The Globalization Boom and Bust Cycle

Includes: FXI, FXP, IEV, SKF, UYG
by: Max Fraad Wolff

As we debate and react to an endless series of micro trends, there has been a turning away of attention from the macro. This is dangerous, to say the least. It is potentially crippling if the macro trends are in flux - and they are. Globalization is going nowhere fast on the policy front. Our recent globalization boom (globoom) is at risk of becoming a globalization bust (globust). Public support has become strident opposition. Discomfort and reaction define the positions of many politicians toward international interdependence. All of this as we come to rely ever more on imports, exports, capital flows and global investment. International financial markets, business press pundits and anti-globalization activists seem to be the only people who have not taken note.

The World Trade Organization [WTO] has been working on the Doha round of trade negotiations since November 2001 with agricultural and service meetings taking place since early 2000. There has been no real progress in nearly a decade! In late July 2008, to almost no attention, the latest round of negotiations failed in rising tides of acrimony. Feared shortages and rising prices - despite recent reversals - in basic materials, agricultural commodities and energy have created a patchwork of protection measures, export restrictions, hoarding efforts and accusations. Thus, the most integrated global markets for basic production inputs have swerved away from the market-led globalization path that defined the last 25+ years. Brazil has announced a $1 billion action to be brought against the US for agricultural subsidies - cotton specifically.

This seems to be the most significant development to emerge from the latest failed round of trade talks. In the place of rational policy toward conservation and alternative energy sourcing, leading American politicians denounce foreign energy suppliers. These are not the sounds that the globalization juggernaut makes as it plows inevitably forward.

Agricultural commodities and energy inputs are increasingly sought after, guarded and generative of accusation and tension. Large state and private firms are racing all over the globe to secure materials and resources as resource nationalism and antipathy to competitors grows.

This is neither sustainable nor desirable. Western financial institutions, long in the vanguard of globalization struggles, are reeling. Financial firms will not and cannot push greater integration. The seriousness of the economic issues in the US, and the growing sense of emerging Asia’s dominance, have shifted economic leadership. Few seem to understand that it is the same global economy, with the same weaknesses and strengths. All we have seen so far is an inversion of leadership and laggardship. We have seen a shift in momentum and growth, not a change in the structure of the global economy. Ultimatley, this will put the lie to decoupling.

The Anglo-American model surged with its perceived advantages over more managed enterprise economies in the wake of the Asian financial crisis exactly 10 years ago. Currency, banking, real estate and macro performance swoons struck Thailand, Indonesia, South Korea, Russia and beyond, buoying the deregulationist sub strain of the globalization movement.

The next 9 years were defined by great gains for financial institutions as borders were crossed, loanable funds shuffled from savers to spenders, and products innovated. The age of free market globalization was pushed and defined by finance. The one year old Anglo-American crisis of banking, real estate, dollar values and confidence is drifting toward a reversal of the effects of the Asian financial crisis. Globally, policy makers and the public are moving away from unrestrained policies and market freedoms espoused across previous decades. The financials that led the charge are in wounded retreat.

The free market, the multinational led globalization of the 1990s, is wilting in the heat of write downs, losses and solvency issues. American and English policy makers have employed the public purse and followed a more interventionist response to recent developments. Greater regulation and restriction are increasingly discussed as voters trend toward favoring increased government action and restriction heading into the 2008 US Presidential election.

The resiliency - thus far - of emerging market growth calls into question the de-regulationist model, just as the Asian financial crisis weakened the developmental state model prevalent in East Asia. The rise of China - her recent and under acknowledged issues notwithstanding - is placing increased pressure on late 20th century globalization. Supporters strain under her exports, currency policy and thirst for raw materials. China’s multi hundreds of billions in dollar assets and dependence on imported raw materials and exported final goods looks poised to damage growth. As Olympic zeal wanes, it will become clear that importing expensive raw materials to produce vast exports for recessionary and protectionistic EU and US markets is not the greatest, fastest, surest route to growth. If this is not well managed, it will deal another major blow to globalization.

We risk missing the forest fire for the ailing tress. If the momentum toward increasing globalization slams into a wall of resistance made up of rising protectionism, resource nationalism, costly energy and public sentiment, there will be a far greater and more profound shift in the fortunes of regions, sectors and firms.

Disclosure: Author holds positions in FXP and SKF