One giant leap for globalization
This summer marked the 40th anniversary of astronaut Neil Armstrong’s first steps on the moon. On July 21st 1969 he uttered the phrase, “That's one small step for man, one giant leap for mankind."
There has been hours and hours of analysis about dropping the “a” as in one small step for a man, because it formed a grammatical contradiction. Armstrong said he hoped history would grant him some leeway and again further analysis suggests that the audio signal might have been interrupted during his historic walk.
I am recalling that famous two and a half hour journey on the moon’s surface because today there is a spirited intellectual debate on whether the financial crisis of the past year will fundamentally change our approach to business, or be just an interruption on the path to globalization.
During this month, nearly every strand of the crisis is being revisited to understand where we have been and what regulatory steps will emerge at the G20 summit in Pittsburgh. But, maybe we are missing the bigger picture.
I have listened to astronauts talking about the mind-stretching image of looking at earth from space. One’s perspective, I am told, changes dramatically after such an experience and maybe that is what we should be doing ourselves right now -- looking not at what transpired in the past year or the decade that led to the asset bubble, but instead on the global puzzle being assembled.
The smart minds are looking both forwards and back. Each year I spend a few days in the Alps with a group of German industrialists and businessmen to make sense of the world today. Last year, the talks took place just two days prior to the collapse of Lehman Brothers. I went back to look at what was said then and the analysis was incredibly prescient.
The business community pointed to historic bank bailouts on a scale we have not seen before, more regulation of financial products by central banks leading to global rules and finally an effort to weed out the Madoffs of the world. The final point seems to be more difficult to police after the other well-known and recent examples of Enron, WorldCom and Tyco.
The reality is one would never have dreamed of a $1.5 trillion deficit for the U.S., that Washington must drag around like a ball and chain for years to come. Europe and the U.S. are learning, much like Japan during the lost decade of the 1990s, the long-term implications of such a financial shock to the system.
J.P. Morgan Chase bank released a study talking about a sizable lowering of the classic return on equity for banks from 15 percent down to 11 percent with higher capital requirements and stricter regulations. No doubt, banks will remain under the magnifying glass.
But the Chief Financial Officer of Siemens, Joe Kaeser is suggesting something a bit different. His company has over 400,000 employees all over the world and only recently recovered from its own shock linked to compliance practices and kickbacks in 2006. Kaeser sees this crisis as the next big step for globalization.
While the West is living on borrowed time and money, the economies of the East have re-grouped quickly. Many tried to debunk the decoupling of the East from the West, but with the divergence of growth we are witnessing today it is difficult to not believe in a higher grade of de-coupling and the bigger march towards further globalization.
Eight, five and five -- those are the expected percentage annual growth rates for China, India and Indonesia for 2009 and Chinese Premier Wen Jiabao is confident that his $9 trillion stimulus plan will maintain that expansion through 2015.
Oil in the $60-70 range should provide above average growth for the Middle East. Both China and the Middle East remain dependent on Europe and the U.S. for growth, but certainly less so than before.
The next big step in globalization for the major industrial groups means to go where opportunity presents itself. GE for example recently landed a $2.5 billion deal to build power stations in Kuwait. Siemens secured a similar size contract for a water and power operation in Saudi Arabia a few years back.
It may have felt like we all stepped off the cliff in September 2008, with many forced to ask the simple question, "Is my bank safe?" Instead of winding the clock back a year, let’s take inspiration instead from Major General Armstrong and his historic words four decades ago.
Uncle Sam on the line
It was a surreal experience, standing outside a brand new conference center in the spruced up port city of Tianjin, China preparing for live cut-in.
In my earpiece I could hear what many people around the world were watching. U.S. Congressional leaders lined up in front of a "political scrum" to tell everyone that they were making progress on a $700 billion rescue package. They wanted to both illustrate their unity while at the same time declare their disdain for having to go to their constituents for money. This interplay came before the first bill was voted down in the U.S. House of Representatives.
My eavesdropping followed a thirty minute plenary speech and Q&A session with Chinese Premier, Wen Jiabao at a gathering of the so-called New Champions of the World Economic Forum. If one wanted to find a starker contrast of ascent and decline, you saw it in person and heard it through the earpiece. Washington legislators were crunching together a package to restore confidence while at the same time the next president with massive debt burden.
Mind the growth gap
These are the new realities of today’s economy. The Chinese Premier hosted a meeting in his hometown, while the U.S. begins a hard road back after years of borrowed time after bankers sold products few understood. In the halls of the vast conference center, many were talking about the "tilt to the east."
CNN cameraman Charlie Miller and I travelled from Tianjin to Beijing to capture the post-Olympic mood and reaction to the banking legislation that was stalling on Capitol Hill. We went to Tiananmen Square on Chinese National Day to tape a segment. Visually the energy of the economic expansion underway hits you.
The U.S. is still growing a respectable 2.8 percent; Europe a less respectable 1.5 percent and the Middle East to Asia 7 percent. China is worried about slowing down to 9 percent. This growth is the primary reason business leaders from this new belt of growth are looking to each other for opportunities. It is why Airbus, for example, which unveiled its assembly plant in Tianjin during the meeting, has an operational support hub in Dubai and is building a plant in Tunisia.
While this is the future, the New Champions cannot divorce themselves from the past. In a panel that I chaired, business leaders talked about financing infrastructure in the Gulf, while raising the sensitive issue of co-dependency with the United States. All told, foreign investors and governments have an estimated $3 trillion invested in U.S. assets -- bonds, buildings and banks. As the dollar has sunk over the past three years, so too did their portfolios.
These investors want the rescue package to help restore confidence, but at the same time, they are not eager to jump bank into the U.S. market in pursuit of value. In an interview, Sameer Al Ansari, Executive Chairman of Dubai International Capital said he has held reservations about the financial sector in the U.S. for months. In his words, “It just feels to us that things are going to get even worse, so it is time to be careful.”
The bottom line? Many who do not need to add political considerations into their investment decision making are keeping their powder dry.
This leads us to the role of the sovereign funds. They have an estimated $2.5 trillion to invest. That is a vast liquidity pool that could buffer the downturn coming on both sides of the Atlantic. Victor Chu of First Eastern Investment Bank called them the super-nationals, government funds that have to look well beyond their borders to, in some cases, serve as lenders of last resort.
“They are the people with the capacity. They can act with speed and they can act with financial and strategic returns,” Chu said, “Sovereign wealth funds have a super-national interest to try to make sure that international markets are back on the right track otherwise we will see a domino effect of major failures,” he continued.
We all know the worn out phrase, "money makes the world go around." It is fitting today as we witness how interconnected everyone is at this level.
As one Gulf banker concluded in our session, if Uncle Sam calls, they will have to pick up the phone.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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