I never heard of Richard Duncan but, after reading this article on MarketWatch, his thinking is quite similar to mine. He is quoted for bearish views on China but the reality is that the scenario is much larger than that. The problems are global in nature and everyone will be affected one way or another. I don't think many will agree with Duncan's outlook but it's worth contemplating. Before someone dismisses him do note that, at least going by what's said in the article, his 2003 "The Dollar Crisis," appears to explain many of the problems we are facing now.
I have excerpted some key points from the article. For what's its worth he is far more bearish than me. Also, no one bat 100% so many predictions will turn out to be wrong. The key is to avoid getting blown up by major mistakes.
Duncan is the former London-based head of global investment strategy at ABN Amro. In 2003 he authored "The Dollar Crisis," which warned that imbalances in global trade would lead to a meltdown of the financial system.
Duncan now believes China is caught in a jam created by excessive credit. Years of easy lending and booming investment inflows have saddled its economy with surplus industrial capacity to the point where China out-produces what it consumes.
Expectations that Beijing can spark up domestic consumption to fill the void are bound to disappoint, he said, as wages are too low to support enough meaningful demand to lift the corporate sector to profitability.
China is not alone in facing up to a slowdown in economic growth. Most of Asia's export-dependant economies will struggle as the global slump proves structural rather than merely cyclical, he said.
Keeping currencies weak relative to the dollar in an effort to bolster exports is no longer a viable option for economic growth, Duncan said.
My view, which is influenced by Michael Pettis and others, is that the trade surplus countries are going to get hit badly. This runs completely counter to what most people believe right now but that is what happened during the Great Depression.
The key problem, as Duncan alludes to, is that there is overcapacity with very little demand. For all the bullishness around the growing consumption from countries like China and India, the reality is that they won't matter for a long time. The income levels are way too low for those countries to matter. A lot of the numbers that are quoted are quantity figures that look good on the surface but are smaller than they appear.
For instance, a country like China may sell more mobile phones or cars or shampoo than North America or Europe, but the total dollar figure of the consumption is very low. Even if China or India, or whomever, starts selling more cars than America and Europe, the price of those cars will come nowhere near what it is in America. Economists try to adjust for the relative worth of something across nations by considering the purchasing power parity figures but most of the numbers quoted in business media give no sense of relative worth. If growth investors are making a big mistake, it is what I have just described.
In the end though, if China or some other country, manages to get through this and raise worker salaries, it is going to be an economic powerhouse. China's consumption will be so large that it will be a planet all by itself. My belief is that the spectacular consumption in America from the 1940's to the 1970's was mainly due to rising wages; the consumption boom in the 1920's was partly due to increasing debt but that was not the case in the 50's and 60's.
It is really hard for me to see the export-oriented countries with low internal consumption and low internal worker compensation recover easily.
Anyway, going back to Duncan:
The subsequent crash that wiped out most of the U.S. banking system amounts to a "New Depression," where the global economy still teeters on the edge of an abyss -- held up by the life-line of government aid.
And that government support, Duncan believes, is likely to become a permanent part of the financial landscape for years, if not decades to come.
"Japan serves as a very good example of what's likely to happen in the U.S. and China," Duncan said.
The good news is that the U.S government should be able to finance huge budget deficits without resorting to printing yet more money, he said, adding that Japan has been able to do just that since the 1990s.
I'm with Duncan on this. I don't see what the big fuss is about soverign default risk. Sure, the risky ones can easily default but I highly doubt USA is anywhere near those lowly-rated countries.
Duncan advocates an aggressive approach of trillion-dollar-plus backing for industries such as solar energy and biotechnology. The idea would be to give the U.S. an "unassailable" lead in frontier technologies. That means producing goods that the world needs and which can't be produced elsewhere at cheaper prices.
Conservative-types, as well as those are more free-market-oriented probably won't like this—too much government intervention—but I think it is a reasonable idea. If you are going to spend money, might as well pursue some pie-in-the-sky ideas. I'm not too sold on solar—it's too uneconomic and it also provides little benefit to developed countries since solar depends on manufacturing and that will likely be carried out in low cost countries—but something along this line is better than the infrastructure spending that some are calling for. I have no idea what's so good about the so-called 'shovel-ready infrastructure projects' and would rather spend the money on some wind power, biotech, nanotechnology, or something.
Beijing's combined stimulus spending and government-directed bank lending amounted to a staggering 40% of gross domestic product in 2009 -- that's just a few percentage points short of outlays by the U.S. government during the height of World War II.Tags: China
Duncan said he's worried that as China tries to spend its way out of the problem, it's really just making things worse. Last year's stimulus package, he said, gave a jolt to the economy much like shot of Red Bull that will wear off over time.
"It tells you how terribly wrong things are there," Duncan said.
To maintain growth of 8% this year, banks will need to crank out another round of lending equivalent to 30% of GDP.
Chinese Finance Minister Xie Xuren said earlier this month that his country is planning something along those lines. The central government has budgeted 992.7 billion yuan ($145 billion) on public investment this year, according to reports by the state-run Xinhua news agency.
What's troubling is that the expanded spending and new loans from state-owned banks will bolster production capacity, fuelling excess, and inevitably compounding deflation.
"So now they have expanded that capacity by that much more, and they have no one to sell it to," Duncan said, adding that the mood in Beijing must be one "panic" as they assess the unfolding situation. /blockquote>
Nothing new here; the usual stuff I and others who lean towards deflation have beaten to death.
Beijing will allow the yuan to rise in an attempt to help cool growing protectionist sentiment in the U.S. and Europe, as unemployment rates remains stubbornly in double digits, Duncan said, adding that other Asian currencies are likely to appreciate alongside the yuan.
Talk of currency reform began circulating earlier this month, when a Chinese policy institute floated the idea of a one-off 10% revaluation of the yuan and an annual appreciation against a basket of currencies of up to 3%. China has held its currency stable against the U.S. dollar since mid-2008. See story on call within China for yuan appreciation.
The outlook for asset prices is less clear. Duncan believes the fortune of the world's property and stock markets will depend upon the size and timing of government stimulus packages.
The need for sustained deficits to prop up the economy means gold prices will rise about 10% a year for the "rest of our lives," he said, although fears of inflation that have led some to buy the metal are overblown.
Land is another of Duncan's recommended investment.
"Over the long run, you want to own things that the government can't debase," he said.
That advice doesn't extend to commodities, especially crude oil, where Duncan believes prices been manipulated to unwarranted levels by sophisticated traders. He expects prices to fall sharply across a broad range of commodities if efforts to regulate derivatives gather steam.
I don't share the same thinking as Richard Duncan when it comes to assets. In fact, I think he is contradicting himself and some of his picks. For instance, things like gold and land tend to perform poorly under deflation. There are always exceptions but my view is that you shouldn't own those. Yet, Duncan suggests that gold will go up 10% per year for the rest of our lives and that land is attractive. My view is that those assets will get hit badly if we get the "new depression" that Duncan was talking about earlier. To give you an idea, Japanese land prices have been falling, for the most part, during the last 20 years. Land in America, Canada or even Europe would be a dangerous bet if the earlier economic prognosis comes true.
To sum up, I pretty much agree with most of Richard Duncan's points when it comes to economics; however, I don't quite share the same views when it comes to investment suggestions.