The Naked Tide 

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Warren Buffett likes to say that when the tide goes out, we can see who has been swimming naked. That applies to overborrowed households and overleveraged companies. But it also applies to monoculture countries, ones who have allowed any narrow dependency to form or to linger, that can become a great weakness once a greater global unravelling strikes. By Cees Bruggemans  


Well, the tide did go out, spectacularly Tsunami-like, in recent years, the knock-ons have grown wildly in scope, well beyond expectations, and the world is still trying to get a grip on the resulting adjustment. How much further does this have to go before being contained, allowing mankind to resume its interrupted common journey?

The problem THIS time did not originate in overreaching poorer countries, as in the 1990s Asian contagion. Instead, this time the rich world encountered various internal discontinuities, by way of serial crises, each major region becalming in turn.

Japan did it a generation ago (late 1980s), ever since living off accumulated earnings rather than growing their cake any further (a surprising state of affairs, seeing their rocket-like post-WW2 take off).

America overreached on financial innovation (again), her first Minsky Moment of the 21st century being the September 2008 Lehman bank failure (in retrospect on a par with Black Tuesday in October 1929). Only after a deep recession and decisive policy intervention did America start a long recuperation while steadily normalising her resource use.

Europe was laid low by the 2008 American (Anglo-Saxon) credit crisis, but then reinforcing this bad experience through various peripheral existential crises of her own, the latest edition being a Syrian refugee (but in fact a greater global migrant) crisis.

Of these three regions,  America is farthest in recuperating from its crisis low point, its real GDP level well ahead of pre-crisis highs, its labour market slack and housing overhang mostly reabsorbed or worked off, its bank system recast.

Europe was late into recuperation, and slow on the uptake, mainly for intricate institutional/constitutional constipations best understood by Continentals themselves.

Japan is even more of a drifting hulk, her growth dynamic entirely becalmed, apparently unable to reform adequately to restart her engines despite many heroic attempts.

However, these developed regions host fewer than one billion people between them. The rest of mankind (over six billion and counting) is residing elsewhere. It is how the latter reacted to these upheavals that now matters most. Stories vary, but the sum total overall is still growing in devastation.

Whereas the world mostly sidestepped overdosing Japan in the early 1990s, the world couldn’t easily sidestep an American Great Recession reinforced by repeat European existential crises in short succession. That was too much of a wham.

If that was the first stage (a Developed World one), rounds two and three were Developing World ones, each in turn falling like dominoes.

The second stage was China discovering (circa 2010) that its highly successful development model of three decades had reached saturation point. No amount of excessive credit creation could compensate for the basic truths. Its economy had become too unbalanced, favouring heavy industry and infrastructure investment, with these driving an aggressive global export effort.

The share of all three had gone too high, and could not possibly be pushed higher (the first in Chinese GDP, the latter in world trade), with her capital allocation becoming progressively unproductive, her financial system imbalanced.

Sustaining high growth by pushing all these ratios yet higher was unrealistic. At which point America and Europe incurred Great Recessions, thereafter entering slow decade-long post-crisis recuperations eroding Chinese export potential.

The global game had abruptly been changed. China had to find a new growth model, one less dependent on growing global trade shares, and raising its unproductive fixed investment to ever higher proportions of her GDP.

Stating the Chinese challenge this way offered an obvious solution. Exchanging an outward focus with an inward one, making her growth less export-dependent and more focused on the consumption growth potential of her own population in a very large continental-sized market. In effect, to shift from exporting outward to the world to exporting inward to underdeveloped fellow Chinese consumers, with quite different production capacities, of course.

But as this shift got underway, mainly one of cutting back on growth in industry and infrastructure in favour of internal consumption sectors, especially services, two things happened in the outside world. The third domino was about to fall.

For in her march to ever greater investment levels and global export penetration of an industrial nature, China had started to dominate global commodity demand (ending up with absorbing between 50% and 95% of any commodity you care to mention) while similarly becoming one huge “screwdriver” plant for Emerging Market industry exports, adding low-cost labour to the mix and re-exporting the end result to global product markets.

In the process huge third-party dependencies were created, the worst being simple monocultures (one commodity export wonders, such as oil from Nigeria); or multiple commodity producers (Aussie, Canada, Brazil and others exporting mainly commodities, but a broad range thereof), or becoming a very heavily industrialized sweatshop thriving on Chinese intermediate demand intended for re-export.

But with the Chinese lynchpin being pulled, all the many global dependencies build on her rock started to come unstuck, too. China changing direction, mainly because rich world demand had slowed and the meteoric rise of Chinese export efforts could not be sustained, meant in turn that all those global suppliers coming in her slipstream had to reinvent themselves, too, just like China.

Except how do you reinvent a monoculture like Nigeria and its oil within a decade (the Chinese timespan) when it has proven beyond Nigeria to do so for five decades? Or how do you get a diversified commodity exporter like Aussie, Canada, Brazil, Russia or SA to change their game in a matter of a decade when this feat has escaped them for a century?

The global oil and gas industry is a case apart (a fourth domino if you will, but off the main stream trajectory), like China discovering limitations in both developed and developing country markets where its demand growth has started to stagnate, while global technological innovations have boosted supply, changing the industry’s structure.

In the mid-1980s I had a revealing talk with a bank chief economist in Frankfurt. This was before the Wall fell in 1989. What, I asked, was the future of Russia? A diversified post-industrial country?

No, came the answer. They have always been producers of raw unprocessed commodities and always will be.

That was damning then, but so far not wrong in terms of what is transpiring. This applies to many more countries, too, going by inability to transform structurally.

The danger in these heavy Chinese and oil/gas dependencies is that when their foundation is rocked, they are often set adrift, basically clueless how to reinvent themselves, for they only know one game, and have not developed more broadly, allowing a change in approach.

So whereas the rich regions will mostly recuperate, if slowly, and China will reinvent itself, many of the monoculture dependencies now heavily integrated with her are being cast adrift, already in deep recession, or otherwise struggling to regain a viable growth dynamic.

A South Korea will reinvent itself (like China) but a Russia seems to think turning autarkical inward will solve her problems (as compared to making them worse, by destroying productivity, efficiency and global market access).

Thus a greater truth is dawning as the world keeps adjusting to falling dominoes, with some reinventing their economies, picking themselves up and going on, while a few too many are finding themselves lost in translation, cast adrift.

Thus the 2000s excesses and the 2010s recasting of moulds has been a very costly affair worldwide, in households, companies and even countries finding themselves at the short end of a painful stick, punished for being in the wrong space or not having tried to become more diversified, able to handle adversity.

This is a big tide running out, many naked swimmers coming into focus, and the decade not quite finished separating winners from losers longer term.

As to South Africa, mainly still a diversified commodity producer with today a very high cost base, a too small-scale industrial capability, and policy paradigms unable to effect necessary structural reform (education, labour market, public sector delivery, public governance) and mostly incapable of inspiring busines confidence or financial markets, one can only wonder about its fate.

We apparently haven’t quite found ourselves yet, remaining suspicious of each other. As if that is sufficient explanation for doing what you like, irrespective of the consequences. The world is an unforgiving place. You either sink or learn to swim real quick. The way to handle that is to use well the few good cards that are yours. And get on with delivering a better future than the one inherited instead of getting stuck in suspended structural animation.

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