Stratfor.com's Weekly Analysis - 02 October 2000 _________________________________________ It's not news, it's intelligence. What else is on Stratfor.com? If you missed it last week, be sure to read our three-part series on the future of the war in Colombia, The Price of War, as the United States prepares to release the first in $1.3 billion in aid. http://www.stratfor.com/SERVICES/giu2000/092700.asp Would you like to catch up on the latest intelligence we've published? Just click on the Intelligence Index. http://www.stratfor.com/world/defaultindex.htm Coming this week: Our forecast for next quarter of 2000. _________________________________________ Oil and the Coming Global Economic Slowdown Summary Oil prices have exploded. From a low point in 1999, prices have nearly quadrupled. In the back of most minds lurks a fear: Will this rise in prices trigger a depression? Will it be 1973 all over again? The answer lies in looking at the structural and cyclical parts of the world's economies. They - not oil - were at the heart of the 1970s economic downturn and will determine events in this decade, as well. Analysis Since petroleum is the key industrial mineral, without which nothing works, there has been an economic consequence to the recent rise in prices. The most immediately perceptible consequences, however, have been political. Oil prices, which caused civil disobedience in Europe, are now a centerpiece in the American presidential campaign. Prices raise concerns about Asia's ability to recover from the 1997 crash. Embedded in the concern over oil is a deep, dark fear: Will the rise in prices so disrupt the global economy that it will tumble out of control and into a general depression? Certainly, higher oil prices cause pain. But the real fear is whether these oil prices will be the nail in the coffin in the expanding global economy. In the back of everyone's mind is this question: Are we about to experience 1973 all over again? ________________________________________________________________ Promote global intelligence. Forward this newsletter to your colleagues and friends! __________________________________________________________________ The 1973 Arab oil embargo created a massive price rise and economic dislocation, from Tokyo to Paris to Chicago. The explosion in oil prices ushered in a decade of "stagflation" in which inflation soared while economies stagnated. By the end of the decade, the United States experienced double-digit unemployment, double-digit inflation and double-digit interest rates. For Europe, the situation was worse. Even Japan, in the early stage of its economic explosion, experienced derailment. What few people remember is that the 1973 oil shock did not usher in the stagflation period. It may have accelerated it and intensified it, but the slowdown was in the works for quite a while. President Nixon had imposed price and wage controls before the 1973 crisis. The United States was in enough economic trouble for the president to impose unprecedented controls on the economy. What drove the global economy toward stagflation was a set of deep structural and cyclical problems. The first of these was essentially demographic. The global population explosion following World War II took place as people entered a period of family formation -- a time when consumption is highest and savings is lowest. This wave of people created tremendous pressure on commodity and money markets. Then came an inevitable cyclical event. The massive post-war expansion that began in the early 1950s was about a generation old. By the late 1960s, it was, not surprisingly, out of gas. The time had come for a cyclical downturn. Coupled with the demographic, structural reality, a cyclical shift turned into a massive economic, social and political dislocation. Deep cyclical and structural patterns magnified the effect of the oil price rise in 1973. Without these other factors, the prices would not have had the effect they had. Alternatively, the rise in oil prices would not have been possible. It could not have occurred after the 1967 Middle East War. But it could take place in 1973, because of a general rise in commodity prices; the rise in oil prices was at most an exaggeration of something that was happening anyway. _____________________________________________________________ Today, the real issue is not oil - not any more than it was in 1973. The real issues are the structural and cyclical forces that underpin the economy. By themselves, oil prices are not definitive. They are merely part of the general operating pattern of global economies. The structural pattern remains in place, with positive and negative consequences. In the case of the former, the same demographic factors that created stagflation in the 1970s are now creating powerful patterns of capital formation, particularly in the United States. Much focus has been on the very narrow measure of savings rates, which are at a historical low in the United States. This measure ignores aggregate and personal capital formation rates. The boomers are in a period of low consumption and massive capital formation, fueling tremendous growth in the capital markets. That means that net worth-and even liquid net worth-is rising. This inevitably depresses savings rates, since saving from current income while net worth expands dramatically is unlikely. Now, some ominous long-term clouds are out there. The first is that the boomers cannot maintain this capital formation for more than another decade at best. Indeed, they will begin liquidating holdings at some point. At that point, capital markets will start imploding, slowly at first and then quite suddenly. But that time is not now. The other very real cloud is this: The rest of the world does not share the American boom. Asia is certainly not participating. Europe shares in it only fractionally and unevenly. Russia is in a massive depression. In short, while the aggregate global picture remains structurally positive, when you break the picture down into its component parts, you see that American expansion makes up for much of the world's deep structural problems, which do not yet parallel those of the 1970s. _____________________________________________________________ However, there are some serious cyclical problems. Many people have asked, "When will the bull market end?" By most definitions the bull market ended many months ago. In some cases there were massive declines. In others, there has been stagnation. But the period in which all global markets reached new heights has been over for quite a while. The stock market is an important element, snapshot and, above all, an important precursor of the economy. In that sense, there are clearly cyclical problems. Consider the following cases: *United States: The Standard and Poors 500 hits 1553.11 in April and has moved sideways since then, closing at 1436.51 on Friday, about six months later, a decline of about 7.5 percent. The Dow topped out in January, showing a similar pattern and decline. *Japan: The Nikkei topped out at 20833 in April. It closed on Friday at 15747, about its low for the year, a decline of nearly 25 percent. It was at nearly 40,000 in 1990. *Hong Kong: The Hang Seng reached its high for the year in April at 18397.97. It fell below 14000, rallied to just below its high and then plunged again, closing at 15648 on Friday, a decline of about 15 percent. Unlike other Asian markets, the Hang Seng did recover from its 1998 lows before beginning the current decline. *Singapore: The Straits Times Index peaked at 2582.94 in January, and closed Friday at 1997.03, a decline of about 23 percent. *Germany: The DAX fell from 8136.16 in March to 6798.12, near the yearly low. This is a decline of about 8,4 percent, but like the American markets, coming off historical highs. *France: The CAC index has gone from an all-time high of 6367.25 in September to 5944.77 on Friday. This is a decline of 6.6 percent, but over a very short period of time. *United Kingdom: The FTSE index peaked in late December at 6930.2, moving sideways mostly and closing on Friday at 6294.2, a decline of about 9.2 percent. _____________________________________________________________ An extremely consistent pattern shows itself. Global markets have begun to move down on a cyclical basis. From a long-term perspective, this is not a big deal. After all, the American and European markets, having risen extraordinarily for years, are more than overdue for rest and regrouping. The Asian markets, however, save for the Hang Seng, have failed to recover from the 1997 battering. Their structural problems remain untouched. Thus we see the following three results: * We are moving into a cyclical downturn on a synchronized basis. Everyone is going in the same direction pretty much at the same time. The downturn may be shallow-a mere sideways movement-in the stronger economies. These cases may simply be a slowdown rather than a recession. * The structural de-synchronization remains in place. Asia's cyclical downturn is a resumption of a long-term downtrend. The United States cyclical downturn represents an interruption of a long-term up-trend. The same may be true for Europe. * Increased oil prices will therefore have disproportionate effects. More vulnerable, Asia will be hurt more than the United States. Europe, for social and political reasons will make more noise than the United States, but still hurt less than Asia. But the world's cyclical and structural shifts are not coinciding. We expect, therefore, that oil prices will not affect the world as they did in 1973, nor will they be sustainable for a decade. They may participate in a cyclical downturn and some will blame oil prices for the downturn. But equity prices already reflect this downturn and have for about half a year on a global basis. Oil prices will affect the depth and length of a downturn, but are not the cause. Instead, a weakening will occur across the globe, one that gives the United States and Europe a healthy breather, but hits Asia very hard. Russia will benefit marginally from increased oil prices, but its deep structural problems are political rather than economic; Russia will be cast further out of the international system. In other words, for all the sound and fury, there will be a slowdown or even a recession, but it will not be the end of the world. Not for a while, at least. _____________________________________________________________ For more on the North America, see: http://www.stratfor.com/services/giu/region/namerica/ _____________________________________________________________ (c) 2000 Stratfor, Inc. _______________________________________________ SUBSCRIBE to the free, daily Global Intelligence Update. Click on http://www.stratfor.com/services/giu/subscribe.asp UNSUBSCRIBE by clicking on http://www.stratfor.com/services/giu/subscribe.asp _______________________________________________ Stratfor.com 504 Lavaca, Suite 1100 Austin, TX 78701 Phone: 512-583-5000 Fax: 512-583-5025 Internet: http://www.stratfor.com/ Email: [EMAIL PROTECTED]
