The Outlook for the Economy and Global Markets
Jennifer Schonberger sat down with Donald H. Straszheim, vice chairman of Roth Capital, to talk about the outlook for the economy. Straszheim served as chief economist at Merrill Lynch for 12 years and also served as president of the Milken Institute. He is an expert on China and global emerging markets.
Q: What is your take on the subject of decoupling? Is the link between world economies — globalization — causing complications for investors who are looking to park their money in appreciating markets?
A: Decoupling is preposterous. Increasingly the economy is becoming global. Market activity is becoming increasingly integrated.
Investors increasingly think and behave globally, not locally. The idea that the economies were decoupled five to 20 years ago makes some sense, but not anymore. The current recession in the United State — I think we're in a recession now — is the first time economic activity outside China, for example, is going to have a real impact inside China and accordingly on its markets. The decline in the economy now is transmitted more and more around the world and the equity markets are down in most places. China is down 20% from its peak a few months ago, India is down a similar amount, just like here.
Q: What is your outlook for China's markets?
A: As long as the turmoil continues in the U.S. credit markets, China's markets will struggle. I cannot imagine China's market really taking off as long as the credit market questions in America and Europe and in the global financial institutions remain front and center.
Q: The Federal Reserve slashed the fed funds rate by 125 basis points in total in January and 225 basis points since September. Do you think the rate cuts will be meaningful for this credit crunch if banks are more risk averse and more concentrated on cleaning up their balance sheets?
A: The rate cuts will help. They're part of the repair process. They're also not over. I think the Fed will keep cutting rates and I think they'll cut another 50 basis points at the next FOMC meeting — perhaps more than that.
Q: How low do you think the Fed will cut rates?
A: I would not be at all surprised to see 2.5%, maybe even as low as 2%. One of the things that worries me is that we will take rates so low and leave them there too long as I believe we did in the aftermath of 9/11, and the 2001 and 2002 recession.
Q: With oil and food prices surging, import prices were up as of last week, slowing economic growth and lower interest rates. Do you think stagflation may reveal itself as a threat?
A: Not really. We won't see stagflation like we had in the late 70s and early 80s. Stagflation [at that time] was no growth and 10% inflation — nothing like that is in the cards, even with $100 oil and high commodity prices.
Q: What are the top growth countries you would invest in?
A: China and India are by far the biggest current and potential drivers of economic growth and change in the world for the next quarter century. Those two countries alone are a third of the world's population. Technology is increasingly transportable around the world. Communications are instantaneous. China began periods of economic reform in 1978 to replace their old command and control economy with, in part, a market economy. China has experienced the fastest economic growth in the history of the world in the last quarter century and the people want this to continue and the government wants it to continue. That lesson has been finally learned in the last 10 years or so by India. India started their economic reform in 1991, China did in 1978. They're about 10 years to 15 years behind. But the Indian people are smart and entrepreneurial when the government stays out of the way.
There are other smaller countries such as Vietnam that are also wonderful growth opportunities, but Vietnam has 85 million people in it, it's the size of one average province in China.
Japan is over. Japan is past its prime. It has the oldest pop in the world by far. It's a very closed economy and society and it's not really a source of innovation and growth. Very little foreign capital flows into Japan and a lot of domestic capital continues to flow out. Japan is last century.
Q: Do you think China's government will increase or decrease rates going forward?
A: The weakness in the United States, Europe and Japan that is now developing is probably going to reduce China's growth rate in 2008 by three percentage points and leave China with the slowest growth rate its had since 2001. That will create a different landscape in China than we have seen in the last decade or so. As of right now, China is still concerned about their economy growing too fast and about inflation being too high and they are allowing their currency to appreciate quite rapidly. That's going to end in the next few months. They have been raising interest rates and that's going to end too. Their concern is going to change from concern that the economy is too hot to concern that the economy is too cold. They'll stop the currency appreciation and interest rate hikes and that will be different. It will be something Wall Street is not accustomed to, nor the Chinese.
Q: What are your thoughts on the dollar? The dollar's recent resilience to weak U.S. data suggests markets may have fully priced in expectations of a struggling U.S. economy. Against the euro, do you think the dollar has bottomed out?
A: The dollar has depreciated a long way. But I'm not convinced that the decline is yet over. The fundamental forces that are driving the dollar weakness I don't believe have yet ended. I think you'll see the dollar erratically fall some more. There will be rallies, it may become more volatile, but I don't think we've quite yet reached the bottom.
Until we get the credit crisis behind us I think we will have continued volatility in all markets. I think you'll see continued weakness in the dollar.
