LOOK OUT for China. And India.
That was the prediction of Don Reynolds, president of 21st Century Forecasting, in his Global Market presentation at TTMA.
Reynolds said the fall of communism was one of the truly significant events in recent history because it added three billion potential capitalists to the world's economy. Viewed another way, that's three billion new customers or consumers in the world's marketplace.
He said emerging markets over the next five years will grow an average of 7%, while developed markets may grow an average of 2.5% over the same period. Emerging markets have 84% of the world's population and 75% of the currency reserves. They utilize 56% of the energy and 50% of the global gross domestic product (GDP), yet represent only 14% of stock-market capitalization.
“The poster child for emerging markets is China,” he said. “The economy has grown more than 10% for the past 10 years. You recognize that this sleeping giant is no longer sleeping. This year, China surpassed Germany as the third-largest economy in the world. In four years, it will catch Japan, and in 10 to 12 years, it will pass the United States as the largest economy in the world.”
He said the country is trying to shrink its population. During the past 25 years, he said, the Chinese government has imposed a policy of limiting households to just one child. Boy babies are valued more, and infanticide is contributing to a ratio of 124 males for every 100 women.
Reynolds said China has what is known as a centrally planned free-market economy.
“While this may seem like an oxymoron,” he said, “the performance of the economy has been staggering: 20% of the world's demand for concrete, a 14% increase in military spending last year — including construction of six new aircraft carriers — and 30,000 cars a week are being added in Beijing.”
His conclusion: “The Chinese are coming.”
But there are obstacles, as well, he said. For example:
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Will the Chinese people, after tasting economic freedom, begin to demand political freedom?
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China is one of the most polluted countries in the world. Sixteen of the 20 most-polluted cities in the world are in China.
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The country has a shortage of mid-level management.
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Because of declining birthrates, China has one of the most rapidly aging populations in the world. In the next 20 years, the average age in China will grow from 32 to 38.
Given a choice between betting on the Chinese tiger or the Indian elephant, Reynolds recommended riding the elephant. He gave several reasons for expecting a surging economy in the world's second-most populous country:
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By contrast to China's aging population, the average age in India will drop from 28 to 26. “Younger populations tend to be more productive,” Reynolds said.
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India is the world's largest democracy.
“It's my contention that the US is in the twilight years of its golden economic age, just as the UK was in its twilight years in 1900,” he said. “And some time in the next 25 years, China will replace us, and then India will replace China.”
He said that in examining growth trends, it appears the US economy will grow this year at approximately 2%. One year before he gave his presentation, the economic growth rate was 5%.
“Profits are continuing to get squeezed,” he said. “There's outsourcing. What's significant is that the average wage in the US has declined by 4%. People are realizing, ‘Gee, if I ask for more, they can take my job.’ ”
In terms of the global energy picture, he said the Chinese “currently are pointing over the next 20 years to have 120 million cars, and the Indians are in the process of developing an automobile that will cost $3000.
“What about gas demand? In annualized energy prices, everything hinges on global price elasticity. Translation: excess supply to demand. In 1980, oil traded on an inflation-adjusted price as high as $91 a barrel. Prices, I would argue, would be a lot more expensive. The average daily use is 85 million barrels a day. That leaves us 2.5 million a day of excess capacity. But China's demand from 2000-2006 went from two million barrels a day to six million, with a projected need of 10 million by the end of the decade. We have other factors: politics. We all know what's happening in Iraq.
“The Saudis dominate the controlled price of oil. At the same time, they're smart enough to know that if the price of oil goes up too far and too fast for too long, alternative energy becomes a popular subject. They're trying to get the price as high as they can for as long as they can, then drop it down real fast for just a little bit.”
He said 7% of consumer spending last year was for what might be referred to as, “We borrowed it.”
The picture has changed. He said the average American family in 1950, in terms of debt to income, was 18%. By 1995, it was 85%. Today, it's 114%.
“Like the trend?” he said. “We have a negative savings rate in this country. And so, we have an intriguing economic event. The stock market collapses in 2000, corporate America shuts down and consumer America continues to spend money by borrowing money to take advantage of tax cuts and lower interest rates, and we begin to develop this insidious thing. The Chinese agreed to make cheap stuff. We agreed to borrow money to buy their cheap stuff. They take our dollars for that cheap stuff and in turn send dollars back, which keeps interest rates lower, which allows us to continue to borrow money so we can continue to buy their cheap stuff.”
He said the Chinese are now accounting for more than 35% of global steel output. The Indian economy has created the world's largest steel country.
“We effectively lost control of steel production in the US,” he said. “I think steel prices have peaked. The Chinese have become exporters. And as they continue to export, the price will drop. Aluminum is pretty much the same story.”
So what he see in his crystal ball for the US economy in the coming years?
“The first thing I focus on is, ‘When is there going to be an economic slowdown?’ ” he said. “On a near-term basis, if we have 2% to 2.5% GDP this year, it needs to pick up a little bit next year. Oil prices are going to continue to head up.
“If your largest, best, biggest customer is in financial trouble, do you extend them a little credit in the hope they continue to function or do you pull that credit completely and the account completely disappears? The Chinese have essentially that problem. We are their biggest customer. We are in financial distress. Do they continue to sell to us?
“The question that frequently comes up is, ‘The stock market is doing terrific. How long is it going to continue to go up?’ The stock market probably has some potentially strong upside in the near term.
“The greatest risk in the US economy is that the greatest statistical probability of a US recession is after the presidential election. The Chinese Olympics and the presidential election are about 10 weeks apart. That's when the greatest concern exists.”