- Summary
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- A year and a half after Asia went into
economic crisis, the announcement of a surging GDP in 1998 shows that the
U.S. has managed to avoid being dragged down by Asia, at least thus far.
In fact, parts of Asia are showing signs of recovery, particularly, South
Korea, Philippines, Malaysia, Singapore and Thailand. Japan remains in
deep trouble while China and Taiwan appear to be getting weaker. The important
news: the nation- state is not dead. The diverging patterns we see indicate
that globalist theories of a single, integrated economy are simply not
true. This means that nation-states will continue to act in ways defined
by national interests, both in their economic and political lives. We
see the twenty first century looking very much like the nineteenth and
twentieth. If the U.S. moves into recession, and it may, it will be because
of the rhythm of the domestic economy and not because of irresistible global
influences.
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- Analysis
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- While the Iraqi and Serbian crises worked
themselves up to their inevitable lather, the important news last week
was the announcement that preliminary figures for 1998 show the U.S. economy
growing by over 3 percent. These figures would have been astounding except
for the fact that they were expected. In fact, we regard them as astounding
precisely because they were taken so casually. U.S. growth rates defy
the conventional wisdom, which holds and has held for well over a year,
that the Asian crisis must drag down the American economy. As so many
people seem to think, this may well happen, eventually. But the simple
fact is that in roughly the year and a half in which the Asian economies
have experienced deep recessions, the U.S. economy has moved from strength
to strength. This is no longer a matter for debate. This is now fact.
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- There are two questions. How could this
have happened and will it endure? The first is easier to answer than the
second. The answer is rooted in a point that Stratfor has been making
for several years. The global economy is to some extent an illusion. This
does not mean that international trade and financial flows are not important.
It does not mean that some sectors of every nation's economy are extremely
vulnerable to shifts in the international economy. But it does mean that
there is not a single, integrated global economy in which national economies
rise and fall in tandem. What we have seen for the past several years
is that it is altogether possible for the world's largest economy to be
in an exuberant up-swing, while the world's second largest economy is trapped
in what can only be called a massive depression.
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- Japan and the United States are simply
running on different clocks. The Japanese clock was set in the 1970s and
1980s when Japanese public policy kept domestic interest rates in the low
and mid-single digits while U.S. and European interest rates were surging
into the mid-teens. Japan enjoyed a massive expansion in the 1980s driven
by lavishly available cheap money, while the United States underwent a
massive, painful restructuring of its economy. Japan then built up massive
inefficiencies, which it had to confront in the 1990s. Its markets topped
in January 1990, and have been in decline ever since. The U.S. markets
began their long-term growth in 1982 and with some interruptions, continued
their growth unabated until this day. After January 1995, these markets
took off like rockets.
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- U.S. dependence on exports to Asia was
simply not large enough that their decline would substantially affect the
U.S. economy. Certainly, some sectors were hurt, but they were neither
strategic nor the pain massive enough to ripple through the economy. Rather
than decreasing financial flows in the U.S. markets or even reversing them,
the Asian crisis intensified them. As the Asian markets buckled, the U.S.
market became not only a safe haven, but also an arena in which rates of
return on risk capital previously experienced primarily in hot, emerging
markets, could be sustained in the exotic world of internet stocks.
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- The linkages that were assumed to be
present between Asia and the United States simply have proven not to be
there. In fact, we see an interesting divergence taking place in Asia
itself. In spite of the claim that Asia cannot recover from its problems
without Japan taking the lead, the fact is that a good portion of Asia
is showing signs of strong recovery, even though Japan is showing no real
signs of recovering. We do not normally forecast the stock market. If
we really knew what the stock market was going to do, we wouldn't have
to work for a living. Being able to predict long-term economic trends
is not even slightly connected with the ability to time markets and pick
stocks. Nevertheless, while Stratfor doesn't predict the stock market's
future, we find stock markets extremely useful in telling us where we've
been and where we are now.
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- Looking at the East and Southeast Asian
markets shows us that a fascinating pattern has emerged since last summer.
Asia seems to be segmenting itself into roughly three camps. First there
is Japan, alone in its splendid, isolated misery. Then there are the Chinese
markets, Shanghai, Hong Kong, Taiwan, showing ominous signs indeed. But
for the rest of Asia (with Indonesia the major, important exception) the
markets seem to be showing every sign of recovery.
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- Take South Korea as an example. It reached
its top in July 1997, and then fell about 63 percent until June 1998.
However, since its June bottom, the Korean stock index has nearly doubled,
until today it rests only about 25 percent below its all time high. A
similar pattern can be seen in Malaysia, the Philippines, Thailand and
to a slightly lesser extent, in Singapore. Each of these markets seems
to have bottomed between August and October of 1998, and have roughly doubled
their value since then. Now, having fallen precipitously, most of these
are still substantially below their tops. They still range between about
30 percent (Philippines) to 50 percent (Malaysia) below the tops they hit
in 1997. Nevertheless, the markets are clearly telling us that these economies
have at least bottomed and that some sort of recovery is now under way.
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- The China patch shows a very different
pattern. Hong Kong topped out in July 1997, and bottomed in September
1998. Since then, Hong Kong has risen a bit over 50 percent. Shanghai
topped much later than the rest of Asia, in June, 1998, hit a bottom in
September after falling about a quarter, and bounced roughly 20 percent.
China showed much more strength during 1997-98 and it is therefore reasonable
that it has not bounced. But the failure of Hong Kong to participate more
vigorously in the rest of Asia's recovery is troubling.
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- All of this could easily be dismissed
until we get to Taiwan. Politics notwithstanding, there are strong economic
bonds between Taiwan and the mainland. The economies are linked financially
in relationships running both ways. Taiwanese invested heavily in China
while Chinese entrepreneurial and other money sought safe havens in Taiwan.
We tend to think of Taiwan as loosely linked to China's economy. Here
the numbers are scary. Taiwan's markets topped out in August 1997, and
since then have fallen about 40 percent. But Taiwan's markets are still
probing for a bottom, having bounced hardly at all.
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- The Chinese markets, therefore, held
up the best during the Asian crisis. They fell the least. One would have
thought that they would, therefore, have led the Asian markets up, moving
from strength and the fact that a Southeast Asian and Korean recovery raises
hopes for Chinese exports. Nevertheless, China's markets have shown limited
bounce. Rather than take a leadership position, both Shanghai and Hong
Kong are lagging. Taiwan is in the pits. Whatever the future holds, the
China patch is certainly not behaving like the rest of Asia.
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- Then there is Japan, which is behaving
like no other country. Japanese markets hit their top in January 1990,
years before the rest of Asia. Since 1990, the Nikkei has lost about two-thirds
of its value, reaching its lows in January 1999 and not participating in
the summer-autumn 1998 rally at all. The markets are telling us that there
has been no recovery in Japan and that none is reasonably expected in the
near future.
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- There is, therefore, no such thing any
longer as an Asian crisis. There is a Japanese sickness, long, dreadful
and from all- apparent signs, incurable. China is clearly running out
of steam while Taiwan is succumbing to some malady. It is not clear whether
this is the Japanese illness or a precursor of a general Chinese illness,
but something is very wrong. Indonesia is in a class by itself, suffering
political and social problems that make economic recovery difficult if
not impossible. But the rest of Asia ñ Korea, Malaysia, Philippines,
Singapore and Thailand ñ is showing some very real signs of resilience.
South Korea is particularly putting on an impressive performance.
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- There are national patterns; there are
regional patterns. But there are no global patterns. There is no longer
even a single Asian pattern. In other words, the nation-state, written
off by "new age economists" during the 1980s and 1990s remains
the primary vehicle for economic expression. Nations can and do control
their economic destinies, if not in the sense that policy makers can determine
economic life, then at least in the sense that the internal economic clocks
driving national economies continue to control outcomes far more than do
affairs in neighboring countries. It seems to us that this is no longer
a matter of debate but an empirically demonstrable fact. We have seen
a global economic laboratory underway since the summer of 1997, in which
the globalists' theories were tested. Rather than experiencing world depression,
nations have experienced the past 18 months in very national ways.
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- Now, the counterclaim is straightforward:
just you wait, it will all fall apart. Perhaps, but it is not clear to
us why what didn't happen in 1997 and 1998 will happen in 1999. Put differently,
since the theory of the globalists cannot explain why the U.S. economy
has continued to boom as it has in the face of Asia's problems, the theory
cannot be used to explain why the U.S. economy should collapse in 1999.
This is not to say that 1999 won't be the year in which the U.S. markets
top out for this cycle and the U.S. experiences a recession. A recession
is long overdue. As our readers know, we are strong advocates of recessions.
The 1991-92 recession in the United States may have cost George Bush his
job, but it got a lot of other people employed. Recessions impose discipline
and are long-term tonics. Asia's major problem is it followed policies
designed to postpone recessions. Rather than take their medicine in small
doses, they've had to eat a giant medicine sandwich now.
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- So, after the longest expansion in U.S.
peacetime history, we would not be surprised or upset to see a recession.
Not that we know anything about the stock market, but price-earnings ratios
of over 33-1 seem like a bit of froth to us and we are troubled by the
market breadth measurements, which are uncomfortably weak in the face of
the current rally. But what do we know about the stock market? Particularly
when, on the other side, Net Free Reserves, a measure of the Fed's monetary
direction remains relentlessly and boringly positive and the yield curve
remains positive, meaning that there is no flight to the safety of short-
term paper. In other words, while the financial figures may not support
the market at the current level, and the clock is telling us it is time
for a short, sharp recession, the fundamentals simply don't point to a
definitive end of the long-term bull market in the United States. From
a broad, geopolitical standpoint, looking at the next decade, we see nothing
on the horizon to abort permanently this American economic golden age.
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- Note that we said "economic."
Note also that we have been describing a world that is increasingly national
in its economic behavior. This also means a world that is increasing driven
to protect its national self-interest. If a nation's fate depends on Tokyo
or Washington, it is likely to work with Japan or the United States. But
if a nation's fate is its own, then it is less likely to cooperate with
the international regime and more likely to pursue its own interests in
its own way. The Asian recovery we have described is taking place with
precious little IMF, World Bank or foreign government help. It is nationally
driven.
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- This is not only a challenge to globalist
economic theory. It is also a challenge to globalist political theory,
which has spent a decade talking about our world as if borders no longer
existed. There are not only borders, but there are also cultures, religions
and interests that have not been abolished by global markets or by CNN.
This means that the twenty-first century is dawning very much like the
nineteenth and twentieth did: with nations pursuing their own interests
in a world where borders matter very much. South Korea is recovering because
of South Korean resources, regardless of Japan's problems. That is startling
news. It means that the world looks very different from the way many thought
it would look.
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