By Chan Akya
Back in 1969, when the Internet was but an idea on someone's blackboard, the
world's largest and most astounding cruise ship, the Queen Elizabeth 2,
or QE2, was launched to great fanfare. Over the lifetime of the great ship, she
(it is traditional to refer to ships in the female gender, a practice that is
frowned on by feminists today) participated in the Falklands War, was
considered the greatest cruise ship of all time (below, left), and finally was
meant to be purchased by the United Arab Emirates-based Nakheel for use as a
Instead, the ship now lies docked at the Port Rashid (below, right) with an
uncertain future. What is clear is that being purchased by an over-leveraged
and technically bankrupt company has spelt the end of the QE2, fated to be remembered in its current state at a rust bucket
rather than for all her past glory.
then to the new version of QE2, namely the second round of quantitative easing
that is now being proposed (well, to be quite clear, it seems a dead certainty)
to pull the United States, European and Japanese economies out of their
apparently permanent downward spiral.
Stop me if you have read this before - and perhaps on these same pages, but
there is a dreadful sense of deja-vu about what is going on in the "real" world
of economics these days.
Gold is getting past US$1,380, the Australian dollar is getting to be close to
the US dollar in value as the commodity boom becomes entrenched. The rallying
call behind all this isn't so much optimism as it is the sheer "academic" logic
behind Ben Bernanke. The US Federal Reserve chairman famously studied the
Japanese bubble and its aftermath since the late 1980s, and is "determined" not
to repeat the mistakes made by the Bank of Japan. These "mistakes" were of
course the central bank's attempts to thwart asset inflation whilst flying
straight into a demographic downturn.
That said, what Bernanke and his cohorts miss is that for the US, the
tightening was done by the markets in the form of the financial crisis starting
in 2008. The failure to recover, despite significant efforts at quantitative
easing, had been essentially due to the demographic downturn of the US and
Europe, aspects in which neither are far different from Japan.
Preventing a plausible recovery from the current downturn is the other bit of
tightening - namely on the political front. Both in Europe and the US, we can
see a clear trend towards the extreme right which focuses on the following
3. Anti-free trade
When you actually think these through, it becomes easy to figure out that the
agenda is not only self-contradictory, but also self-defeating in the end. Let
us look as an example, at the French national strikes this week that seem to
have paralyzed the country yet again. While strikes in France aren't exactly
news, the agenda here seems to be along the following lines. Unions are opposed
a. The government's reforms on pensions that would raise the eligible age from
60 to 62 years;
b. Attempts to cut the size of the French government;
c. Attempts to push through any other type of structural reforms.
In an effort to shore up its popularity ahead of the strikes, the French
government enacted right-wing laws such as the ban on the burqa (see
Burqa over the Bastille, July 24, 2010) and ejected a bunch of
Roma gypsies who probably were puzzled more than disappointed.
There is a basic failure of math in France today; ironic for a country that
produced the likes of Louis Bachelier and Pierre de Fermat. Increasing the
retirement age is a simple mathematical necessity - driven both by the longer
life expectancy of the average European and the parlous state of government
finances. Fighting it is about the most bone-headed notion in the history of
This is also happening in other countries including the United States, where
the "right" wing protests government reforms on medicare but equally expects
help in other forms, especially lending to business, which has been made all
but impossible in light of the decline in property prices. So to get the "tea
party" right, government should cut essential spending on medical care for its
citizens and lend to small businesses instead. A noble notion, but completely
It is in the United Kingdom that some sense remains in government. Cutting
government spending has remained a priority despite its apparent unpopularity.
How the government fares in future years is, funnily enough, given the
country's relative unimportance in world affairs today, actually the best
signal there is out there about the direction of Western economies for years to
come. If the UK manages to cut deficits but still bounce back, there is hope
for the rest of the West; else forget about the whole hemisphere.
The amended short list
All that is but cold comfort over where we head in months to come for the
global economy. I am convinced that the way forward, with low public confidence
in governments and businesses, is not much different from what we have seen
before. So even as risky assets such as stocks may rally, the intrinsic value
of growth and earnings capability is only to be discounted in coming months.
The points about the global economy I raised in the Short List remain valid but
there is also little merit in being right at the wrong time. Given that, the
main focus of investors for the medium term ought to be: a. Stay long the
b. Stay long (invested) stocks with potential acquisition risk (possibility);
c. Purchase cheap insurance such as the VIX whenever it falls below historical
means, that is, 15%;
d. Avoid government debt involving G-7 countries;
e. Distribute your bank accounts among different institutions from various
Nothing has changed, except that everything appears different in the light of
the new round of QE. It will make no difference to the economic outcome, but
the objective here is to reduce interim pain.
The alternative is to launch grandiose projects on the lines of Japan's
much-vaunted "roads to nowhere". Expensive white elephants may help to buttress
GDP figures of the short term but will do nothing for the longer-term
fundamentals of Western economy. That picture of a rusting QE2 in Port Rashid
should be stuck on the wall of every central bank around the world as an
indication of things to come.
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