Tuesday, November 11, 2008

Out With The Old, In With The New

On the surface China’s actions re stimulating their economy may look to some as a modestly positive development. However, such thinking misses the larger point.

Emerging economies are beginning to show a willingness to take the global growth lead. By seeking to generate domestic demand (which is what their stimulus package is designed to target), China is showing the way for other well capitalized emerging economies to take control of their own economic destiny: Depend less on exports to the developed countries and their overburdened consumers and more on their own emergent middle class for growth and stability. In the process, emerging economies will be a central part to a world economic transformation that will usher in a new, more sustained era of global growth that is difficult to impossible for many to see through the current haze of the credit crisis.

It is, of course, reasonable to be skeptical that such a transformation will succeed, certainly to the extent that it replaces in large part what has been the engine of global growth – the US consumer. Moreover, the process of transformation will not be smooth. The disruptions to the world economy and financial markets have been profound. And the policy responses have been both disjointed and evolutionary. But progress is being made as evidenced by the TED spread.

Of course, in a world dominated by conventional thinking and simplifying assumptions re trends, it is not hard to find many doubters that the progression to a new multi-polar world order underway will result in growth and stability that far exceeds the credit juiced era just ended. Moreover, it is equally hard for many to believe that such a world will include better managed financial instruments to satisfy the emergent global appetite for financial innovation. But that is precisely where the surprise may lie.

Investment Strategy Implications

While it won’t happen overnight, the global growth handoff is underway. Coupled with a rebalanced developed economies, global growth driven by emerging economies appears to be poised to lead the way for a more sustainable and balanced era. More work needs to be done and things must go right on a whole range of levels (economic and financial). However, yesterday’s news re China is a big step in the right direction.

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