I was going through Business Week and all pertinent information available on ASEAN economies, there have been talks of interest rate hikes from IMF officials. On the other hand, there are contradictory reports emanating from Asia on its turnaround, about which I posted an article just yesterday, whereas Business Week has an article saying that Asia's problems have still not surfaced and there is still a lot of uncertainty.
Undoubtedly the fact remains that Japan is the key, and Japanese tax cuts and the stimulus package is reportedly not being spent in the right place; its not generating the kind of economic activity which will remove the structural deficiencies of the economy. Japan's apparent inability to address the demand problem has more to do with the entrenched Asian mentality of "more saving" and a slant towards insecurity. The economists will not be able to redefine the way the Japanese live. They have become a big nation and the world's second largest economy being an island nation. They don't have to reinvent the wheel; they know what to do. For any cycle to self-destruct its not the income-producing asset inflation, its the non-income producing asset inflation which causes the bubble in the economy, the kind of real estate bubble we've seen so far in Asia and Japan. At the height of Nikkei, the P/E ratios were as high as 75-80. As P/E ratios are expected to drop, we will see some normalcy.
I also don't believe that the Japanese economy will not be able to turn around. It is the sixth most efficient and competitive economy in the world. It has suffered from the hands of excessive speculation. The session is a reminder of the speculative bubble in the real estate market, where I'm repeating myself again, that an acre in Central Tokyo was once priced equal to the whole island of Manhattan. The prices were as high as $1 million per square metre; these are the excesses of speculation.
But in case of the present economy in UK or USA, it does not have the kind of disturbing signals of non-income producing asset inflation. This is an ideal position for any economy to reach where there is non-inflationary growth. The free market economiteers and neo classes do not have answers to this present state of economy. The breakdown of growth/unemployment relationship is as big an event as Einstein's theory of relativity. Since '95, Bankers Credit Analysts and all the European fund managers have been on the wrong side of the bet. I remember watching Abby Cohen talking to these fund managers two years ago where they thought 5500 was too steep for DOW. They wanted to see it at 2000-3500, and now, the same managers that I saw the night before, want to re-enter at 7900 having missed a chance as close as at 28th October at 6900.
This is not a speculative bubble. I doubt if a single Fed increase of rate would break this. I think, like in early '95, even if Fed decides to increase the rates, we'll be setting up for a good run by the year 2000. The dips will only be opportunities to buy. Talk of corporate profits not meeting 7.6% growth does not take into account a small factor and that is that the world is being brandized. Due to efficiencies within corporations, the profitability is increasing in big companies and of course the economy growth is only 3%, but the point that is not being appreciated is the higher percentage of GDP is being captured by S&P 500 companies. So, if the total economy is $7 trillion, at 3% growth, the economy grows by $210 billion; it is the big companies with brand products that benefit the most from this growth of $210 bn. They have the advantage. This should be seen in conjunction with the other sector that is much smaller; the mom-and-pop stores are not really flourishing. Add to it the new element of diminishing budgetary deficits, lower taxation and of course as the possibilities of budgetary surpluses increases, we've never had it so good before. But even with the global nature of the market, we are still looking at the growth of the economy domestically without realizing how much of global growth is trickling down to American corporations.
Consumer confidence is high, but if classic economic principle should have held, 2-3 years is a long period, inflation should have crept up, which means something has broken down - we have highest consumer confidence, high capacity utilization, but very low employment cost index, whereas only last month everyone was saying that wage pressures are being detected. I think maybe there is possibility of redefining a new set of principles for global economy. I think the present economists are unable to understand the windfalls from globalisation. Only time will tell that its a new paradigm, or that a new economic model or new economic interpretations are required.
I wrote to Bankers Credit Analyst two years ago. They had told all their clients to short the market because of inflationary fears. When they asked me to renew the subscription, which is quite expensive, about $500 a year, I wrote to them saying that they'd been wrong about the market for the past one year so on what basis should I renew? Since last one year they have been somersaulting between inflation and deflation. They have not been able to identify or reorganize the issues involved here and that is what I'm worried about. I am only an amateur meter of the market, but I am just worried why they are still insistent on models which have failed them over a period of last seven years. The market can go between 8000-9000 but the direction of the market is up and the trend is up; dips will be opportunities.
Iqbal Latif |
