Risk or opportunity?

Is there an opportunity or a risk, when China was the world’s third largest IT hardware producer – and that was last year. Angelo Coppola reports…

Anatole Kaletsky says that China is largely responsible for the global recovery last year, and more than half of the global increase in crude last year was due to China.

China will replace the US boom of the 80s and 90s. The rise is not a flash in a pan – this is the start of a long term boom. And internationally what can be expected, asked Kaletsky, who says the world is in the middle of a year trend. The USA will continue to grow strongly, following their normal cycle, based on the early 90s path.

US interest rates will increase more strongly than most analysts are predicting. This shouldn’t do much harm as the Bush administration will be adding more stimulus. Strong growth, interest rates and a growing deficit are the main concerns, however.

For the next two years there are a couple of issues, including the property and debt bubbles, oil and commodity prices, inflation and the shift of global trade to the East. And this is for the next 24 months.

The bull market in property has gone too far in certain countries. In the UK the ratio of house prices to disposable incomes is considerably lower than the ratio in the 90s.

On the energy level, oil prices and the $50 level is still only half of what it was 25 years ago – if inflation is taken into account. Peace in the Middle East would possibly mean a reduction in the price.

Inflation is a serious concern. Monetary policy, borrowing, devaluation, war, protectionism, oil, public spending are the seven deadly sins that are contributing to this inflation number in the USA.

It wont go up, as global competition will stop that from rising too high. Bond markets are going to suffer the most if the figure rises to 4%.

The shift in global trade is the biggest risk and opportunity for global markets. $630bn is the size of the US current account deficit. The world bank would be knocking at the door if were any other country.

The problem is that no modeling can determine when this figure becomes unsustainable. There are disruptions when the demand tappers off. Devaluing the US currency against the euro, as has been the case for the past three years, wont make a difference.

The Asian surplus and needs are counteracting the US deficit. The surplus needs to be reduced.