The Year of the Golden Tiger – Economic Outlook for 2010

This past week one quarter of the planet closed their offices and returned home to celebrate the Chinese New Year on Feb 14 – the Year of the Golden Tiger. In Chinese astrology the tiger is considered to have courage, passion, fearlessness and power. On the other hand this year is considered an unlucky year for the tiger who can also symbolize volatility, dramatic change and cataclysm. Therefore, the economic prediction for 2010 is to hold on for a roller-coaster ride because we will see energetic movement in the market but it will be laden with risk.

As the Chinese rejoice with fireworks, dancing dragons and family dinners this week they have a lot to celebrate. China has become the world’s leading exporter in front of Germany, and the second largest world economy behind the US. In addition, China was one the only G-7 or BRIC countries (besides India) to experience positive economic growth in 2009 and who can safely boast close to double-digit growth for 2010.

IMF Growth Forecasts for 2010 – China Leads the Global Economy

China’s exploding wealth and economic power has caused a change in attitude towards international trade relations. The Chinese Tiger is starting to rear its claws and a fierce fighter is emerging. The US should proceed with caution as the political economy is shifting and China is ascending. China has no intentions of taking direction from the United States moving forward. They have declared that the China of eight years ago is not the same China today. They are right. They could care less if Google leaves.

Part of the confusion that will come in the year of the tiger is around the bipolar balance between the US and China in the world economy. The US has a model of extreme market fundamentalist on one end, and China has a socialist/communism model of tight regulation on the other. China will move towards privatization, but to be successful the US will also have to rein in its free-market.

This January iRED’s Eva Otto joined the GIC delegation of economists and central bankers in China to discuss the post-financial crisis markets.

The harbinger for world trade is that the rules and regulations so lauded in China may come to dominate the global economy in 20 yrs. As China weighs in on global policy decisions we will most likely shift away from our current laissez-faire paradigm of deregulated global trade towards policy that resembles the Chinese agenda.

The US is waking up to the sobering fact that although economists promise us that we have turned a corner in the economy, we are not really going to make a full recovery for at least another 2 years. That leaves many green economy initiatives off the agenda for 2010. As we calculate the winners and losers of our own neoliberal model for deregulated trade, the US has clearly emerged as a loser and squandered away a decade of wealth resulting in zero positive job growth, zero positive stock earnings and the debt and disgrace of 2 wars without end. The greater loss however is that the US has lost it’s creditability in the global economy as well as a generation of good will.

The US- China Debt Crisis
Aside from government borrowing, Americans have a role to play in the debt crisis with China through excessive consumption of goods. The below graphs illustrate that China’s rising wealth is linked to increased trade with the US. New excess wealth created in China searched to find it’s own investment return and found a friend in Wall Street who used deregulated financial markets to hedge, bet and create new derivatives and products (such as subprime loans) to make money for investors. This ultimately brought down the US economy and left Americans under a pile of Chinese debt – which is truly a crisis.

China now has over 2 trillion in reserves

Our relationship with China has changed dramatically over the past 15 years. In the 1990s we started out our relationship with China as if it were just another Third World economy. Our corporations went to China to out-source their manufacturing to then sell as retail goods largely imported by the US. The Chinese at the time depended on foreign companies and technologies for 80% of its economic growth. Today China has spawned national companies that have copied technology and products and the inverse is true; China now depends on foreign companies for about 20% for economic growth. In another reversal, foreign corporations are now seeking to enter Chinese markets not for labor manufacturing, but for domestic consumer markets. The Chinese are growing richer and want to buy more.

Within 20 years China will lead the world’s economy. Hustling, bustling and innovating, China has all the luck of the tiger going into 2010. With 10% growth rate and a government that is taking financial steps to cool down its overheating economy– some ask is China a miracle? Can it last?

Housing

The good news for 2010 is that economists are firmly saying we have turned a corner in the economy and we are headed for recovery. Credit should begin to ease, although we will not see a return to “easy” credit. This long-term transition from easy to tight credit will make it difficult for those trying to refinance, as home values, appraisals and the quality of credit will just not be there.

Source: Federal Reserve of St. Louis

According to leading economists it is unlikely that we will see a double dip in the housing market. Some even believe that we have seen an end to the housing market price adjustment downward. However boots on the ground will tell you that supply is still too high to satisfy demand. Instead of general price adjustments downward, some communities will stabilize and see positive growth, while others areas will continue to decline. Factors such as walkability and schools could likely play a role in positive growth.

Many believe that the worst is over for the housing market

It is unlikely that we will see the Fed make any hike adjustments until employment numbers have risen for several quarters. Some are pointing to as early as 6 months from now, but looking at the Fed’s history we see that they have waited up to 2 years after a recession in the past to raise real interest rates, so uncertainty lingers. The market will still be dealing with the commercial building crisis for the next 2 years and capital will be scarce.

The Fed is backing the housing industry and will continue to do what it can to help the real estate market recover. This includes the likelihood of continuing to buy some (although fewer) mortgage-back securities after it’s March expiration date. The approach the Fed is taking is to slowly wane from buying so as not to create shocks in any areas. Some claim that when the Fed stops buying mortgage-backed securites interest rates will rise, but by the same token others claim such a reaction would not be historically accurate. Note that both sides are hedging bets for and against the Fed’s actions so be careful of speculation in the media.

Although a nascent recovery is occurring, structural defects in the economy remain. This is one reason this will not be a rapid recover. Historically, bank reform took up to 4 years between the 1929 stock market crash and meaningful legislation restoring the banking industry. The 1933 Glass-Steagall law (now being invoked by economists) provided regulation over market speculation and specifically separated commercial banking from investment banking. It also set up the FDIC. In 1999 Glass-Steagall was repealed as financial markets were deregulated.

In conclusion markets sense a lot of uncertainty at this time. Generally, markets do not like uncertainty, which often leads to volatile market behavior. Since March of 2009 markets have had a robust movement upwards. Some analysts say that no upward trend moves in a straight line and that the markets are due for an adjustment, which has happened already this quarter. Without clear financial reform, beware of the the year of the Tiger!