What Happens to the U.S. Economy and Market if Thailand Falls?

I have been concerned for quite some time that the tone of headlines around the world could change from a focus on economic issues to political turmoil. I originally wrote about this in early March as political protests started to gain a critical mass of sorts (see “There Is About To Be A Very Significant Change In Headlines Around The World”).

I usually read The Washington Post because I live in the Greater Washington region, but while I have been spending much of the winter in Florida, I can get the New York Times delivered to my door. The big benefit of a print edition of a newspaper is that it gives you a quick scan of the news as you eyeball headlines. If nothing more, people who just read the headlines of the front page, maybe the local section and the business section, won’t get educated but they will get a fairly accurate sense of the rhythm of the world.

The front page of the New York Times today is a further step in the realization of the prospects I feared when writing the article linked above. The global economic crisis is morphing into a global political crisis. Today’s front page of The Times looked like this: A large color photo on the top left corner of “Unrest in the Streets of Bangkok,” showing armed Thai militia massed to deal with violent protests. The lead story on the top right was “United Militants Threaten Pakistan’s Populous Heart.” There was also another story about U.S. efforts to initiate talks in Iran, easing demands about their capabilities of producing a nuclear weapon. It’s not the front page of a paper announcing a political meltdown around the world. But it is an indication that there is a change in the news headlines that are beginning to change the environment. Is this a trend? I think it well could be. And, if so, the consequences would not be good, especially for those hoping to see an economic recovery.

I think we can see a boomerang effect on the market as the headlines change. I do not see how a bull rally can possibly make sense at a time of volatile and unpredictable political turmoil around the world. Will consumers consume when they fear more governments failing?

Thus far, since the beginning of 2009, Iceland, Latvia, Czechoslovakia and Hungary have seen their governments step down (that is not officially what happened in Czechoslovakia – there, the Prime Minister’s own party forced him to leave office so that they could keep their coalition and their cabinet in place and thereby avoid a total political meltdown). Today, the odds have increased for seeing the Thai government fail, or for seeing the increase in violence as protestors confront their government, which could be worse than a failed government. The trends are going in both directions: violence and political instability. OK. That’s Thailand. Big deal. Next.

It is a big deal. Here’s why.

As Nehginpao Kipgen, political analyst and general secretary of the U.S.-based Kuki International Forum (www.kukiforum.com), noted in his article “Instability in Thailand,” published in the Korean Times, during its meeting just a couple of weeks ago in London, the G20 Summit pledged to help developing nations to revive their ailing economies. Thailand would have been at or near the front of the line in getting that aid from the World Bank and the IMF, but not now. The G20 nations are hardly in shape to prop up their own economies but they obviously thought that the need was great enough in poorer nations that they have been willing to give up some of the resources that could have been used to help their own nations’ economy for the sake of the poorer nations. What happens to those nations when political instability makes that assistance impossible?

Just a few days ago (April 11), the protestors in Thailand forced the cancellation -- for the third time since December 2008 – of the summit of the Association of Southeast Asian Nations (ASEAN). But the protests didn’t end when the summit leaders left Thailand (even before the summit meetings could get started). Kipgen makes the point that if these protests continue, there is the prospect of a “precarious split” in the political stability in Thailand.

We should be concerned. The prospect of another government stepping down is far from good – it would be the fifth this year while others are waiting in the wings. It will also be far from positive if political uncertainty pre-empts the ability to provide financial help to poor nations that need them. There will be more negative headlines and greater momentum in the direction of even more unstable political regimes. How does a stock market continue to rally in that global environment? How do consumers get the backbone to help the economy recover?

How can analysts and investors continue to pooh-pooh the situation? Probably the same way they ignored all the signs of the meltdown in the capital markets last October. Oh well. The more things change, the more they stay the same.

Comments

[Alan Young:]

Sadly, the current political turmoil is not a response to a temporary economic crisis, but to secular pressures of growing populations vs. shrinking resources. And at its worst, it's only a warm-up to the turmoil that is certain to erupt when sea levels start rising faster and dislocate coastal populations all over the world.

But don't worry, there will still be a bull market in sandbags, security forces, and barbed wire.

Apr 15 06:51 PM

[McPhilip:]

I enjoy Big Picture articles such as this one.

In addition to your points about the instability caused by failed governments, I think it's pertinent to mention the danger of existing governments leveraging the crisis to enact changes that are damaging to local markets and international trade.

Besides all the controversial protectionist measures, the following examples come to mind:

1. Venezuala: Chavez taking over rice plants accused of not controlling prices properly
2. Argentina: Pension funds raided (again).
3. Zimbabwe: White farmers evicted.

I know I'm forgetting many other examples...

The scary part is that the political unrest due to the crisis may have only just begun. Eastern Europe defaults still threaten to start a devastating chain reaction that spreads to West European banks and then on across the globe.

Apr 15 09:53 PM

[fleeing omega:]

While employment levels are known as a lagging indicator in terms of market timing, what articles like this help point out is that in serious situations like the world is in now, rising unemployment is not just another consequence of a downturn but can convert into a causal factor in terms of further destabilization, both economic and political.

Just because we haven't seen much of that in the West in recent decades doesn't mean there isn't plenty of historical evidence. Of course anyone who believes this is just another turn of the business cycle will tend to dismiss what I am saying...

Apr 16 01:36 AM

[Martel:]

"...since the beginning of 2009, Iceland, Latvia, Czechoslovakia and Hungary have seen their governments step down..."

Czechoslovakia ceased to exist in 1992. At that time, they split into two independent countries, the Czech Republic and Slovak Republic. It was the Czech gov't fell at the end of March.

I don't think yet another change of Thai government would damage the U.S. economy. It may be bad for Thai democracy, but thus far even the Thai stock market hasn't suffered. At the current level, the Thai stock market is a buy, along with some other Asian markets.

We may be heading towards more politically turbulent times, though.

Apr 16 09:22 AM

[reluctantQuant:]

Thailand changes its governentment pretty frequently, actually... and King Bhumibol has repeatedly stepped in, let things stablilze, then let the people try to build consensus for the next government installation.

The current situation seriously kicked up last December when Somchai Wongsawat was ousted, which was not long after a "storming of the office by protesters" in September.

Thaksin Shinawatra was tossed in 2006, the government instituted "draconian" capital controls, and investors freaked (though some smart bulls did quite well, rode the SET up to October, 2007, when the great cosmic bears arrived from Mars and took over the planet).

There was a huge confidence debate over the Thai government in 1999, and quite a leadership battle in 1997. Let's just skip the Asian currency crisis of 1998. 1995 and 1993 both saw major government reshuffles... And there was quite a bit of bombing and political unrest in August 1992, which increased the speculation of the return on Chatichai Choonhavan, who was ousted as premier in 1991...

I'm NOT disagreeing for a significant increase in politial unrest building over the next 18 months; I think some very "stable" countries are quite ripe. But Thailand is a poor barometer. Watch Baltics and China instead.

--rq

Apr 16 12:06 PM

[Dustinian:]

I don't believe that Thailand will continue to suffer major unrest (at least nothing that the Thais aren't used to). Furthermore, I doubt even another coup would have a pronounced effect on our economy. Possibly the economy of Malaysia...but not the USA.

I think now is very good time to invest in Thailand, or Thai equities.

Apr 16 01:31 PM

[Larry House:]

I don't see a direct correlation to the US, but the trend is troubling. I remember all too well when the argument was made over and over that Viet Nam was crucial to US security as well. The world economy is certainly interconnected.

Apr 17 03:15 PM