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This is the Biggest Risk to the World's Economy
By: Chris at www.CapitalistExploits.at
It's over a decade ago now that I first began stomping around Asia and Southeast Asia in particular... longer actually but I prefer not to age myself. At first it was simple fun and adventure - a pretty girl at my side, and the very real fact that I had absolutely no idea what I was going to do with my life. None. Zero.
I'd traveled extensively before venturing to Asia so culture shock was not a problem. I'd seen enough weird things in Africa, South America and the Middle East, but quite frankly nothing will appear weird to anyone who's had the pleasure of commuting the last "tube" aka underground in London.
In Asia foreigners were, and still often are, the ones to watch out for. There are plenty worrisome sorts. They're easy to spot... Mustache, striped cardigan, bitter about something they're not able to articulate very well, and a hard drive that would likely be of interest to Interpol.
Mind you, people "running from something" exist all over the world, however they tend to congregate mainly where it's inexpensive and permissive. Asia offers both. Today I want to talk about what the rest of us farang come to Asia for... the opportunity, driven by what has been happening here economically for the past few decades.
For those readers who have have children you'll appreciate that when you see them on a day-to-day basis they clearly don't grow. Nope, they're just the same. This is how the suckers manage to creep up on their parents and suddenly tower over them, leaving them wondering, "when the hell did you get to be up there and why is your voice so deep?"
Extended friends and family on the other had see them growing. “Wow, Johnny you're a big boy now.” This is what Asia has looked like to me for much of the time I've been coming here; returning to cities, even rural districts year-after-year provides this perspective.
The growth is naturally not uniform. Some countries are performing better than others, but the overall trend is as unmistakable as "little Johnny's" acne and body odour that he tries so desperately to hide.
Fortunes have been made, and are being made, as I pen this. The question that everyone tries to answer is, what does the future hold? Is the growth continuing, is it due for a crash, is it too early, is it too late?
My recent article comparing Asia to a supertanker elicited a couple of very valid questions which I'd like to share with you:
1. The Asian upward mobility has been about manufacturing - peasants moving to goods making and elevating their income 10-20 fold in the process to $2/hr. What happens when the mobility is stopped by robots and 3D printing capping income at $2-$3/hr? Detroit robots are $3 and take no shipping or customs to produce goods, and have no wage burden. A ceiling has formed.
These are good questions to ask ourselves. Robots, 3D printing, these are changing the world in front of us and cannot be ignored. In order for us to try to understand what may happen I think it's worth looking at similar situations that the world has found itself in previously. The introduction of the car is a good example. People everywhere were terrified that cars and incidentally railroads, would destroy the economy. After all, at the time a large part of the economic activity was tied to filthy, plodding horses. Trains and motor cars had a significant impact on the equestrian industry. How did it turn out?
The horses got off easy and can be found amiably grazing in fields today. The people - they did what people always do... they adapted.
This brings me to education...
One thing that has been rewarding to witness, and surprising at the same time, is the ever increasing level of education I've seen in Asia. Asian kids as a whole are really, really dedicated to learning. As a father of young kids it's somewhat daunting because I know what my kids are going to be up against. Asians are hungry and eager. Singapore and South Korea lead the charge in this, and while I personally think they're quite over the top with the way they go about it, that's a discussion for another day.
There are no concepts of "expectation" like that found in the West. Without education, peasants moving into roles now filled by robots is certainly problematic. What do these peasants do that a robot cannot?
It's impossible to tell the future much in the same way that determining what the landscape would look like as the Industrial Revolution took hold in the late 1700's was impossible to determine. What I do know is that the growth of the Asian middle class is rapid and accelerating, and with it increasing levels of education.
The other thing I'm cognizant of is that robots affect everyone on the planet. Robots in Detroit affect wages and employment in that city. They affect the pricing of goods produced by those robots, yet this has an impact worldwide. We'll discount subsidies and tariffs for the moment just to play out my thinking on this.
I was recently at the dentist in Bangkok. I never get medical or dental care done in the West if I can help it, and the reason is that the vast majority of the talent in Asia is western educated but offering their services at a huge discount. This large and swelling middle class wants to live in their own culture, with their own families, and they're willing to sacrifice higher pay overseas for these pleasures. The way I see it robots affect them in much the same way they will affect the rest of the world. Flexibility and education are key to who succeeds in a world with additional technology that replaces menial labour.
Here's another point that same reader shared with us:
2. Oil is in free fall. There is potential for $25-$40 oil. Since this is the lifeblood of both energy (machines) and raw material (plastics, animal feed, all commodities that require extraction), this is potentially massively deflationary. If we see oil go in a race to the bottom, every company is looking at a well and saying well, whatever I get is better than the next guy getting that dollar... The Saudis have made clear they are going to pump, regardless of price. For Asia, energy they need gets cheaper, but there are even fewer dollars to buy their goods.
Oil is much more a political commodity than anything else I can think of. I agree that the above scenario would be deflationary and this would impact globally. With respect to domestic demand there may well be bumps along the way but on a relative basis I think my money is better parked where the long term trend is in my favour, as indicted by the graph below.
While we're speaking of risks, there's another risk that we should all be aware of: CHINA.
China already is, and will almost certainly continue to be a major force to be reckoned with. BUT right now there is clear evidence that there is a massive credit bubble in China. My friend Brad wrote about this here. If you've not read the article, and even if you have, I strongly recommend revisiting it to gain a better understanding of the massive problems, and coincidentally the opportunities for profit.
Chinese banks are in huge trouble. Their loan books are brimming with assets which have questionable value, and the shadow banking industry in China is larger than any other country I'm aware of, having grown at completely unsustainable rates, quadrupling in size since '08.
I've never seen credit growth of that magnitude NOT accompanied by irresponsible lending. Fraud is rampant and we've already seen some high profile cases with banks losing hundreds of millions of dollars. These are large, well resourced institutions who themselves have come out saying they have little idea what is going on. My friend Harris Kupperman likes to say that you have more chance of figuring out a Chinese balance sheet by reading a fortune cookie than looking at what is presented to you.
As the economy turns down much of this will not be able to be swept under the rug. Falling demand in China will likely be accompanied by increasing capital flight. How this plays out I'm not sure. Does it flee, as it has been doing, into Singaporean, Australian, New Zealand and Hong Kong real estate?
Does a crisis of the magnitude some expect cause the bond markets to wake up to the very real debt problems the world is facing? In other words, is this a catalyst for the end of the world's largest bubble?
We'll likely soon find out.
- Chris
"Risk is what's left over when you think you've thought of everything." - Carl Richards
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Rambling article, shotgunned facts splattering in all directions....and some VERY faulty conclusions.
Education will not save general populations from unemployment, anymore than it has "saved" all the unemployed US college students. Basic fact of life.....the entire world (not just the US) has no idea what to do with the tremendous excess labor force created when technology allows us to 'make stuff' using fewer and fewer people. We (all of us) are rapidly reaching the point where fewer and fewer people are employed at jobs that pay well enough to buy all the "products" we produce. No one wants to pay for non-productive work...(undertandable)....but as the pool of available productive work continues to shrink.....we leave a ton of people with no option.
Yes.....things ARE going to collapse. The idea that man can continue to play Christopher Columbus and find new continents to plunder is coming to an end. Asia and all of it's "opportunity" will shrivel and collapse under the load like every other place has.
Agree, but its so much worse.
Re; We (all of us) are rapidly reaching the point where fewer and fewer people are employed at jobs that pay well enough to buy all the "products" we produce.
In the US alone over 100 million are not working at all, and are paid with borrowed "make believe" money which is used to buy the products you speak of. Indeed, to buy the very food that allows them to continue living.
We (all of us) are living in a mass delusion.
Chinese invented accounting fraud. Wall Street embraced it and now no books are to be trusted. Trinity capital and Tesco come to mind.
Advancing Time... I appreciate your posts...keep them coming.
Chinese banks pay 3.5% interests for one year CDs, AdvancingTime.
ya chris, you wrote this pos right? chris, your writing days are sofa king over. find a new job. you might have the passion, but i just wasted a whole lot of time reading this pos and i'm pissed about that.
i know you probably watched a lot of starwars cartoons and you think robots are cool, please, go somewhere else and write about go-bots or some shit.
this is zh, big leagues
your skills are better placed writing mothers day cards
can you dig it?
So uhh where you at Ubon,Udorn,did you go where surf meets sand? Do you think a robot could walk behind that water buffalo,know it's mood,get the most out of it without it turning violent? Could the robot know which mamasan uses the most beetle nut to get her dose by looking at her. As far as opportunity in Asia I'm thinking it's in Burma. Thais dont like them very much or Cambodians it's an old feud. Like native Americans aren't really that fond of us. Enjoy yourself. "Choke-Dee Kop.
It looks more certain that China is going down. A big reason dropping house prices in China is so important is that is where almost 75% of household wealth is stored. Here in America a much larger share of household wealth, approximately 71% is stored in financial instruments. The end of the housing bubble in China has the potential to become a huge deflationary "house of cards."
The country is already suffering from massive overcapacity. Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need.
For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.
http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html
"Oil is much more a political commodity than anything else I can think of."
UM, well, DUH!
I don't think I saw the answer to the headline teaser, though.
Are you saying that the biggest problem might be ROBOTS? Would it be the best thing to invest in CHINESE robots, perhaps? If Chinese robots form a political party to try to control OIL, would THIS be the biggest risk? If the Chinese robots decided to start regional wars throughout the Middle East to try to control the sale and flow of this Black Gold, would the robots from the West respond and escalate this war? Would nations like Australia and Taiwan open their borders to allow the influx of Chinese robot immigrants (and their newly-found wealth)? Would Buhddists and Taoists and Church-Of-England Aussie acolytes declare that the ROBOT RELIGION is from SATAN, starting a BACKLASH and a 'Global War On Robots'? 'Either you're with US, or you're with the ROBOTS'?
NAW.
Let's see.
Full-scale global thermonuclear war might be a bigger threat.
All the paper assets in the WORLD would be either burnt up, or declared worthless, I think (by the 500,000 or so survivors).
Hey fella! just the facts huh, I don't have enough minutes in the day to plow through all this minutia.
"2. Oil is in free fall. There is potential for $25-$40 oil."
Right, like there is potential for me to grow wings and fly to the moon. The oil price takedown was done by the Saudis as a favor to the US, in an attempt to hurt Russia. It's not going to be permanent.
Can't believe I wasted 3 minutes reading this.
Cliff Notes... Everything is complicated in Asia and it will be a big mess when it crashes
The Agricultural Revolution, the Industrial Revolution, the Medical Revolution, the Electronic Revolution and the Nuclear Revolution, and, next, the Robot Revolution.
The american revolution, the french revolution, the robot revolution
There, fixed it for you
I can't afford enough gas to get out of town, how do people travel the world without working? As for Asia being productive they only make things the West buys. When the Euros and dollars quite coming they'll go back to doing what they did for thousands of years, dieing by the hundreds of millions from war and famine.
Debt.
If you haven't saved enough....debt. It's available everywhere and anywhere for the "appropriate" juice (i.e. interest).
Play the game correctly and you can easily obtain 50k to 100k on credit cards, alone.
"This is the biggest risk"
A hodge podge of info, what's the biggest risk exactly? Robots, politician, oil etc.
Ok article with crappy title.
LOL.
If bonds go risk-off, and people for whatever reason think they're better off selling than buying (holding? at 2 percent? what's the point?), the whole thing goes up in smoke. Everybody's focused on the stock market, but it the bond market (set on fire by the carry trade) is where the crash will originate.