Seismic Shifts In The Global Economy

Saturday, December 10, 2005

While Thomas L. Friedman postulates "The World Is Flat" a look at economic and political developments leads me to the conclusion that nowadays many principles of the last century get turned upside-down. Although many shifts in the world are not apparent to the eye, even when sucking in myriad pieces of information, capital markets are speaking a clear language. The power shifts from the West to the East.
Take bond markets. Yield spreads between the so-called 1st world and the developing countries have shrunk to levels that were unimaginable before the millennium.
When a conflict-torn dwarf-nation like Serbia can find buyers for debt maturing in 2024 that pays a coupon of 3.75% while the US has to pay some 4.50% for the same maturity I face a conundrum.
The other conundrum is the performance of European bonds altogether. The basis for the Euro is the stability pact that stipulates that governments must not exceed a target of 3% for budget deficits in comparison to GDP. This target, established in 1999 when Europe's economies enjoyed growth rates above 3%, has not been met by the biggest European economies for years. Bond investors, mainly pension funds and other institutionals, don't seem to mind though. 10-year German government bonds still yield a paltry 3% although all economic indicators are sliding downward with no end in sight. Even Italy can continue to pamper its bloated public sector, where employees can be more reliably found in their favorite espresso bar than behind their desks, with ridiculously cheap new debt, given the fact that the country's growth rate falls within the statistical margin of error.
Take share markets. Despite the comparatively strong officially published GDP growth rates in the US the stock market limps along on the crutches of still excessive liquidity. European shares meanwhile have performed impressively this year although the growth outlook can be described as foggy at best and energy-induced inflation will roar its head foreseeably in 2006 and after that. Here too the performance can be directly linked to excessive liquidity that costs governments just the paper and ink to print more fiat money.
Turning further east, I can only marvel at the performance of equities in places like Russia and India. Both markets are racing from one all-time high to the next. At least these moves follow a rationale. Russia, discussed in an earlier post, can brag about a balanced budget and strong economic growth while inflation has been stabilized at manageable levels.
India looks altogether like a place to be when in search of economic dynamism. The country has embarked on a flight towards greater economic freedom after having followed austerity policies until the 1990's. The gamble has paid off. India's silicon valley in Bangalore is now home to the biggest software development centers in the world. Only a few days ago Microsoft has announced another multi-billion investment in India which turns out three times as many engineers every year as the USA do. With a middle class counting more than 300 million people the biggest democracy in the world can fall back on huge domestic demand in case the economy in the until now so-called 1st world turns sour.
Turning to China one short paragraph is enough to decribe the outlook there. Chinese officials estimate growth to average more than 8% until 2020. This year China has become the largest vehicle market in the world and it now does what Japan did 40 years ago: It starts to export locally produced cars to the rest of the world.
Let us fly back a bit westward again in our virtual tour of the global economy. The former members of the communist bloc in Eastern Europe are all posting impressive economic growth rates too. As a result investments in the Polish share market are to be counted to the ranks of the top performers in a global portfolio.
The same can be said about Austrian shares. The former empire spanning from Venice in Italy to Lwow in the Ukraine and the coast of the black sea now enjoys a stock market that jumps to new historic highs frequently. Reason for the success is their early drive in the developing economies in East Europe where they now have a strong footing, especially in the finance sector.
Taking a plane down south to Africa yields a mixed picture. While democratic South Africa is the economic powerhouse of the continent, its neighbour Zimbabwe is hit by the worst humanitarian crisis the regime of dictator Robert Mugabe has brought along.
Other African countries are set to share in the new wealth the commodities boom from commodity-poor China will bring. As China has relatively few commodities it has gone on a buying spree that will last forever.
Looking at the gold price which has always been a barometer for the expected stability in the world it is almost ironic that the growing uncertainty about coming developments will help the poorest countries in the world most. 70% of today's gold production comes from the 25 poorest countries in the world.
My conclusion of all this is: When scouting for profitable investments throw the old dogmas overboard. The world is changing more rapidly than ever and I see no stone that will be left unturned. The seismic shifts will come as no surprise to those who stay on top of the information that is so easily available on the world wide web.

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