I do not mean a global depression along the lines of the 1930s. I mean a global downturn that persists long enough to do serious damage and change the lives of a lot of people.

The IMF defines a `global recession' as fall in world growth below 3 per cent - a very rare event. It says there is a 25 per cent chance of this happening. Will the sky fall if that happens? That depends on who you are, and where you live. It did not fall for most people even in the 1930s.

One can glimpse a flicker of light already at the end of the American tunnel. The economic woes are still spreading as the delayed effects of the credit crunch hit home, but the shape of the downturn is becoming clearer - it looks like a W, with deeper dip on the second V. America's bad news is mostly in the market.

What is not fully priced into the market is the second half of the story: that Europe, Japan, and arguably China are also coming unglued. This is not US contagion as such - though for Japan it surely is - but rather because these regions face their own internal boom-bust cycles.

Europe's Latin bloc, the Baltics, Ukraine and Kazakhstan, all risk a crunch after letting rip with credit - indeed, Italy is now brushing recession and Spain is crumbling by the day.

Britain has become a disaster area, of course. Today's RICS (Chartered Surveyors) report on housing was the worst since records began in 1978.

Commercial property has fallen by almost a third in the London region. The budget deficit reached 3 per cent at the top of cycle, leaving no fiscal ammo to fight the downturn. Household debt is 103 per cent of GDP. I weep for Britain as much as I weep for America.

I confess that I do not speak with authority on China, and may be wrong to doubt the miracle -- so much like the Japan hype of the late 1980s to my jaded eye.

I look to clever people who know what is going on, such as Dr Kwan Chi Hung from the Nomura Institute -- an esteemed figure in the Far East, and himself Chinese - who believes that China's long-term prospects are "horrible".

China's workforce will peak in seven years (the delayed fruit of the one-child policy) and then go into the steepest downward spiral ever seen by a large nation in peacetime. It will, and do so long before it is rich. This demographic implosion cannot be reversed quickly.

Dr Kwan says China enjoys a dreadful return on capital because credit is still allocated by a Communist banking system pursuing political aims.

This is how disasters on a truly huge scale are incubated. Competitiveness is in any case slipping. It is already cheaper to produce cars in Japan than China, he says.

Charles Dumas, global strategist at Lombard Street Research and author of a new book `China and America: A time for Reckoning', says China must soon slam on the breaks as inflation hits 8.5 per cent, or let overheating get out of control. "The Chinese will have to slow sharply, and it will start in earnest this autumn," he said.

Much the same can be said of Vietnam, Russia, Argentina, the Gulf states, now inflating at double digit rates. The Emerging Bloc has hit the buffers. They either pop their bubbles, or spiral into hyper-land -- from which no government ever returns safely.

The fat reserves of Russia, China, East Asia, and Latin America may cushion them from investor flight, but these holdings cannot cushion them from a home-bred squeeze. The game must soon be up.

In answer to the commodity bulls, yes, the super-cycle is here to stay. Peak oil, peak metals, and peak food all loom, to some degree. But that does not preclude vigorous mini-cycles along the way.

The International Energy Agency has downgraded its oil forecast yet again, predicting that consumption will grow just 1m barrels a day this year, down from its 2.2m bpd call last July. Inventories are building up across the world, including China, nota bene. China's copper stocks are rising too.

I dismiss the Goldman Sachs suggestion of $200 oil this year as one of those silly utterances that occur at the top of a spike.

Yes, I know that the Goldman seer Arjun Murti struck lucky with an equally outrageous prediction before, but that is just a curiosity. His arguments this time were very thin gruel, at least in the report I received. It seemed to rely - implicitly - on speculative momentum.

Will I resign if there is no Global Slump? Certainly not, (though I may be booted out).

Am I going through mid-life depression? Been there, done that, come out the other end, I hope. Rioja helps.

In reply to Aussie, what did you mean by the quote from Kant: "Reason is Refracted"?

Bravo bringing Kant into a business blog. He was the greatest of German philosophers, as different from the charlatan Hegel as Hyperion to a Satyr, or Volcker to Greenspan.

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Aportando al debate con alternativas económicas desde 1978