DABERIAM XIII

November 2004

Since August large sections of the Wall of Fear that was confusing the Stock Market have crumbled. It would seem that we are left with the rubble of worry - perhaps a metaphor too far! 

The US elections have come and gone with President Bush greatly improving his electoral mandate to the huge disappointment of the Democrats, the legal fraternity, and the more intellectual pundits. There seemed before the election to be an implied desire in the press for a disputed outcome; the last thing columnists and experts seemed to want was a clear mandate. Luckily, middle-America voted for a man with clear ideas and principles and the world will now move forward. 

The US economy seems marginally to be slowing down but corporate America is continuing to turn in profits above expectation. Employment is rising at a slow but steady rate and even the budget deficit is starting to improve. Federal Tax receipts from an improved economy are growing and Federal Government outlays are slowing. The international deficit is a more difficult problem as the Chinese/US currency link means that the declining value of the dollar has no impact on the primary source of US imports, but even here there are encouraging signs. Chinese investment in Latin America, which is growing at a considerable rate, is likely to help US exports to that region. It is worth remembering that economic imbalances tend to revert to mean with or without Government intervention. 

The other market nightmare was oil. The tendency to project economic trends and graphs in straight lines showing an ever-increasing price of oil causes much “worry”. During the summer major sources of oil production were simultaneously curtailed: Nigeria with both strikes and civil strife, Russia, with the Government attack on YUKOS, the devastating hurricanes in the Gulf of Mexico and, of course, the war in Iraq. 

This, coupled with both US and Chinese reserve-building, meant that there was enormous pressure on oil prices. Saudi went into full production, the disruptions in the four other areas of oil supply have started to self-correct and the stock building seems to have abated a little. The linear extrapolation of increasing oil prices has turned down and we are likely to continue to see declining prices for the moment. Oil supplies, however, in general are getting tighter so there is no doubt that there is now potential for oil supply crises for some time to come. 

There are many other commodities, however, that are in short supply and will continue to be so as the Asian economy grows. Asia, with China at its core, is, I believe, taking on a life of its own. China’s growth, which would appear to have slowed a little, is fuelling Japan, Malaysia, Indonesia and the rest of the area. Foreign investment in China is still growing at a tremendous rate, some 23% in the first three-quarters of this year. The Chinese authorities are reforming the banking system at a faster rate than is generally appreciated and I believe the sophistication of the Chinese Government’s economic managers is not appreciated in the West. Chinese officials know they have to manage growth fast enough to mop up a huge labour force, possibly some 300 million people, that could be released from the land and Government industries as the country reforms. Labour unrest is the greatest fear of the Chinese Government. 

To fuel Chinese growth, and keep inflation down, the authorities seem to be shifting their focus to external sourcing of food and commodities. The Chinese President’s visits to Brazil and Argentina are the confirmation of a new policy direction. As Chinese prosperity grows and their farm production goes up-market, there is a need to import primary foodstuffs to keep domestic food prices down along with industrial commodities. 

There is probably a political dimension to these Chinese developments in Latin America. The US sabre-rattling with regard to Chinese imports along with periodic congressional attacks on the transfer of technology to China, is encouraging China to increase its political and trade muscle around the world. 

In general, the US economy is doing fine and will benefit from Chinese growth. In the US we are also likely to see an expansion in capital expenditure as US companies struggle to improve productivity and experience the supply-chain problems of bringing product from Asia. The demand for shipping and port facilities is outstripping supply. The US will extricate itself from the turmoil in Iraq, almost certainly within the next twelve months, but it will, under Bush, continue to exercise a global influence that will discourage pariah states. 

The major dilemma for US foreign policy in the next few years is likely to be Taiwan. If the Taiwanese Government decide to antagonise Beijing in the run up to the 2008 Olympics, America will have to decide how to react. The Chinese domestic politics will not allow the Government in Taiwan to publicly humiliate it by announcing “independence” moves. Conversely, the Taiwanese Government is tempted to wave the “independence” flag for its own domestic purposes. 

Europe seems to continue on its path of bureaucracy building. In spite of myriads of initiatives, governments in Britain, France and Germany continue to bury their industrial and entrepreneurial managements in red-tape and confused legislation. Companies are moving the hearts of their businesses to Eastern Europe and Asia. 

Russia is another question......................

Damon de Laszlo 
November 2004