Majorityrights Central > Category: Economics & Finance

Not an overly “majoritarian” issue this week.  But Martin Hutchinson’s mini-tour of the global investment hotspots makes a good read, even if you’re poor like me.

Breaking the BRICs

Over the last few years, emerging market investment has been overwhelmingly centered around the concept of the “BRIC” group of emerging economies – Brazil, Russia, India and China. These countries were supposed to be the giants of 2050 and the only emerging markets that a truly Important institutional investor should consider, because of their liquidity. Like most ideas spawned by investment banks (truly original minds are weeded out by the banks’ Darwinian appraisal systems pretty rapidly) this idea was vapid and silly at the time. More interestingly, it is now a recipe for gigantic investment losses. There are economies in the world with excellent medium term prospects, but none of the BRICs qualify.

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The following Post-Autistic Economics Review article, from March 2005, is an investigation of Japan’s enduring economic success by Robert Locke.  It was sent to me by Wintermute who urged me to read the whole thing.  It’s long ... some 8,000 words.  So I will not reproduce it in its entirety here.  But if you want to understand how the Japanese function economically, and whether they have a better way of doing things than our market-driven approach, I do urge you to read the article in full at source.

GW

Japan, Refutation of Neoliberalism

No-one wants to talk about Japan these days.  The conventional wisdom is that the bloom went off Japan’s economic rose around 1990 and that the utter superiority of neoliberal capitalism was vindicated by the strong performance of the American economy during the 1990s.  Furthermore, everyone is now convinced that China – whose economy is 1/8 the size of Japan’s – is the rising economic power and therefore the appropriate object of attention.

But Japan is, despite everything, still one of the master keys to understanding the future of the world economy, because Japan is the clearest case study of why neoliberalism is false.  Simply put, Japan has done almost everything wrong by neoliberal standards and yet is indisputably the second-richest nation in the world.

This doesn’t mean that neoliberalism is wholly meritless as an economic theory or as a development strategy, but it does mean that its claim to be the only path to prosperity has been empirically falsified.  Japan’s economy is highly regulated, centrally-planned by the state, and often contemptuous of free markets.  But it has thrived.

What follows is for space reasons necessarily a sketch and exceptions, subtleties, and refinements have been left out.  Facts have been homogenized and caricatured to make structural fundamentals clear.  But a reader who bears this in mind will not be misled, as detail analyses are available elsewhere.

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On February 28th Karlmagnus, in response to a question about major business managers on PF’s Calcium Imaging thread, ventured the opinion that:-

... since the system is about to collapse, the intellectual outlook of management may be very different at Dow 5000 to what it was at Dow 12000.  No point trying to change their thinking at the top of the bubble; large numbers of the current mob (particularly the investment bankers) will be behind bars by 2012, only peripherally because of their ideas on globalisastion.  Just as 1935’s CEO was a very different animal from 1928’s, so too will 2014’s be very different from today’s.

Requests for elaboration went unanswered.  But evidently, KM had already been at work on this because today the following piece appeared at Prudent Bear.

GW

This is what it will look like

It’s impossible to tell when the world’s stock markets will finally wake up from their easy-money induced stupor, but one thing is clear: when they do so the initial break will look like last Tuesday. A modest event of no apparent global significance will cause a stock market drop that cascades around the world, producing severe declines in other markets. Last Tuesday’s break may or may not have started the climacteric sell-off, but that sell-off cannot be long delayed.

More interesting than the unanswerable question of when precisely a crash will occur is that of which sectors will be worst affected, which relatively unscathed. Current market thinking appears to be that since the crash originated in China, that market is due for a significant downturn, and that emerging markets in general are overpriced and due for a fall. That view fails to reflect an intelligent appraisal of where the true economic vulnerabilities are.

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Here is Martin’s latest offering at PrudentBear.com.  Subject matter: the highly political global oil economy, following on rather neatly from James’ antennae-twitching piece on hyper-inflation.

Since the recent drop in oil prices, the market appears convinced that we have seen the last of their stratospheric rise – the NYMEX oil futures contract remains under $70 per barrel for the next 2 years, for example. However the free market economists’ theory that supply will always arrive to meet demand increases is pretty shaky in the oil sector, and the market looks likely to be wrong.

In conventional analysis, the surge in demand from the emergence of India and China and a strong economy in the West is believed to be temporary.  Prices may be boosted by an unexpected event such as Hurricane Katrina or the Nigerian oil disturbances, but a sustained period of high prices such as in 2005-06 produces additional sources of oil supply. These take time to appear but eventually satisfy demand and drive prices down to their equilibrium level, currently thought to be in the $25-30 per barrel range.

This analysis may be wrong for a number of reasons.  On the demand side, this is not an ordinary economic boom, but has been “turbocharged” in China and India by the Internet’s one-off enabling of outsourcing to those two countries.  Thus the world’s economic growth is heavily concentrated in China and India, particularly China, rather than in the countries of the West and Japan in which oil demand is relatively saturated. 

The Chinese automobile market has grown from 3.2 million vehicles in 2002 to 7 million in 2006, and is now the second largest automobile market in the world, just ahead of Japan, 40% of the size of the U.S. market and 10% of the world market. Naturally the buyers of these vehicles are going to drive them, since gasoline remains a relatively small part of the overall purchase and maintenance cost of an automobile. Hence gasoline demand in China is rising not by the country’s 10% overall economic growth, let alone by the lesser figure that might be expected as usage becomes more efficient, but by something fairly close to the 22% per annum growth rate of Chinese automobile ownership. 

While Chinese gasoline usage still represents a modest share of world oil demand, if even a small part of the oil market is growing structurally by 22% per annum, the normal effect of higher prices in encouraging conservation and reducing consumption may be swamped. Indeed, that appears to be the case; in 2005 world oil demand increased by 1.2 million barrels per day, in spite of an average oil price around 40% higher than in 2004. Almost all that increase in demand was outside the OECD group of wealthy countries.

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Chevron appears to have joined the peak oil community.

Read on:

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