GaveKal offered the following observations this week: For some reason, we often see rapidly accelerating change around the turns of centuries. A man who fell asleep for 30 years in 1790 would have woken up to a very different world in 1820 (France was no longer the dominant European power, Britain was rapidly expanding her global reach, Spain had become a has-been, the United States was experimenting with a new form of government...). The same is even truer for the man who fell asleep in 1890 and rose in 1920 to witness the end of the Austro-Hungarian and Ottoman empires, the establishment of the USSR, the rise of Japan....And from FXStreet (Dec. 13):
And the same is true today: someone who fell asleep in 1990 would likely be surprised to hear that Pentagon officials are now more worried about China than about the Soviet Union (which of course no longer exists), that Europe is going cap in hand to ask for loans from China, India and Brazil, that Iran may, after all, end up exercising ultimate political control over Iraq. Of course, we are not yet in 2020 and so things may still "revert to the past century's mean" over the coming decade... but somehow this does not seem likely! Instead, we should ask ourselves what are some of the key trends which will reshape the coming ten years-especially those trends that investors are perhaps less aware of (i.e., not the rise in the emerging market consumer, nor the scramble for resources, nor the deleveraging in the West...). Amongst the potential important trends, we find:
* The growing irrelevance of cheap labor: Even in China, the land of cheap and productive labor par excellence, some manufacturers (e.g., Foxconn) are increasingly turning to the use of robots in order to remain competitive. And as robots start to perform an ever greater array of tasks, this will put into the question the development model of most emerging market nations. Simply put, will multinationals still feel the need to build factories in the more remote corners of the world if the labor component in manufacturing production falls to the same level as, say, the labor component in agricultural output? In such a scenario, not only will the disparities in wealth between nations increase, but also, worryingly, the disparities between those that own the factors of production, and directly benefit from the productivity gains (shareholders), and those aiming to sell their physical labor.
* The question of whether the US will become energy independent: In the past few years, the ability of the US to find and extract natural gas on its own territory has grown by leaps and bounds (hence the breakdown in the gas-oil price correlation). In turn, this raises the question of whether the US will be able to optimize both its electric grid and its wider energy consumption patterns to profit from what now seems to be a widely available resource (LPG buses and cars? No more heating fuel for homes?...)....MORE
Sorting Out the Euro Mess
I had the pleasure of spending the morning and part of the afternoon today with Louis Gave and Anatole Kaletsky at a seminar here in Dallas; and we shared a long lunch, where Europe and China were the topics of conversation. So, with their permission, here is their latest "Five Corners," in which Charles Gave and Anatole Kaletsky discuss last week's summit, and then engage in an internal debate about whether Italy really has a significant trade deficit with Germany. As I expect from GaveKal, it's not your typical analysis. And since I have to run to dinner – and glean more insights from their team (there will be homework when I get back!), this introduction to Outside the Box is short, and we can jump right into today's piece. Have a great week.
Sorting Out the Euro Mess
By Anatole Kaletsky, Charles Gave, Francois Chauchat – GaveKal
Starting With the Bad News...
Although the usual post-summit rally should not be too hard to orchestrate in the thin markets around Christmas, there was more bad news than good for the dwindling band of bureaucrats and politicians who are determined to save the Euro, regardless of the costs to the democracies and economies of Europe. We will begin with the "bad" news–partly because our bias is to treat bad news for the Euro as good news for the world and Europe, but mainly because this so-called comprehensive and final "fiscal compact" was no more comprehensive and final than any of the previous failed deals. As in all the previous summits, the only truly definitive decision on Friday was to have another meeting in three months' time, when a new agreement would supposedly be cooked up to resolve all the controversial issues left undecided on Friday. Once the holiday season is over and investors start to think seriously about this "fiscal compact," the economic and political uncertainties are bound to intensify, building to another crisis ahead of the next summit in March.
The summit failed to satisfy the first (and maybe not the second?) of even the minimum necessary conditions to give the Euro a chance of medium-term survival. These are (i) creation of a fiscal union, which will take at least one to two years to set up, and (ii) unlimited ECB lending to bridge the gap between this multi-year political timetable and a market timescale measured in weeks or months. While the ECB may still end up being more pro-active than Mario Draghi suggested last week (see next page), the summit's most obvious failure was on the fiscal front. Despite the self-congratulation among EU politicians about their "fiscal compact," the fact is that Germany vetoed the most important characteristic of a true fiscal union, which is some degree of joint responsibility for sovereign debts. Since Germany refused even to discus Eurobonds or a vastly expanded jointly-guaranteed European Stability Mechanism, the summit did nothing to reassure the savers and investors in Club Med countries that their money will be protected from either devaluation or default....MORE