The crash that wasn't
Newspapers are filled with the crisis scenarios, Soros presented his view while in Austria, that recent turmoil may have more serious consequences for the global economy than any other turbulence after the Second World War.
Maybe those Mr Dooms are right, and global economy will experience a period of major slowdown after twenty years of “Great Moderation”. But do notice that:
- while markets are crashing in the West, companies in the East (China) are raising USD22bn and 4bn respectively to embark on global acquisitions trip
- monetary policy is better than it has ever been in the after-war period, it is run by incredibly bright minds who do understand the importance of expectations for future inflation and growth
- globalization made world economy very resilient to shocks. When hard times come companies have much more possibilities to change their business processes than before. Again in the face of rising costs I expect the next big wave of offshoring (Asia, CEE and possibly Latin America may become big winners in this process in the long run)
- Greenspan put was replaced by SWF bid
This list could be much longer. I think that this “crisis” should be seen in relative terms. It was caused by inter-temporal strategic blindness of John Smith times 300 million, who wanted a bigger house and did not understand the importance of saving for retirement. In the long run it will cause a major drop in valuation of US assets RELATIVE to Asian and EM assets (just wait and see China market cap chasing US market cap in the coming years). It will be extremely interesting to see what is the “quality” in the possibly upcoming “flight to quality”.
In short, the next few quarters may be extremely volatile. But I do expect a fairly robust recovery in the late 2008. I also expect that Asia will play a much more important role in this recovery that it did in the past.