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China Will be a Winner in the New Economy
The following is an excerpt from a recent opinion piece of mine in the Wall Street Journal. For links to this and other writings, please feel free to visit River Twice Research.
The incoming Obama administration will face formidable challenges, but global economic collapse is no longer imminent. That may be small short-term comfort to the markets and Main Street. But having stared down the abyss, governments around the world appear determined to address root issues. The G-20 gathering of the world's major powers in Washington on Nov. 15 was only the beginning of a long and constructive process of revising the global system.
In the new system the United States will still be the largest economy but no longer the sole determinant of global economic health. The new winners will be cash and China.
Those without cash are in a precarious position. Tens of millions of homeowners and property owners in the U.S., Europe, the Gulf region and Asia have seen the value of their assets decrease sharply. They either have negative equity or insufficient income to make payments. Pension plans and 401(k) accounts have been devastated by a 50% plunge in global equities. Millions of workers have lost or are about to lose their jobs. The U.S. government balance sheet will become even more debt-laden.
But every crisis creates opportunities -- or at least so goes the old Chinese saying. This time is no exception, and China will emerge victorious. As its recently announced $600 billion stimulus package makes clear, those who have cash can spend their way through this global crisis, and China has lots.
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Some nice reads on your links, Zachary. Somewhat troubled by the discussion that there are still trillions out there "sloshing around," even though $30 ($40? $50?) trillion have melted away. I can agree with that, and that there's huge opportunities out there for global investors, and that the system is responding more quickly than in the 30's, but...
1. Money's neither melting nor flowing EVENLY across the global surface, or even within any one economy, its firms, or households. There are real problems with this, as each of these players is then linked to specific others, but also in an uneven manner. So a 10% hit, while manageable if spread evenly, can drive much deeper holes if concentrated in certain industries, regions, etc. And those people/firms/regions, if pitched into full decline, are more likely to respond with behaviors that are well out of the mainstream. This can cause serious problems for neighborhoods, families, industries, etc. e.g. If an investor goes down, ok, maybe we're fine, but what if it's Buffett? An industry goes down, but if it's cars? A university blows its endowment, but if it's MIT? A team can handle all players being injured an average of 10% of the time, but if Brady goes down for a season?
2. It's one thing to say lots of hedge funds are going down, or the derivatives burden is being processed, but much of this financial world still operates without much transparency. Say 1 in 3 hedge funds will take down their shingle. Does it matter if we don't know precisely who? Ummm, yes. It makes everyone in general more cautious than, on average, they'd need to be. And especially so, given #1. A random pop might be fine, but if it's in your bailiwick, you want to be protected, right? But you can't know, so.... you feel like you need even more protection, to handle the uncertainty.
3. Yes, the world's governments are responding faster. But there's utterly no guarantee that it's fast enough. Especially when combined with the uneven nature of the impacts & the uncertainty mentioned above.
4. Cash. Ok, a lot of money is parked. Waiting. Fine. And then it starts moving, believing it's found new opportunities. But where is it parked, and where does it head to? If a lot of cash is parked in country A, which, let's say, has a particularly powerful currency, but which also happens to be a country which suffers from extreme trade & other imbalances at the moment the cash exits, what does this do to it? Something quite different than if it was parked in the currency of nation B. Maybe the investor is ok, found a nice opportunity. But the country? Could be trouble.
Anyway. Thanks for the article & links to your blog. Made me think. Sorry for the long comment. Bad habit.
December 2, 2008 2:14 AM | Reply | Permalink