The perfect storm

History is always a good reference point when trying to predict the future. The only issue is that many folks get too caught up analyzing the past and forget that the real task at hand is looking forward. The recent market sell-off was almost reminiscent of the 2008 sell-down leading to the global financial crises (or “GFC,” as some insiders refer to it). Just within the first week of February, the US stock market lost $37 billion in value, an almost domino effect from the decline in the Chinese market from fourth quarter 2015 and January 2016.

As an entrepreneur and investor, it is always important to understand the macro headwinds so one can review strategic plans in relation to the change in the weather. For example, it isn’t wise to sail in turbulent waters especially when you have meager supplies. I have always seen the financial markets as a bellwether and predictor of the economic headwinds. While it is true markets can react drastically to current issues, the smart investor is more adept at reading the crystal ball than the ordinary layman. Thus, efficient markets do react ahead of the actual event and therefore serve as a predictor. What are the markets concerned with now?

Low oil prices. Crude oil costs are at an all-time low. While this is good for oil-importing countries and consumers in general, it is bad for oil-producing countries and companies that have historically been big liquidity contributors to the financial system.

China. There is no doubt China’s economy is slowing and the “official” data released on Chinese economic growth is likely overstated by 200 basis points. China’s real growth is likely at five percent per annum (down from seven-plus percent), and the slowdown has a significant impact on the rest of the world. China, with its surging population, is also transitioning from an export-based economy to one that is consumption-based. The transition obviously has its own set of challenges. Also watch out for the huge amounts of bad debt in the Chinese financial system. (Subprime Part II.)

Slowdown in US economy. US Corporate earnings in fourth quarter 2015 were disappointing and the same can be expected in first quarter 2016. Economic data also looks anaemic. Given the size of the US economy, a lack of growth does impact the whole world.

Disruption and dislocation. Advancements in robotics will lead to large-scale automation of many tasks. While this will boost productivity of operating companies, it will lead to massive dislocation of traditional jobs, both white collar and blue collar. I do not think anyone has fully grasped the scale of this dislocation. It is not a question of “if” but “when.” It is a real concern as the world cannot have a strong consumption-based market without a broad base of earning households to support it.

Muscle memory. Traders, trading systems, funds and retail investors all have 2008 fresh in their memory. There seems to be a kneejerk reaction or Pavlovian response to anything that could resemble a pre-GFC market selldown.

Some folks think we have elements that can lead to the perfect storm. My personal view is the bull market is over and the bears are back. However, we must give time to the economic system to work through these issues and move the global economy to more solid footing. I would expect more choppy waters ahead. On the bright side, both the Philippines and Vietnam have been singled out as the “bright spots” among world economies in a recent talk held by McKinsey & Company. Safe havens are local consumption-based businesses, and those new economy companies operating on the Internet or in digital space. Now is the time to hunker down and focus on work that produces tangible value and solid fundamentals. I would not espouse a build-to-flip model during this period but rather position your business for the long game and be there and ready when the bulls come back. For those already in market-leading positions in the home market, the rest of the region and world can provide consolidation and acquisition opportunities. 

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Any questions? Email me at egtheplayer@gmail.com.