Today, I went for a run down the West Side of Manhattan. It was raining and I looked down the shore towards the World Financial Center, the new Goldman Sachs Building, and the other large towers of what used to be the world’s most important financial neighborhood.
I had a bad feeling that things were never going to return to the way they were when I worked for Merrill 2 years ago as a Credit Derivative Specialist.
As of November 2008, the population of the US has finally come to accept that we are in a recession. Months (and years, in come cases) of warnings are finally coming to bear after they were not heeded. As I wrote in one of my previous pieces (linked here), the reason why they were not heeded is due to a structural condition which did not properly align the incentives of Wall Street’s traders and Executives to correspond with a publicly beneficial equilibrium.
Many people have said that they think this will be a long and painful recession, and I agree. The average consumer in the US is getting hammered from all sides at once. Any assets in the stock market are probably worth half what they were a year ago, housing values continue to fall, and the credit freeze and slow thaw is killing millions of jobs. With the collapse of the stock market and the Wall Street banks, more than a trillion dollars worth of assets, have simply disappeared. Oh, and don’t forget about the ongoing war in Iraq.
It seems clear that the US is going to have trouble growing over the next decade. Once the volatility starts to decrease in the stock market, the larger players like hedge funds and pension funds, along with large numbers of individuals, will start to re-enter, helping to buoy up equity prices. However, economic indicators and company performance are going to take a lot longer to regain any upward momentum.
Here is the interesting part of this writing, where I am going to make a prediction: I think that counter to historical precedent, the emerging markets are going to lead the pack coming out of this global recession, China in particular.
While world markets did not react very much to China’s recently unveiled stimulus plan, I think it is a huge deal. It will be the defining point in the story of China’s emergence as a fully industrialized, first world country. This is China’s “The New Deal”, and they were wise enough to act pre-emptively to stave off a severe and disorderly contraction. The 2008 Olympics provided the Chinese with an excuse to invest billions in their infrastructure. Coupled with recently announced fiscal stimulus, these two rounds of infrastructure investment are an ideal way to balance their economy, making it more independent and self-perpetuating, and less dependent on the rampant appetite of the American consumer.
China’s booming population includes huge numbers of young people, mostly men, who are flocking by the million to the urban centers, looking for opportunity. This stimulus package will work to insure that the enormous amount of energy looking for a place to work, will not be burned by the global contraction, but rather, be embraced by a furiously growing country in need of their youth.