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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: The AA Milne theory of the tiger economies, Asean economies ditch reliance on overseas money, BRICs hit wall, US stronger than we thought, A round-up of GDP. Companies in the news: Capital&Counties, Direct Line


The AA Milne theory of the tiger economies

Back in the 1990s the talk was of the tiger economies. Then 1997 happened. They went from tiger to Tigger and then everything went to Pooh.

The problem was that money flooded in during the boom years. When the economic backdrop started to change in the West, the money went pouring back out, and left behind a region propped up by leverage. The region had the opposite of the zombie problems we have in the West. When crisis struck over here in 2008, governments and central banks came riding over the hill, as if they were the US cavalry. Banks were rescued, interest rates were cut, then cut some more, and then really cut. After that, QE was revealed. The single biggest danger to have emerged has been the emergence of a zombie economy – banks, non-financial firms, households, even governments that have been kept afloat by abnormal monetary policy. Maybe we would have been better off if they had been allowed to fail, so that the economy could re-start. Maybe to an extent this did happen in the US, and maybe that is why the US economy is seeing better performance than most European economies. What we can say is that the experiment is inconclusive.

After the crisis of 1997, the IMF, egged on by Alan Greenspan and our beloved Gordon Brown, waded into South East Asia like John Wayne. Interest rates rose and austerity was imposed. The result was devastating. The region plummeted into depression. The letters I, M and F – when used in unison – became the three most unpopular letters in the region. Truth was, the global consensus – what former World Bank chief economist, Nobel Laureate, and arch critic of the IMF Joseph Stiglitz called the Washington Consensus – was more interested in protecting western assets than saving the economies of the region.

It is a little odd. You can see why rapidly growing economies, but with vast untapped potential, could benefit from bail-outs, low interest rates and capital flows. You can see why old, mature economies, stuck in their ways, and dominated by banks that had lost touch with the real world needed creative destruction. We got the opposite. The developed world got bail-outs, and the developing world austerity.

There is a parallel with the Eurozone too. Spain, in particular, may be said to be analogous to the tiger economies. Because it shares a monetary system with Germany, it had interest rates that were lower than was appropriate, and money – especially German money – flooded in. Part of its problem today is that the money flowed back out.

Asean economies ditch reliance on overseas money

Here is the good news.  According to Bloomberg, soaring savings rates in the South East Asia region has meant that bonds sales are being largely funded by local money. “Local investors hold 88 per cent of domestic government notes in the Philippines, 85 per cent in Thailand and 73 per cent in Malaysia,” it states.

Bloomberg quoted Lee Kok Kwan, deputy chief executive officer of CIMB Group Holdings, as saying: “One thing that Asia learned from the 1997-1998 financial crisis is that reliance on foreign-currency funding is toxic.”  Apparently the savings ratio in Singapore was 49 per cent of GDP last year. It was 39 per cent in Malaysia.

See: Record Bond Sales Showing Lessons of 1997 Learned: Asean Credit
One assumes rising saving ratios have their roots in the IMF rescue, and the bitter taste this left.

But the IMF errors of 1997 are completed by the fact that this rise in savings rates may not prove to be desirable in the long run. Countries need to growth in consumption too, because if that does not happen, instead of being reliant on overseas money, they become reliant on selling to overseas consumers and businesses.

BRICs hit wall

Turning from the poster boys of pre 1997, to the stars of the noughties – the BRICs – and it seems trouble is ahead.

Capital Economics has been reviewing the situation. So let’s run through them from B to C.

Brazil’s problem is too much consumption. A boom in commodities helped promote a consumption boom. Alas investment lagged behind. The country has one of the lowest investment rates in the emerging world. Increasingly, growth in Brazil has come on the back of debt. Leverage is now looking nasty.  “Brazil’s households now spend roughly a fifth of their disposable income servicing debt,” says Capital Economics. Now consumption is faltering. To enjoy a sustained recovery, Brazil needs to see a massive jump in investment, but poor infrastructure and the high value of its currency the real are holding this back.

Russia’s problem is reliance on oil and gas. After the collapse of the Soviet Union the country had considerable spare capacity. As the price of oil and gas surged, the economy boomed.  But just as is the case in Brazil, investment has lagged way behind, and infrastructure is poor. Apparently it costs more to ship goods from Russia than any other emerging country. Russia is not an easy place in which to do business. According to the World Bank’s report looking at the ease of doing business across the world, Russia came in at 112th. Still, looking on the bright side, its president is good at shooting tigers – although, maybe it needs to be a bit more like tiger economies.

India’s challenge lies with reforms, or lack of them. Between 2000- 2004, India was the land of reforms, but since then it has stopped. The stories last year about India relaxing rules on Foreign Direct investment into retail illustrate the point. These reforms came too slow, and don’t go far enough.

And then we get China. The challenge here is pretty clear, and it is pretty much the complete opposite of the challenges in Brazil. It is too much reliance on investment, its consumers don’t spend enough; they save too much. In the West we too often see China as the unstoppable juggernaut. The truth is that China has to fix the problem of too saving and too little consumption. Japan faced a similar challenge twenty years ago. It did not meet the challenge, and now that its consumers are spending more, it is – thanks to demographics – frankly too late. China is in danger of going a similar way.

Capital Economics concludes: “The upshot is that the slowdowns that the BRIC economies have suffered in the last couple of years are unlikely to be substantially reversed.”

US stronger than we thought

When data on the US economy in Q4 2012 was revealed last month, some panicked.  The data said that GDP contracted 0.1 per cent. Economists said: “It is not that bad, the falls were largely down to one offs.”

Well the data has been revised. It is important to be consistent. When it showed a contraction, the headlines screamed doom. The new data says that, in fact, the economy expanded by 0.1 per cent, so why are the headlines that were previously screaming doom not shouting that it is not so bad after all?

Okay, 0.1 per cent growth is not exactly impressive. But one offs including unfavourable changes in inventories lay behind the modest rise.

Actually, drill down and the data gets more interesting. The revised data showed that inventories took even more off growth than previously thought, subtracting 1.6 per cent, against 1.3 per cent previously estimated. Capital Economics reckons Q1 will see annualised growth of 2 per cent.

German inflation dips

Meanwhile, data on Germany’s inflation rate and unemployment was out yesterday. You can see why its central bank is fretting so about inflation, because in February new data says German inflation was a frightening 1.8 per cent, from 1.9 per cent in January and 2.0 per cent the month before.

Here is a confession. A note of sarcasm crept into the above paragraph. Truth be told, German inflation is about as terrifying as a pet guinea pig.

As for unemployment, it fell very modestly, but has been 6.9 per cent for some time.

German inflation will probably fall further, but unions want pay to rise. So far this year pay settlements have been in the region of 2 to 3.3 per cent. It seems in Germany at least, real wages are rising.

A round-up of GDP

Yesterday saw three sets of data on Q4 2012 GDP. In India, growth was 4.5 per cent. In Europe, Switzerland saw quarterly growth of 0.2 per cent, from 0.6 per cent in Q3. In Denmark, the last quarter of 2012 saw sharp contraction, growth was minus 0.9 per cent, from plus 0.8 per cent in Q3.

Companies in the news

Covent Garden market operator Capital&Counties was reviewed by Tempus in the ‘Times’. There was an increase in number of upmarket outlets in 2012. Tempus was more nervous about the company’s plans for Earls Court and Olympia, and the need for it to reach a deal with Transport for London. Tempus said “hold.”

Questor at the ‘Telegraph’ was impressed with Direct Line’s high yield, the fact that it is a market leader, and that it is making progress in Italy and Germany. But its major shareholder, RBS must sell its stake next year, and as a result Questor said “hold.”

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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