``Is Asia decoupled from the U.S. economy? Only partially. About 60% of Asean's and Northeast Asia's exports are ultimately consumed in the G3 countries (the U.S., the EU and Japan). A U.S. recession will slow growth in the EU and Japan. However, at least 60% of the shoes, textiles, garments and other essential consumer products these countries import will come from Asia, providing a buffer for Asian manufacturers. Those Asian economies that export commodities, oil and gas will also benefit if these resources continue to command high prices. India and China are set for rapid growth. Both have the resources to increase spending on infrastructure and to stimulate consumer spending. Only 35% of China's economy is consumer driven. This could be pushed up to 50% to 60%, which is also true for India. We'll soon know if China will be able to rely more on domestic consumption for its growth. Once the Chinese are accustomed to spending more of their disposable income, trade imbalances will decrease.- Lee Kuan Yew, China's Olympics Journey
One of the seemingly implausible observations is for experts to suggest that any global economic recovery would likely originate from the US.
Since the US had been the epicenter of the crisis, whose malaise belatedly spread to almost the entire world, the aggressive policy actions are deemed to have aptly settled most of the balance sheet impairments and should pave way for normalization of its economic cycle. For us, this is putting too much faith over the efficacies of the actions of policymakers.
While true enough, the world is momentarily feeling the brunt of the real economic impact of the downturn, many parts of the world remain affected because of trade and capital flow channels than from a debt overhang in their national balance sheets. In other words, the recent synchronization of markets had been mostly because of forcible liquidations from the debt deflation process and isn’t representative of the same disorder suffered by many OECD economies as compared to Asia or other select emerging markets.
What we’d like to point out is that many balance sheets of Asian economies for instance remain lightly leveraged, (as we discussed in Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?) such that if the US seems having a hard time normalizing credit flows, I would venture a guess that once the effects from the trade nexus subsides, credit take up will most likely be more apparent in economies unhampered by the debt.
Since there are more unknowns than what can be known, we’d be operating from the standpoint of what we know based on what’s happening with the US, the largest and most influential economy of the world today, and its possible influence to the world.
What we know:
1. Inflationary policies are laden with unintended consequences.
2. Applying greater degree of inflation means a further loss of purchasing power of the currency or a lower standard of living.
3. More government intervention means suboptimal resource allocation which also entails suboptimal economic growth.
4. The shift in the leverage to government involve a “too big to fail” paradigm which only increases systemic risks. Governments cannot be viewed as “risk free”. Iceland’s fall should be a reminder (see Iceland, the Next Zimbabwe? A “Riches To Rags” Tale?)
5. The US economy and financial markets are now “Housed” by Ben Bernanke who is playing the financial game with a loaded dice. Meanwhile, the US government is also playing the economic god.
6. Because life and death of industries depend on Washington’s blessings, lobbying has turned into a sunrise industry.
7. Policymakers are still struggling to figure out how to deal with the crisis and thus exhausting all creative means for instantaneous results at the expense of the future.
8. The US will be operating from the perspective of government consumption as driver of the economy since private consumption, investment and exports will likely remain soft. Yet, government spending doesn’t create value or raise aggregate demand because it has to get money from somewhere from the economy mostly via redistribution.
This from Daniel J. Mitchell, Cato Institute, ``This is a debate about Keynesian economics, which is the theory that the economy can be boosted if the government borrows money and then gives it to people so they will spend it. This supposedly "primes the pump" as the money circulates through the economy. Keynesian theory sounds good, and it would be nice if it made sense, but it has a rather glaring logical fallacy. It overlooks the fact that, in the real world, government can't inject money into the economy without first taking money out of the economy. More specifically, the theory only looks at one-half of the equation — the part where government puts money in the economy's right pocket. But where does the government get that money? It borrows it, which means it comes out of the economy's left pocket. There is no increase in what Keynesians refer to as aggregate demand. Keynesianism doesn't boost national income, it merely redistributes it. The pie is sliced differently, but it's not any bigger.” (highlight mine)
Thus, government consumption as driver of the US economy will likely be a short term fix but isn’t likely to provide the much widely expected support over the long term.
Overall, the operating environment of the post crisis US economy will be one with less degree of market openness, lesser productivity, greater regulation, higher taxes and lower leverage. Our view is similar to PIMCO’s top honcho Mr. William Gross where in his recent outlook wrote, ``My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.”(bold highlight mine)
Thus the implied market and economic impact:
-This suggests that on the basis of recovery, Asian markets are likely to outperform the US markets if not recover earlier economically barring any further crisis.
-Asia’s economy or markets will not be immune to the volatility elsewhere especially from the US, as the recent events has shown. But over the long term it could be expected to build on its newfound “advantages” and would be perhaps less vulnerable.
-Over the short term, given the collective low interest inflation inducing environment worldwide, combined with the underperformance of Asian markets during the recent rout, any global market technical bounce should also likely reflect an outperformance of Asian markets relative to the US.
-Over the long term, the normalization of the economic cycle would translate to renewed appetite for risk taking, this means capital flows should revert to where economic growth remains least unimpeded by government instituted restrains. In addition, given the lack of leverage within Asia, our bet is that the next round of credit uptake will likely stem from the region.
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