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Table of Contents:

What direction is our economy heading? Underlying trends that are shaping our world today Rise of purchasing power in emerging markets In response:  Commodity boom Changes are happening in China (that will change the world) rising inflation 2008 KookyPlan prediction: The next bubble to burst may be commodities in 2008 Agflation - the end of cheap food Commodities prices on the rise: High Oil Prices Manufactured goods are getting more expensive: Credit Crisis 2007-2008 Which led to:  deleveraging of financial markets 2008  how would a USA recession effect Latin America   Decoupling? Double bubble trouble - two bubbles burst in the USA Weakening of the US dollar Asian countries fight to keep their currencies undervalued vs the dollar Gulf coast countries peg vs the dollar Deficits in the US leading to currency weakness Fear of Global Warming  and the rise of green business models Challenges to public markets Private Equity industry booming in 2007 and slows in 2008 rise of "Sovereign Wealth Funds" Technology changes the rules of the game Tech trends to watch Globalization of Business, Ideas and Markets free trade movement under pressure Immigration effects felt around the globe Iraq war Regional Trends North America Emerging Markets Trends: Latin America Asia Middle East and Arab states Links from KookyPlan

 

 

What direction is our economy heading?

see our list/ discussion of economic indicators

 

 

Table of Contents:

What direction is our economy heading? Underlying trends that are shaping our world today Rise of purchasing power in emerging markets In response:  Commodity boom Changes are happening in China (that will change the world) rising inflation 2008 KookyPlan prediction: The next bubble to burst may be commodities in 2008 Agflation - the end of cheap food Commodities prices on the rise: High Oil Prices Manufactured goods are getting more expensive: Credit Crisis 2007-2008 Which led to:  deleveraging of financial markets 2008  how would a USA recession effect Latin America   Decoupling? Double bubble trouble - two bubbles burst in the USA Weakening of the US dollar Asian countries fight to keep their currencies undervalued vs the dollar Gulf coast countries peg vs the dollar Deficits in the US leading to currency weakness Fear of Global Warming  and the rise of green business models Challenges to public markets Private Equity industry booming in 2007 and slows in 2008 rise of "Sovereign Wealth Funds" Technology changes the rules of the game Tech trends to watch Globalization of Business, Ideas and Markets free trade movement under pressure Immigration effects felt around the globe Iraq war Regional Trends North America Emerging Markets Trends: Latin America Asia Middle East and Arab states Links from KookyPlan

 

 

Underlying trends that are shaping our world today

 

Rise of purchasing power in emerging markets

 

 

Around the globe, in many emerging markets, we are seeing a phenomenon occurring where millions of poor people are suddenly emerging as consumers and moving up along the social chain.  This trend is leading to opportunities with consumers of low income on a scale as never seen before.   In countries such as Brazil, and in many emerging markets, there is the growth of the "third class" of consumers, which suddenly find themselves using credit and other mechanisms to join the global consumer market.  As this trend occurs the world over, there are massive opportunities for marketing "at the bottom of the pyramid".  

 

As technology and travel  becomes more affordable, we are seeing a booming auto market in Brazil, and the expectation that this emerging class of consumers will want more appliances, electronics, and international travel. 

 

This, in turn, gives a boost to the commodities market, and can explain why more construction materials, and industrial commodities are needed in India, China, and in many emerging markets. 

 

In response:  Commodity boom

 

But, is there too much speculation, and is the price increase justified by actual extra demand from emerging markets?  This is an issue of hot debate, and leads many analysts to speculate that there may be a popping of the commodity bubble sometime in the near future.   Whether or not there is in fact a "bubble", it is clear that there has been a fundamental shift on the demand side as countries such as India, China, Brazil and the countries of the Gulf now demand higher and higher quantities of raw commodities to build roads, cars, etc... see our discussion on emerging markets for more...

 

 

 

Changes are happening in China (that will change the world)

 

Yes, everyone knows that China has been booming, but,  in early 2008, we noticed some fundamental changes that were occurring in China, and began to wonder how they might affect global business patterns.  In particular, we are seeing that inflation is ticking upwards, which is making many Chinese made goods more expensive.  Also, the Chinese currency has appreciated and is expected to continue appreciating significantly.  This will also make Chinese exports more expensive on the world market. This might have many significant effects on the world economy, from exporting inflation, to shifting global supply chains.  This will make Central Bankers jobs considerably more difficult over the next 5 years (than it has been over the past 5).   

 

As the Chinese economy faces down inflation, they have been forced to raise interest rates, which has attracted the desire of foreign investors to invest in China, which would have the effect of pushing the currency even higher, but China is desperately trying to maintain their system of capital controls.  Will this delicate balance last?  Will China slip into recession? 

 

Quitely, China has changed their currency regime, and that has massive implications for the financial markets (especially in the US).  The Chinese look to be slowing down their purchase of US Treasury bonds (which they were doing to keep their currency down).  How will this effect the US?  How dependent is the US on Chinese capital to fund its current-account in balance?  (remember, the US has a massive current account deficit, but has traditionally had a capital account surplus....thanks in large part to the inflow of Chinese capital).  If the Chinese stop sending their excess capital to the US, will other countries pickup the slack?  Or, will the US be forced to cut the current account deficit (which should happen if the US dollar continues to weaken)....  note:  India is slowing down too 

 

 

 

rising inflation 2008

 

This trend is serious.  For the first time in a really long time, global prices are rising beyond the comfort level of most central bankers.  Which means that the world should brace themselves for higher interest rates down the road as central bankers get ready to fight against higher inflation.  Also, in response to higher food, energy and health costs, we are seeing governments around the world trying to combat inflation with price controls (a big mistake).  By capping prices (good intention), they are distorting the markets, and are leading to shortages and under investment (bad consequences).  While inflation has not yet gotten out of control, we see that this is a major area of concern for global markets.  The drivers of this trend are various, from the rising cost of food (which is partially caused by the US ethanol policy), to the rising cost of oil and other commodities.   Note:  a large part of the run up in prices in commodities is due to China's booming economy, and their need for resources to feed that boom.  But, what happens if Chinas growth were to slow?  (see our discussion:  Changes are happening in China).  Another reason for the boom in commodities prices may be due to speculation.  Is there a speculative bubble in commodities?  What happens to economies in emerging markets if that bubble bursts?  See our discussion on speculative asset bubbles (internet, housing, commodities)

 

 

KookyPlan prediction: The next bubble to burst may be commodities in 2008

 

Over the past decade, we have seen two major asset bubbles build up, and then burst.  First we saw the internet bubble, and then the housing bubble...so, whats next?  My guess is commodities.  But, the real question to ask is... why are we seeing these asset bubbles rise in the first place?  What is the underlying root cause of these asset bubbles?  If you look back to 1991, we saw a mild recession, and the fed cut interest rates to spur growth.  Then came the Asian crisis of 1997, and more economic stimulus.  Lay this on top of already low interest rates as a result of China purchasing massive amounts of US treasuries (in effect, lending money very cheaply to the US), and you see that liquidity was building up.  This excess financial liquidity, mixed with tech spending led to the first bubble, then a burst in 2001.   But, the underlying liquidity issue did not go away, and in fact it got worse.   In response to the bubble bursting, the the following 2001 terrorist attacks, Enron scandal, etc... the Fed once again cut interest rates to spur the economy.   The Chinese and other nations continued to lend the US money at extremely cheap rates, and again a liquidity pool built up... this time in the housing market as investors poured money into "safe assets" of homes.   Cheap borrowing costs led to the second asset bubble, which then burst in 2007, leading to a credit crisis around the world.   But, in response to a slowing economy, the Fed once again cut interest rates.  Do you see a pattern here?  Where do you think the excess liquidity will flow next time?  Where is the next asset bubble (that will once again burst).  In early 2008,  I'm making the prediction that commodities are the next asset bubble, and we are on track for another bursting / crisis....what will be the impact on commodity dependent economies in Latin America?.... add your comments here...

 

 

Agflation - the end of cheap food

 

Inflation in the Agriculture sector.  There is a world wide movement of food prices significantly upward.  Food prices are rising on a mix of strong demand from developing countries; a rising global population; more frequent floods and droughts caused by climate change; and the biofuel industry’s appetite for grains.  This is hurting consumers, but is helping farmers in poorer nations.  It is causing inflation concerns around the world.  On the positive side, it has the potential to lift millions of the worlds poor out of poverty if they happen to be food producers, and it might eventually lead to the reduction of trade barriers in food.  If the US, Europe and Japan were able to take advantage of the high price of food to dismantle the protectionist trade barriers, then the structural changes could benefit millions of food producers around the world.  see more in our discussion on the end of cheap food. 

 

 

Commodities prices on the rise:

 

This is in large part due to the  Rise of purchasing power in emerging markets..... Around the globe, in many emerging markets, we are seeing a phenomenon occurring where millions of poor people are suddenly emerging as consumers and moving up along the social chain.   This trend is leading to opportunities with consumers of low income on a scale as never seen before.   In countries such as Brazil, and in many emerging markets, there is the growth of the "third class" of consumers, which suddenly find themselves using credit and other mechanisms to join the global consumer market.  As this trend occurs the world over, there are massive opportunities "at the bottom of the pyramid".   As technology and travel  becomes more affordable, we are seeing a booming auto market in Brazil, and the expectation that this emerging class of consumers will want more appliances, electronics, and international travel.  This, in turn, gives a boost to the commodities market, and can explain why more construction materials, and industrial commodities are needed in India, China, and in many emerging markets.   This is also the basis for the "decoupling" theory that holds that countries like Brazil (which are big commodities exporters) are not as effected by a US recession as they would be in the past, because a big part of those commodity requirements are now needed to feed this swelling of the purchasing-class.  read more here... 

 

 

High Oil Prices

 

High oil prices are effecting lots of other distant business models, and is having an impact on many aspects of business.   Why are oil prices so high?  On a global scale, there are several factors..  The main culprit, however, is probably the "twin peg of currencies and commodity prices in emerging markets"...a theory put forth by Merrill Lynch economist Francisco Blanch, and published in the Financial Times.  What are the results of this trend?  Many...One of the more interesting trends Ive seen recently is that high oil prices led the USA to push for alternative energy sources, which led to the idea of subsidizing Ethanol production.  The simple idea of growing our own fuel, and becoming less dependent on foreigner was pitched as a matter of national security, and something that would be good for the environment. But subsidizing farmers to grow corn (rather than other crops), and to produce fuel (rather than food) has resulted in a massive food price increases in crops such as corn and wheat, as well as other crops such as hops (which is a key ingredient in beer).   As a result of this, we are seeing countries such as Venezuela, Russia and Argentina putting pricing controls on food as poor people are having difficulty affording food.  Pricing controls, as we all know, will not work, and will only result in food shortages.  Another strange result is that the price of raw ingredients for beer production are pricing out independent breweries, and we are seeing closing of independent brew pubs all across the US as they are less able to absorb price increases than the major breweries such as Bush.   see articles: Iraq war  ,   end of cheap food, and agriculture

 

 

 

Manufactured goods are getting more expensive:

 

This is in large part due to changes that are happening in China with upward pressure on wages, but also due to higher oil prices that increases shipment costs, as well as higher commodity prices for raw materials. 

 

 

 

Credit Crisis 2007-2008

 

In 2007 and 2008, we have seen the bursting of two economic bubbles in the USA.  One was the housing market bubble as a result of subprime lending.  The other is the bursting of the financial markets, otherwise known as the credit crisis of 2007.  The combined effect of these two market-meltdowns is unknown yet, but it could get ugly.  In this section, we will discuss both bursting bubbles together, and look at the root causes, and the possible after effects.  see our discussion on Double bubble trouble - two bubbles burst in the USA

 

Which led to:  deleveraging of financial markets 2008 

 

In response to the bursting of the housing bubble, and the following credit crisis of 2007, we are seeing credit (lending, borrowing) contract significantly in the USA, Europe, and in many other markets.   This is leading to fears of a  Possible recession in 2008.  At least when looking at the US in isolation, it looks possible that the US could slip into recession this coming year.  but, considering all of the global linkages (see trends below), it is possible, that the US housing slump / credit crisis / recession could drag other countries down as well.  But, as in any economic state, there will be opportunities (as well as challenges).  In this section, we will look at possible connections (linkages) between a potential US slowdown, and what that means for global investors.  The big question is... 

 

how would a USA recession effect Latin America  

Decoupling?

 

Double bubble trouble - two bubbles burst in the USA

 

In 2007 and 2008, we have seen the bursting of two economic bubbles in the USA.  One was the housing market bubble as a result of subprime lending.  The other is the bursting of the financial markets, otherwise known as the credit crisis of 2007.  The combined effect of these two market-meltdowns is unknown yet, but it could get ugly.  In this section, we will discuss both bursting bubbles together, and look at the root causes, and the possible after effects.  

 

 

 

 

Weakening of the US dollar

 

As the US dollar has weakened against the Euro and other major currencies, it has made importing into the US that much more expensive, and has given US exporters a much needed lift.   They say that "traded goods" are three times the size of the housing market in the US, so conceivably the boost of exports could help the US to weather the US housing troubles (see subprime lending and credit crisis discussions).   While the weaker US dollar has helped exporters such as Boeing, it has also had global repercussions as other business models are forced to adjust to the falling dollar.  One of the more worrying trends is discussion in Asia of central banks potentially switching to Euros rather than dollars as their way in which they spend their foreign currency reserves.  The US relies heavily on foreigners to continue to purchase our debt in order to finance our massive trade deficit.  If the foreigners were to loose taste for purchasing US debt, then the US would be forced to raise interest rates on a massive scale, which could crush the US economy.  A weakening dollar is worrisome if foreigners loose confidence in the ability of the US dollar to maintain its value against other currencies.  If that happens, then foreigners stop investing in the US. 

 

One of the main causes of the weaker dollar is due to a massive trade deficit, and excessive spending (and very little savings in America) due to the Iraq war.  Note that the last time the US went to war with Vietnam, the excessive spending during war time led to a collapse of the monetary system back then (the Gold Standard), and it led to a decade of inflation in the 1970's as the US recovered from the excess spending which led to a massive weakening of the USD dollar (and an inability to stay pegged with gold).   On the Positive side, the weaker US dollar has allowed consumers in emerging markets to feel richer, and has helped making technology affordable .  This has helped consumers worldwide, as well as major US technology exporters such as Apple, HP, and so on...

 

 

Asian countries fight to keep their currencies undervalued vs the dollar

 

This trend of countries in Asia fighting to keep their currencies undervalued has had major impact on the world economy.  China, is of course the major country that comes to mind, but others are doing the same thing.   In order to keep exports competitive, the Asian governments do their best to keep the currency undervalued.  But, with massive amounts of foreign capital coming into the country, these governments are forced to spend that money overseas.  See our discussion on the balance of payments and the Mundell trilemma to see why this is.  But the result of the situation is that countries like China are forced to invest most of that money overseas, and most of which pours into US T-bills.  As they buy up US debt, that helps keep the US borrowing costs to a minimum, so the Fed is able to keep interest rates extremely low.  This is partly to blame for the asset bubble in housing, and the subsequent credit crisis of 2007. 

 

Gulf coast countries peg vs the dollar

 

In addition to China, there are many countries especially those in the Gulf Coast region that are guilty of pegging their currencies to the depreciating US dollar.  But, as the dollar has lost value, this has forced GCC countries to cut interest rates to maintain the peg...this has fuelled inflation in these countries and put pressure on them to appreciate their currencies to fight inflation.

 

 

Deficits in the US leading to currency weakness

 

The bigger fear, however, is what would happen to the US economy if China were to suddenly stop buying up all that US debt (which they have done recently).  If China were to stop supporting the weak currency by purchasing US debt, then the US would be forced to a balance of payments crisis, unless it would significantly cut back on imports, expand exports, or devalue their currency.   For this reason, I suspect that many in Washington secretly are welcoming a weaker US dollar which should help to slowly correct the balance of payments issue (before confronting the Chinese to allow their currency to appreciate).  

 

 

 

 

Fear of Global Warming  and the rise of green business models

 

Fear of global warming is a major trend in the world today, and is resulting in major regulations changes that affect all sort of businesses.   Carbon trading is a market that sprung up since they Kyoto accords.  In addition, we see an increased interest from Venture Capital into areas of green business models.  The energy industry and the European Car industry are two major industries affected, but so to are the cement industry and the lighting industry.  There are many connections, and many business models that will eventually be effected by a growing global fear of green house gas emissions. 

 

 

Challenges to public markets

 

 

Private Equity industry booming in 2007 and slows in 2008

 

One of the more interesting mega trends that has occurred over the past few years is that Private equity companies have increasingly taken a vast number of companies private.  This means that they are no longer listed on the NYSE or NASDAQ, and therefore what happens inside of the companies is now secretive, rather than public information.  The benefits of going private are advertised as being great:  companies are no longer needing to meet short term investors expectations, and so they are free as a private company to make longer term decisions without having to meet wall streets expectations each quarter.  Also, some argue that by going private, the companies are no longer overly burdened by regulations and expenses that arose from the passing of Sarbanes-Oxley (a new law put in place after the collapse of Enron, WorldCom, and other scandals in the early 2000's).  But, while these arguments may be true, there also seems to be something else going on here.  Private equity funds have been very successful in raising massive amounts of money (billions) which has allowed them to raid public companies and take them over.  In the past, there might have been public outcry, but in the Sarbanes-Oxley world (and with everyone getting rich from buyouts), there has been very little public outcry.  But, what happens behind doors is out of sight of the public.  Is this worrisome? 

 

As this trend was escalating with no potential end in sight, all of a sudden, the credit crisis of 2007 came along (caused by the housing bubble bursting, and the subprime lending), and all of a sudden, the private equity guys were having trouble finding the credit needed to close on many of these deals.   If private equity takes a breather, will this open up the door once again for strategic corporate mergers and acquisitions?  It is an interesting trend, and if you want to comment on it, please click here...

 

 

rise of "Sovereign Wealth Funds"

 

In the world of finance, these guys are scary.  Think about all of the money that leaves the USA as they purchase oil.  All of those "petro dollars" have to go somewhere, and many of them have been stockpiled in massive "sovereign wealth funds" in the middle east.  The same thing has happened with China and all of the billions of US dollars that we send over there to import Chinese made goods.  Singapore, and others...they have all built up massive "war chests" of capital that is waiting to be deployed.    Ok, but forget the doom and gloom of what negative things could happen if they decided to start spending that money, and consider all of the investments and projects that could be financed if you could convince those money managers to put some of that capital to work on your project.   That is exactly what is happening as entrepreneurs and established businessmen parade their project proposals to these funds.  Here is an interesting article about green business models that are getting funded.  ("guess who's building a green city")

 

 

Technology changes the rules of the game

 

Tech trends to watch

 

Technology seems to change and move faster today than at anytime in history.  The key to strategy in this quickly changing world is to understand the trends that are occurring and to position your company just ahead of the trends so that you can capitalize and profit from your insights.  The trouble of putting yourself in front of the trends is that of risk.  If you are wrong about the trends that you expect to occur, you may spend a fortune positioning your company in front of the wrong trend.  Companies make these bets every day, which is the essence of developing sound competitive advantage.  For more discussion, see our page on strategy. 

 

 

Globalization of Business, Ideas and Markets

 

Within the mega trend of "globalization", we see some interesting things happening, such as the rising importance of Emerging Multinational Companies and the Emerging markets financial centers grow in importance.    We see this as evidence of Emerging markets growth in importance on the World stage.  While it may be a bit cliche to say that "globalization" is a trend, but the importance of competing globally can not be understated.  As we look at the industry analysis we notice that some industries are much more globally competitive and need to be due to massive economies of scale advantage that can be obtained from marketing products globally.  Such industries as computer manufacture where the products are standardized are prime candidates for global competition.  But, rising oil prices, and falling dollar values are important shift that make competing globally an ever changing game.  Changes in regulations and trade barriers, are things that can significantly alter comparative advantages globally overnight.  As travel costs have fallen, communication costs have fallen and the world has become more technologically integrated, we see new opportunities for even small companies to compete globally.  But, on the other hand, we also see company after company failing in global competition because they still think too US, or European-centric, and thus give up global market share to the "clones", or copy cat business models that pop up around the globe.  See our discussion about troubles going global (business).  Any discussion about the effects of globalization wouldn't be complete without thinking about the Anti-Globalization Movement, and the many "Washington consensus". 

 

 

free trade movement under pressure

 

As the Bush administration races to push free-trade agreements with Colombia, Panama and South Korea through Congress before leaving office next year, it is meeting a level of resistance observers call high even by the normally contentious standards of such debates.  It happens as the administration is confronting the most hostile domestic environment toward free trade in years. Recent polls suggest more Americans than ever view globalization as negative, blaming free trade for the loss of millions of manufacturing jobs that have moved overseas. As the economy falters, populist pundits of the Lou Dobbsian school are blaming reckless trade deals. In a hotly contested election year, Democratic candidates are jockeying for the labor vote, questioning the wisdom of such accords as the North American Free Trade Agreement.  Congressional opposition has confronted the administration with a dilemma. If it forces a vote on Colombia in the current climate, it could score the first defeat in modern history of a successfully negotiated U.S. trade deal. But if it does not try, analysts say it risks sending a message overseas that America's doors to trade are temporarily closed.  Given the opposition to these agreements, they are likely to remain on ice until at least after the U.S. elections in November.

 

 

 

Immigration effects felt around the globe

 

Immigration issues are being felt as globalization and cheap transport has allowed immigrants to move from developing to developed nations as never before.  All OECD nations are struggling with ways in which to deal with the massive influx of immigrants, and how to integrate them into society.  The US is building a wall to keep undocumented immigrants from crossing the Mexican border, while Euope struggles with a mass of immigrants from Morocco (Spain), and across northern Africa.  From the developing nations perspective, this massive loss of human talent (a brain drain) can surely be felt, and will be felt for generations to come.  What are the impacts on the global economy?  In this section, we seek to find out...

 

 

Iraq war

 

The war in Iraq has led to many unforeseen consequences such as High Oil Prices, and a weakening of the US dollar.  It has led to massive US budget deficits and a loss of US reputation in the world.   On the other hand, high oil prices have led to Clean-tech and environmentally conscious investing and have raised awareness of US dependence on foreign oil sources.  Many green business models that we discuss today might become unviable if the price of oil were to drop back to $30 a barrel.  The war is obviously a terrible thing in and of itself.  This is not the location to discuss the war itself, but we seek to allow users to use KookyPlan space to discuss the (sometimes strange) connections between global events and everyday business challenges (and opportunities).  Primarily, this space is set up for investors and entrepreneurs to discuss the impact that major events have on their operating environment.   Please feel free to contribute, but keep the comments in line with our overall objectives:

 

 

Regional Trends

 

North America

1. US election '08

   • Tax issues:

   • capital gains tax:  if there is a change in parties , this tax will likely rise....effecting PE, and entrepreneurs

 

1.  "baby boomers" generation aging
   • Opportunty for Private Equity investments:   offer PE as an option to this group of business leaders that dont want to sell out to a "strategic buyer" (who might change the culture of the firm), and instead partner up with a PE firm, who will preserve the culture, and give an equity option to the employees...."help transition and transform them".   see discussion Venture Capital in Florida

 

 

Emerging Markets Trends:

 

1.  Transition from state-run (socialist) to market-driven economies

2.  Privatizations of state owned enterprises

3.  Liberalization of trade policies

4.  Liberalization of FDI foreign investment policies

5.  Formation of regional trading blocks and regional integration 

*  related pages:  Washington consensus , Criticisms of the Washington Consensus, 

 

 

Latin America

Trends in Latin America

 

 

 

 

Asia

Trends in Asia

 

 

 

 

Middle East and Arab states

 

Trends in the Middle East and Arab states

 

 

 

Links from KookyPlan

• trends
• predicting the future
• predicting trends in foreign exchange rates
• Packenham model to predict policy changes
• Futures market
• forward contracts

• upcoming trends we are watching  - check here to see what trends that we are watching that might make it onto the main page:
• Industry Analysis