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The Global Economy (and What Peter Learned At Band Camp) Peter Zeihan Stratfor May 12, 2009.

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Presentation on theme: "The Global Economy (and What Peter Learned At Band Camp) Peter Zeihan Stratfor May 12, 2009."— Presentation transcript:

1 The Global Economy (and What Peter Learned At Band Camp) Peter Zeihan Stratfor May 12, 2009

2 The Geography of Economy: The United States US maritime transport network  Mississippi/Missouri/Ohio/ Red/Tennessee  Ragged coastline (Intercoastal and San Fran)  Contiguous Midwest Lack of security competition  Canada -- too cold, only useful maritime network is shared  Mexico -- too dry/mountainous, no maritime network

3 The Way Down: The United States Subprime trigger ABS scared banks Result was a liquidity crunch that has since been corrected Now ‘just’ a ‘normal’ recession No systemic weakness in the American system (not even in housing)

4 Things to Look For: United States 70% of GDP locked up in consumer spending Sharpest inventory decline on record Just-in-time v just-in- case

5 What Peter Learned: Its not so bad 85% of the retail sales drop is from cheaper gasoline and fewer car sales Most of the Q4/Q1 GDP declines are from investment declines, the rest is from inventory declines Consumption already recovered

6 What Peter Learned: Its not so bad Real disposable income is up CA home sales already back to 2000 levels FL, NV and AZ still fucked (not enough pop pressure)

7 What Peter Learned: Tricksey Jews Paulson: new housing plan won’t help anyone who is underwater, short-selling subprime is fun! Greenspan: best thing for economy is for underwater lendees to default, go down the street and buy another house (and for legislation to allow them to do it)

8 Chinese Geography Yellow River difficulty Yangtze Basin is subtropical Coast is rugged or muddy – few natural ports (and most of those are in the south) Inland region very different culturally

9 Chinese Implications: Subsidized Finance Result is a country that isn’t deeply integrated and doesn’t hold together well Unification becomes a political imperative, but is a geographically complicated task Must use infrastructure (expensive!) to attempt to bridge the differences and exert central control – the costs make China capital poor Need to give the regions incentives to defer to the center => economic development via (very) cheap money

10 Chinese Implications: Subsidized Finance Maximize employment, firm size, market share, activity and throughput Capital pooled into the state’s hands, funneling it to achieve national goals; interest and payments negotiable Debt levels, profitability and return on capital irrelevant  $600 billion on recapitalization efforts  No NPLs actually disposed of  Asia’s most financially penetrated state

11 The Way Down: China Did not suffer a liquidity or financial crunch Exports, exports, exports  Cannot recover until her customers do

12 The Way Down: China Europe down nearly 30% China down over 50%

13 Things to Look For: China Efforts to stimulate domestic demand failing  People who farm by hand only need so many dishwashers  Consumer market roughly equivalent to Spain Chinese banks may not be as capital rich as we think  The story of the AMCs – the $300 billion question  Current overlending – the $1 trillion question

14 Things to Look For: China The reality of “6%” growth All this to hit 0% growth?

15 What Peter Learned: How Asia ranks Four factors determine self-generated growth chances  General health of the banking sector  Can the banks lend  Fiscal ability of the state  Institutional capacity to spend/function Best to worst  Indonesia  Singapore  South Korea  Hong Kong  China  Taiwan  Thailand  Malaysia  Japan New US restrictions on capital/operations will push many American financial operations to relocate to HK/Singapore Look out for China’s mid-sized private banks

16 What Peter Learned: Mad props to Korea Loan/deposit ratio hit 140% in 2008 Won tanked Banking sector reinvented Will lead the East Asian housing boom Corporate bonds looking very good

17 The Geography of Europe Peninsulas Islands Mountains Coastlines Rivers Northern Plain Very small space Result: Trade and War

18 European Implications: Chaos and National Plans No clear sovereign Different geographies tweak governance demands and tools in different directions Collectively Europe has a fairly good natural transport network making it moderately – but unevenly – capital rich The German example:  Rivers and coasts not naturally integrated, all shared  Successful economic development means integrating with security competitors and compensating for a complex geography  Germany must have a national development plan for the allocation of capital

19 The Way Down: Europe Total European exposure to American ABS is probably about $100 billion

20 The Way Down: Europe Europe lacks positive demographics

21 The Way Down: Europe Yen/euro loans to local currency loans Foreign denominated wholesale/retail loans

22 The Way Down: Europe Austria $300 billion Sweden $135 billion Greece $63 billion Italy $212 billion

23 The Way Down: Europe Freshly euroed states The benefits of EU affiliation No debt from Soviet era

24 The Way Down: Europe Snapping like twigs “Summer of Rage” Germany unable to assume leadership right now That little Lisbon...thing

25 Things to Look For: Europe EBRD already estimates that over 20 percent of all loans in Central Europe are non-performing Spanish NPLs already at 4 percent No meaningful program to address banking failures has begun

26 Things to Look For: Europe Germany is taking the long view  High-value export-oriented economy means local stimulus will not work, so why try?  Banks take long-term corporate view – as opposed to short-term retail – so are not bearing brunt of recession  September election and EMU limit options Impose conservative German lending policies on the rest of Europe Negligible effort to addressing the wider banking problem

27 Things to Look For: Europe General recession now shifting the burden to non- capital market banks So even those who were healthy are now coming under extreme pressure Banks far more important for capital generation in Europe than in the US, and so they get hit much harder in recessions Monetary Union debt procedures Germany’s Landsbanks

28 What Peter Learned: Poor Stupid Europe The Europeans really don’t realize that it is bad (and they hate Moody’s)

29 What Peter Learned: Frac off

30 What Peter Learned: Party’s Over Final thoughts  Global productive capacity too big for global income/demand  Deflation set to be a major international feature for much of Asia

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