The recent U.S. stock-market volatility has taken a significant toll on the global investment psyche which will have long-lasting effects.
Many of the traders may have calmed down and rationalized their behavior, but the consequences of last week’s stock-market volatility have deeper questions that will plague America for years to come.
The main question in my mind is whether the United States is going into a double-dip recession? And will it mean another global recession?
Whether we believe this is another slowdown in the U.S. economy or a harsher prediction of an upcoming recession, the fact is all isn’t well in the United States.
Unemployment, declining housing, lack of personal savings to sustain a slowdown are all signs of an exhausted citizen who has no way of pulling themselves out of the funk.
Government programs and spending (call it bailouts, quantitative easing, pork project spending, etc.) had saved a much steeper and deeper recession in 2008.
Yes, we had a recession and it was prolonged, but it was assisted by government intervention to somewhat ease the pain.
But this time around, there is neither the political will nor the fiscal ability to provide that ointment to the gaping wounds in the American economy. Due to the excessive debt levels, we don’t have any internal political will or external support (through continued buying of U.S. debt) to allow the U.S. government to overspend and reduce the pain of another recession.
All we have been able to do (and I suspect that we will continue to do in the next year or two) is export inflation around the globe. The excessive printing of money hasn’t helped spur U.S. growth.
We do have some inflation here, but the government’s manipulated measurement scales seem to show that we have none. So all the excessive money finds its way to Asia, which does have growth and where interest rates are high — and where we do get some good yields on the cash.
The challenge is for Asia to continue to grow in the face of three steep challenges:
The first challenge is continued growth through a “Goldilocks” type of monetary policy in Asia. A policy stance which is too loose and inflation would eat into any real growth. Too tight and it would stifle the growth. So the policy has to be just right.
The second challenge is to grow and grow robustly while the developed economies face intense slowdown pressures. The slowdown plagues not only the United States but also Europe.
The European debt crisis will lead to a lost decade in Europe as much as in the United States. Japan can be termed as the “lost economy” for a long time to come. Africa will need a decade or longer at the current levels of investment and some real stability in governance before doors can be opened to real growth.
That leaves Asia and Latin and South America (throw in Australia and New Zealand for good measure) as the only viable growth areas in the globe.
Now the dynamics here are very supportive of growth: a vibrant and young population demographic, higher levels of education, hard-working temperament and keen desire to succeed are all going to keep growth alive in this new region.
The globe will reach 7 billion people in population this year and between Asia and South America we have nearly two-thirds of the population.
So as long as we can really see the countries in question start to trade well with each other and cater to each other’s demands, we will see a continual progress of decoupling from over-dependence on U.S. growth. And this trend won’t be in favor of the United States retaining its global superpower status or the U.S. dollar remaining as the reserve currency.
For example, India just announced its industrial production for July at an 8.8 percent growth year over year while manufacturing was at 10 percent growth. What was also eye popping was growth in exports. After averaging 54 percent year over year in January-July 2011, exports clocked 81 percent year over year in July as per preliminary estimates. This isn’t only strong relative to historical performance but also well ahead of any other country in the region. Petrochemicals and engineering goods remained the main drivers according to media reports.
On the China side, we are seeing re-emergence of industrial production growth again, after a few months of flat data. And Singapore has shown resilience in the face of Western slowdown. As has Indonesia and Malaysia.
I would suggest that you start a serious and disciplined regimen of allocating your investment dollars to Asia and South America and grow your portfolio in a serious manner. This will hedge your investments from slowdowns in America, which are now imminent and going to be prolonged.
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