Emerging Markets:
Emerging markets such as Turkey, South Africa, Malaysia, Indonesia, etc. have made a classic mistake of presuming the future (James 4). Assuming that China’s growth rate would remain very high (7-10% per year) these countries have borrowed enormous amounts of money and gone deeply into debt both corporately and personally. Much of this debt revolves the commodities and commodities markets, which have been necessary raw ingredients in China’s massive infrastructure build-out and urbanization (10-15 million Chinese moving from farms to the cities annually).
The dollar has been skyrocketing, especially against emerging market currencies, causing the repayment of dollar-denominated debt to be increasingly difficult as debt burdens have skyrocketed.
Prayer – 1st that the U.S. Fed will not raise interest rates, which would push the U.S. dollar even higher against emerging market currencies, and that banking and government officials in these countries will lower interest rates, and provide enormous amounts of liquidity (print money) to keep the debt contraction, which is presently underway and intense, from becoming catastrophic.
China:
Their new premier has instituted a massive crackdown on corruption, which in the long run could be quite beneficial. However, in the short run it is scaring everyone to death (at least one execution so far), which is not exactly conducive to trying to “grow the economy”. In addition, China has experienced a massive bubble in their stock market which has now burst. While their economy revolves more around infrastructure build-out (highways, airports, dams, etc.), the massive urbanization mentioned earlier, manufacturing and exports the bursting of the stock bubble will certainly not help as there has been an exponential rise in lending outside of China’s “official” banking system (50% per year increase for 5 consecutive years- clearly unsustainable), much of it revolving around the stock market.
Much of this debt will go bad and create bankruptcies or bailouts, which will hurt/slow China’s economy. China’s growth could go from the “official” 7% rate to as low as 4%, which would be great for most other countries, but such a radical slowdown (China’s economy was going at a 12% rate just 5 years ago), means that the engine of world economic growth (China) slowing so radically will cause all of the other cars on the train to crash (the other emerging markets). As the other emerging markets have become dependent on high rates of growth from China which is not happening.
My guess would be this could take 2-3 years to work out, and while I do not expect a collapse of the Chinese economy, and I do expect them to continue to grow over the long run, in the short run this is going to be tough. Bad debts will have to be cleansed (bankruptcies or bailouts) from the system before any semblance of economic growth can resume. China’s problems will literally affect everyone in the world, as they are the #2 size economy in the world after the United States. While the U.S. is bigger overall, the rest of the world (including Europe) has gotten addicted to rapid growth rates in China.
Prayer- That the Chinese officials will slowly let the air out of their debt and stock bubbles and not have a precipitous collapse.
United States:
The U.S. is best position to weather this economic storm of any of the major players. Our banking system, after the sub-prime/leverage fiasco has been healing and the economy has been growing very slowly- but at least it’s growing. As best as I can tell, the only major vulnerability is our oil industry as we could see as much as a 30% shrinkage here, as people in the oil patch borrowed way too much money assuming oil prices would stay above $100 per barrel indefinitely (James 4). A combination of a very slight increase in supply above world demand was hammered by extreme leverage (borrowed money) in the energy patch and big banks related to energy and commodities. Now the forced liquidations will begin as banks, by law, must revalue all oil related loans every 6 months, and unfortunately it is “let the bleeding begin”. In the long run, this will likely result in a healthier, more stable oil industry overall with less debt in the system, but in the short run it will be very painful.
The U.S. only recently became the largest oil producer in the world (larger than Saudi Arabia and Russia), due to new technology revolving around horizontal drilling and fracking. Unfortunately, this oil price crash will cause a major contraction in the oil drilling and service industry, which will likely take another year or two, but within 24-36 months this oversupply will disappear and oil prices will likely go back up. Sometime in the 2020’s, I expect oil prices to go well above $200 a barrel as China’s economy gets back on track and India builds infrastructure, buys cars, and starts driving. Thus, all this hype over oversupply is way overblown.
In addition, I am very concerned about geopolitical stuff in the Middle East as Iran hates Saudi Arabia and Israel. Saudi Arabia hates Iran and ISIS hates everybody. Most of these countries need in excess of $100 a barrel to float their government budgets as most of their country’s revenues come from oil. Through the straits of Hormuz pass 30% of the world’s oil (Iran, Saudi Arabia, Iraq, and Kuwait). I believe that major geopolitical issues and possibly major wars could breakout within the next 2-3 years.
Prayer- That America’s oil industry will not be decimated as we are the chief producer in the free world. Excess debt will have to be cleansed from the system, but again it needs to be in a systematic controlled way not a massive crash.
Europe: Still has a fragile banking system and an unstable currency. Pray that the euro as a trading union and currency will not go into a chaotic fracture.
Japan: Is a massively aging society which has way too much government debt and unsustainable social spending structure for their old people, which are starting to outnumber their young people. Pray that evangelization will wake up and change Japan as I see no possible solution on how to fix the government’s long term (10-15 year) fiscal situation and debts.
Jerry Tuma
Macro-economist
Cornerstone Financial Services
Dallas, Texas
www.cornerstonereport.com
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Registered Representative offering securities through Independent Financial Group, LLC (IFG), a registered broker –dealer, member FINRA/SIPC. Advisory Services offered through Cornerstone Financial Services, Inc. (CFS). CFS and IFG are not affiliated firms.