Sucheta Dalal :Exclusive: MEGATREND WATCH 2007-2012
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Exclusive: MEGATREND WATCH 2007-2012  

October 22, 2007

Mega Trend Watch: 2007 to 2012

 

By Asish Putambekar

 

Intro: Trouble in the US Housing market could lead to a recession in that country. This in turn could end up causing the demise of the Chinese Communist Party after massive unemployment is triggered in the costal region of China. Chinese exports, which contribute to 40% of GDP will take a huge hit and the problem could turn acute due to the absence of a strong domestic Chinese market. Massive internal strife could follow. In the process Tibet will be set free and democracy will return to

Myanmar. All this is expected to happen over the next 2 - 3 years. This is an interesting piece sent to this website by the author in which he explains the basis of his forecast.

 

The best time to issue a megatrend watch is at a possible inflection point in history that can capture a whole big move – you cannot issue it on a quarterly or yearly basis. Most people miss the occasion because we have become so conditioned to huge market volatility that even a global financial crisis gets passed over as a one off event that can somehow be resolved with adequate attention. Let us look at some board changes that our occurring before our eyes.

 

US heading for a recession: The Rationale

The current financial crisis has moved beyond the sub prime market and is now affecting not only lenders and borrowers in sub prime transactions but global liquidity itself; the biggest banks around the world are wondering how exposed their counter parties are to junk paper. This lack of trust has occurred because greedy bankers mixed sub prime loans were mixed with good paper and traded it as Collateralised Debt Obligations that were gobbled up by investors around the world. The problem is so big that even the central banks may not be able to step in and provide liquidity. Over the next few months close to $ 1 trillion or $ 1000 billion of loans are going to be reset to higher interest rates... and it may create huge problems in the markets around the world.

Or this is the scenario that is widely predicted. My own view is very different and is based on one question. What has the western world to gain by allowing this global financial crisis to develop? Tightening lending regulations at the right time could easily have prevented the crisis and anyone with experience with government knows this is true. It therefore appears that the forces of globalisation will be unleashed only when the strategic drivers behind current market conditions allow the market to drop to a point where the prize would be big enough to put together a comprehensive rescue package to revive the world economy.

The South East Asian currency crisis of 1997-98 gives us some indication of where we are headed. That crisis started out as a property market bubble and we saw the price of Dubai crude going below $ 10 per barrel. Asset prices crashed and there was huge unemployment. Finally, the situation was retrieved only when the West & Japan went in with huge amounts of money to buy cheap assets in South East Asia. The

Recovery came but outsiders ended up controlling a substantial portion of the economy in the ASEAN region.

This time around, the triad countries (US, EU and Japan) have a lot to gain by letting the sub prime problem get so big that it creates a global systemic problem in the markets which needs policy intervention at the highest levels in Government... but the money bags won’t come in and mount a rescue attempt till China is taken out.

There is a proper rationale for this: China had some 87,000 cases of public unrest in 2005 (BBC reports) directed against Communist Party officials in various provinces. 10% of the Chinese population (most of it in coastal cities) controls 45% of the nations wealth with the per capita income in Beijing & Shanghai at $ 4000/year levels. But the 750 million plus Chinese living in villages have an average per capita income of $ 400/yr. This huge disparity is the biggest threat to stability in China.

Exports account for 40% of Chinese GDP and the Chinese trade surplus has increased sharply from an average of 3% of GDP in 2003 to 8% of GDP or $218 billion in2006. Though the Chinese domestic market has been growing as well, it is still confined to consumption along the coast. The interior of China is still a mess.

If Chinese exports were to drop drastically, driven by a US recession, the only part of China that is doing well (the coastal region) will have howling mobs on the streets. This combination of unrest in the interior and unrest along the coast can kill the Communist Party in China. Even the Trillion dollars plus (actually $ 1.4 trillion) that they have as reserves in overseas banks/treasuries and real estate cannot then be deployed at short notice to save the Party.

 

The fallout of any social unrest in China:

Were it to happen, will be felt across Asia and the world. We will then witness history being made and can expect the following developments:

* China will be in turmoil for the next 7 - 10 years (both economically and militarily) and no longer a threat to the west.

* Tibet will be free in three years and the Dalai Lama and his people will be able see their dream realized in their lifetimes

* Myanmar will see Democracy under Aunt San Sue Kiwi by 2010.

* North Korea’s Kim will go too

*Taiwan will no longer have to fear the Mainland

The biggest prize will be that valuable industrial assets and banks in China will be sold to companies in the US, Europe and Japan... just as it happened with the Asian Tigers. This is what I would call the “Jug Jet Su strategy”(The Japanese martial art where the opponent’s massive strength is used against him). For China, its huge manufacturing and export capacities in manufacturing and exports will turn out to be their undoing in the absence of a strong domestic market.

This strategy actually has great potential for deployment in the derivative markets depending on an organization’s physical exposure and the size of its existing paper position. If the above logic is okay then what is happening in the market today suddenly starts to make a lot of sense and we begin to appreciate why the West has ruled the world for the past 300 years. The recent cut of 50 basis points in the Fed funds rate was a dangerous thing because it let loose a Tsunami of liquidity that saw huge amounts of cash land up in the Indian, Chinese and other markets. Please note that the Chinese markets are already trading at an average P/E ratio of 45/50+. We now have even more asset bubbles all over the place.

Therefore, for the first time since Mikhail Gorbachev (former premier of the USSR) set his own people and the multitudes in Eastern Europe free, the world is again going to see another huge battle for the human spirit. The battle for ideas that are now going to let us witness the power of the forces unleashed by Free Markets. This time again, these forces will free countries. Let no one be in any doubt of what market forces can achieve.

So the real question is-- given the potential size of the prize mentioned above, will the rescuers be inclined intervene in the markets in the massive way that is needed to preserve the current balance of power?

This has huge implications for businesses around the world. Currently perceived demand-supply gaps in specific industries are irrelevant when the powers-that-be decide on the strategic landscape of their choice.

At a certain level of thinking, everything becomes a trade. It is therefore important for countries and companies to make an attempt to understand the big picture and then play their game in such a way that their strategies and investments are aligned to the larger strategy being played out. Basically you have to make sure you are going to fall in the direction that benefits you. This is very much like the game of Jug Jet Su where the winner falls in the direction that benefits him. It is all about falling artfully. It is good strategy. In the case of companies therefore this means that they should concentrate on markets they know best and stay out of areas where huge turmoil is expected.

Acquisitions like metals need to be avoided as asset prices are going to fall. For Indian companies … overseas acquisitions should be focused on serving the domestic market/demand. There are specific strategies for this, that go beyond the scope of this note.

 

Humpty Dumpy in the Middle East & South Asia:

(this is a separate subject... but I will include it here in order to save time)

A lot has changed since President Roosevelt met the King of Saudi Arabia in February 1945. US Strategy in the Middle East is in tatters. The US/NATO Afghan campaign has failed and Pakistan is in the state of collapse. Even on the Palestinian question the US and Israel, have lost the strategic initiative to Hamas by not reading the signals properly. It would therefore not be unfair to say that the Americans are in retreat across the entire region since they don’t have any significant ally in military or economic terms, from Israel in the west to Australia in the east (except India of course). In such a scenario, it is suicidal for them to take on Iran is suicidal as they will never be able to hold the country. People must realize that though the world has changed a lot since the time of Alexander, the rules for holding/controlling foreign lands as stated for the first time by him remain the same.

Osama Bin Laden thinks like Rockefeller. His very ordered mind immediately grasped the strategic need for a benchmark project that would move the theatre of war out of the Middle East to the developed world. I have written a whole section on this earlier but the essential point is that the Middle East is going to change considerably in the near future. In all this turmoil, which I now see quite plainly, it is best to be cautious about investing in the Middle East as far as large hard currency investments are concerned. If Australia or South America is an alternative, all other things being equal then go there. In the Middle East, a potential war with Iran and the break-up of Iraq are going to un-leash new forces and create new identities as everyone fights everyone else. Already Kirkuk is on the verge of being annexed by the Turks. The UAE, Qatar and Kuwait are sweet spots seeing huge investment currently but larger regions will continue to be in flux. Moral of the story, don’t put half a billion dollars in a place where things are getting worse.

The current situation in Pakistan is very interesting too and its actually going to create huge opportunities in the energy domain as it will now be possible (5–7 years from now) to have an On Land Gas pipeline from Iran to India which does not pass through the State of

Pakistan.

No, you did not misread that last line. The truth is that in the last multi party election held nearly a decade back neither Nawaz Sharif who comes from the Punjab nor Ms Benazir Bhutto who hails from Sind were able to get more than 17% of the popular vote on a national basis. Neither of them therefore will be able to run a united state of Pakistan and deliver on any promise to the west to curb extremism in a country that has more militants today (thanks to the Madrassas that have grown from 2500 in 1947 to 30000 today) than there were fanatics in Germany at the height of world war two (I refer here to the years 1940–1941 when Germany had close to 950,000 men in the Waffen SS).

The same, to a lesser extent, applies to Mr Jamali of Balochistan. Neither he nor, whatever is left of Akbar Khan Bugti’s family can rule anything more than Balochistan. The only way out for all these people is to run their own native states and leave the lawless North West frontier province with its capital at Peshawar to its own devices (The US / NATO would love this as they will be free to go and strafe and bomb militants in any province of a divided Pakistan. This leaves Pakistan Occupied Kashmir (POK) as the last party standing. Hopefully the Kashmiris will see the writing on the wall and quietly begin the long walk home. It is hoped that as the above changes happen, there will be a controlled implosion and not an explosion that would be expected to accompany a militant backlash.

Readers will agree with the above in varying degrees. Actually... though you may disagree with the view totally, you will admit that it is a different way of looking at things. You will also be hoping that if the forecasts come true, the changes will happen as peacefully as possible.

 

Ashish Puntambekar

Project Visualizer

www.busybric.com

 

The Author is a former Crude Oil derivative trader. He currently conceptualises projects in diverse areas ranging from Energy, Transport to Healthcare and Education. He has recently conceptualised a unique plan to build hundreds of Hospitals all across the country. This large project which has a unique financial structure and was recently announced in the Times of India by a leading corporate house. Those interested can visit our ‘ Product Verticals ‘ page to download some of our sample projects.

 

‘Sometimes, 24 hours can bring a total revolutionary change.’

Aung San Suu Kyi

 

The view are those of the authors and not www.suchetadalal.com. We welcome a debate on the issues raised.


-- Sucheta Dalal



 



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