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Danger and Opportunity await as the financial Crisis returns

Financial Events
By Paul Hodges on 19-Nov-2014

Crisis Nov14aThe Great Unwinding began with the change of economic direction in China.  So it makes good sense for businesses and investors to view developments with a Chinese perspective in mind.  This is particularly relevant as the Chinese word for Crisis contains 2 characters – Danger and Opportunity – as the picture shows.

It is not hard to identify the key Danger from the Great Unwinding, namely that it leads to the end-game in the Cycle of Deflation.  :

  • Falling oil prices are likely to lead to the arrival of deflation in Europe, and to a return of deflation in Japan
  • The oil price collapse has already caused a leading supplier in Singapore’s marine fuel market to go bankrupt
  • Other companies must also be at risk as we enter the seasonally weak year-end, when factories close for holidays
  • And there is geo-economic risk, as weak oil-producing countries such as Venezuela may run out of cash

In turn, these developments highlight an even greater danger.  We have all grown up in a globalising world, where money and trade and people can move around relatively freely.  And so it is easy to forget that this was not normal before the SuperCycle began.

In the United Kingdom, just as one example, exchange controls existed until October 1979.  These stopped individuals from taking more than £50 ($80) with them when they left the country on business or vacation.   Businesses also faced major restrictions on imports and exports.

There is an enormous risk, therefore, that today’s competitive devaluations (for example, the yen and the euro versus the US $), will prove just the first step towards protectionism.  We have weak political leadership in most parts of the Western world.  And protectionism is an easy option for populist politicians to argue.

Danger itself can cause us to freeze.  Instead, it is important to develop a vision of the future. This was why we offered 10 forecasts for how the world will look in 2020, in chapter 4 of Boom, Gloom and the New Normal :

  • A major shake-out will have occurred in Western consumer markets
  • Consumers will look for value-for-money and sustainable solutions.
  • Young and old will focus on ‘needs’ rather than ‘wants’.
  • Housing will no longer be seen as an investment.
  • Investors will focus on ‘return of capital’ rather than ‘return on capital’.
  • The term ‘middle-class’ when used in emerging economies will be recognised as having no relevance to Western income levels.
  • Trade patterns and markets will have become more regional.
  • Western countries will have increased the retirement age beyond 65 to reduce unsustainable pension liabilities.
  • Taxation will have been increased to tackle the public debt issue.
  • Social unrest will have become a more regular part of the landscape

Companies’  own views of how the world will look may well differ from these.  But the critical issue is that it is essential to look forward, not back.  Regret for ‘what might have been’ will not help us to survive the Danger now ahead.

Tomorrow, I will look in more detail at the Opportunity that lies ahead, for those bold enough to grasp it.