Saturday, December 27, 2008

The BRICs are falling like bricks

Brazil, Russia, India and China, aka the BRIC emerging markets, are victims of the the world wide recession. Does anyone know of a country that is immune to the current credit and consumer confidence crisis? Even Dubai has seen a massive drop-off in real estate.

The US is deploying massive fiscal and monetary injections of dollars into the economy. The rest of the world is doing the same, leading to a "war-time financing in the absence of war", to quote Niall Ferguson.

But this war needs a name. The worst recession since "fill in the blank" is running out of blanks. No one wants to hear or use the "D" word, depression, as in "the Great Depression". In fact the words Great and Depression are enjoined forever now in our lexicon. The pundits say that term doesn't apply to the current crisis because unemployment will never reach 25%. But the sheer number of people out of work in American (and the rest of world) may indeed surpass the numbers in the early 1930's. Eighty years ago, agriculture dominated our economy. Farmers couldn't sell their crops, but they could eat them. The soup lines were in the cities. Today, we all live "in the city". In a somewhat whimsical forecast article published in the Financial Times today, Niall Ferguson coins the term "The Great Repression". Works for me.

In WWII, the world suffered, the US suffered, but the US emerged stronger. And led the world's recovery right up to the current crisis. The same thing will prove true in this war. Forecasts that our time has come, that our models are broken, are plain phooey. The world is exchanging "their" surplus dollars for "our" 0% yield T-bills - thank you very much. Oil-rich countries that over-leveraged $100/barrel oil (Venezuela, Iran and to a degree Russia) are devastated by $40/barrel oil. Deflation prone Japan, which recently saw their worst monthly drop in GDP ever, will lose their #2 position in the world's economy forever. China will learn a bit of humility perhaps. America and China will emerge stronger after The Great Repression.

Monday, December 1, 2008

Maybe this time we've learned out lesson??

A good strategic question raised by Tony Jackson in the Financial Times commenting on a Morgan Stanley forecast - "The present downturn is neither the Great Depression nor Japan because (in essence) all previous mistakes have been avoided this time." Tony is correct to observe that this assumes that all possible mistakes were contained in those two economic episodes and none of today's policy actions will later turn into new mistakes. (Japan once famous for poor quality imports, then highest quality DRAM memories, and ultimately all manner of cool consumer electronics is now famous for a never-really-ending deflationary stagnation).

As for the Great Depression, all we have are history lessons. No one alive today was old enough in 1929-1932 to understand what was happening. Paul Volker, Obama's new Recession advisor, was in diapers in 1929. Recently I tried reading the Financial Times to my 3 year-old granddaughter, but I don't think a single word sank in. A lot of help she'll be when the "Economic Disaster of 2090" occurs.

A world economy of $80T with 4B consumers, and 1B investors, all connected to online information and complex trading systems. But with different goals, strategies, political, emotional and cultural bias. In other words (to paraphrase Black Swan theory), knowledge of past events cannot perfectly prevent tomorrow's surprises. That's why they're called surprises. At least the smartest people are (gathering) in the room.