Thread,
Stratfor's latest, and always provocative, view:
"There is, therefore, no such thing any longer as an Asian crisis."
Global Intelligence Update
Red Alert
February 1, 1999
U.S., Asian Economic News Points Away from Economic Globalism
Summary
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.
Analysis
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 – Korea, Malaysia, Philippines, Singapore and Thailand –
is showing some very real signs of resilience. South Korea is
particularly putting on an impressive performance.
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.
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.
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.
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.
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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