Financial Sense Newshour had the recent privilege to speak with Dr. Jim Walker, Founder and Managing Director of Asianomics Limited in Hong Kong. Dr. Walker discusses the macroeconomic outlook for Asia, specifically Japan and China, and says the global environment is too fragile for the Fed to raise interest rates this year. In the case of another downturn, he expects the Fed to launch another round of QE, which will be problematic since stocks, he believes, are already in a bubble.
Here are a few excerpts from his interview that recently aired to our subscribers (click here for audio):
Where do you see the greatest risks around the globe currently?
“The real dangers are concentrated in Europe, Japan, and China. They're probably less concentrated in the U.S., which was not the case before but even there I would say that the debt levels companies have taken over the course of the last few years, whether it’s for share buybacks or paying dividends or financial engineering, is really quite worrying if interest rates were in any way to normalize. Those debt loads would come back home to roost very quickly in a very weakly growing global economy.”
Do you think the U.S. can continue to grow with what we see taking place in Europe, Japan, and elsewhere?
“Well, the good news about the U.S. is that it of course has a huge domestic economy as well as just the biggest economy in the world; and American companies are tremendously responsive to both price signals in the economy and incentives to grow if they see profitable opportunities… My worry there though is that the latest numbers we've seen from international trade for the second month in a row, U.S. exports have grown at zero. That might be a minor part of the GDP statistics but when other things are relatively fragile, for example the energy sector now which will certainly be suffering, anything that acts to further drag the economy can have a significant influence. Plus, this is something that people really haven't taken on good yet, the moves in both Europe and Japan and elsewhere to weaken their currencies translate into much weaker profits for U.S. companies operating offshore...so eventually what's happening in the rest of the world does feedback into the U.S. economy as well.”
And that leads us to Fed policy. Do you think the Fed will raise rates this year, which of course would only serve to exacerbate some of these concerns?
“I think that becomes much more questionable now. What's going on in the rest of the world…and how that translates into the U.S. economy I think is going to become an increasing concern. As I say, we've already had the international trade data for December. It came out yesterday and that was the highest trade deficit almost in the last 5 years. So the moves in other countries and the moves in the dollar are beginning to have an impact on the GDP numbers. We certainly don't expect a rate rise in the US this year...I think things are just too fragile.”
Well, if the economic environment is such that they can't raise rates and we’re still sitting near zero, what is the most likely response if we were to move into another downturn?
“Well, they do more of what they've been doing for the last few years. They don't think they have zero bullets in the chamber...these central bankers believe that printing money, QE, is the answer to the zero bound on interest rates and I think so far they would claim that they've been very successful in doing that. They've certainly been very successful in printing money but not when it comes to generating any economic activity. They've got asset prices up and that seems to be all they care about these days. So I think they would just do more [QE].”
If you print enough money, sooner or later that money is going to flow into an asset class and not only create malinvestments and misallocation of capital but also, more likely, a bubble. What are the risks we see this take place?
“Actually I don't think that there are any risks, but that it has already happened. We have an asset bubble in equities, we have a huge asset bubble in government debt, we have asset bubbles in activity in other parts of the world...these are all chickens that are going to come home to roost over the next few years, hence the reason that they're going to be so reluctant to try and reverse policy because they've been flying the plane blind for a long time. Landing it is just about the scariest prospect in the planet for these people. So I think we've got plenty of bubbles, it's just a question of how much further they're willing to inflate them, that's all.”
So, in this kind of market where does one invest?
“The interesting thing is that I've lived in Asia for most of the last 25 years and many people consider me here to be one of the bears of the region, always warning about potential problems in countries: the Asian crisis and the global crisis, fearing what's happening in China, etc. And that's generally true because we think that governments and central banks are more prone to making mistakes than they are to getting things right so there's usually quite a bit to worry about, but I look about the region at the moment and we've just put out probably the most upbeat piece of research in my twenty five years in Asia about the domestic demand conditions in a lot of South East Asia and in India…”
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