Looking At The Crystal Ball For 2008
December 31, 2007
Can you tell me the future? We shall try, assembling the largest team ever - our panel of hacks have all screwed on our Nostrodamus hats and will ruminate on the major trends that’s likely to feature in 2008.
Topics include the major socio-economic & political trends; Are we heading for another recession? How are job prospects? Is the price of petrol going to keep heading upwards? If 2007 was the year of run away train inflation will more of the same pan out for 2008?
To summarize; three main drivers will muscle their way to the lime light in 2008.
Food is going to be big for producers, retailers and consumers. We are not referring only to quantity, but also quality.
2008 will be the year when some of the most radical regulatory changes to food in the primary markets [EU and US] will take effect redefining how it’s produced, distributed and marketed.
2008 will also feature as the great year of economics. Expect it to make headlines as never before. In 2008 even your friendly auntie in the NTUC outlet will be able to give you a 5 minute lecture on ‘cost driven inflationary pressures.‘ If 2007 was the year that oil prices went crazy, 2008 will be the year when the world finally begins to make sense of how to get on top of this problem with the help of economics – so expect economics to be the main actor in TV, newspapers and magazines in 2008.
2008 is also the year when the large teutonic plates of the US and EU collide with those in the Indian continent and North Asia. We know this has been an on-going story, but no time in the history of financial markets has it ever reached such a watershed. Or aligned itself to cover so many topics of interest ranging from migration, defense, economics, oil and security.
(1) First East to West, Now West to East.
The good news next year is the world economy will still grow albeit at a slower rate – with Asia taking up much of the slack. in 2007 Global growth hit 4.58%. This is unlikely to fall below 4 per cent in 2008, despite an expected US recession.
One reason is due to the rise of North Asian economies e.g China which has over taken the US as the major contributor towards GDP growth. These days China, India and Russia between them now account for more than half of global growth.
If the story of 2007 was the great “disconnection” of the world economy from the US juggernaut, which once colored the rest of the world i.e What happens in the US economy has the ability to affect the rest of the world.
The narrative in 2008 will be about how the economy of the world “re-connects” with the new power houses in the East.
This signifies a shift not only in the way we typically make sense of stuff. It will also have a profound effect in re-defining the balance of power between East and West.
Expect the trilogy of China, India and Russia to feature more prominently in the world stage. As they assume greater roles on issues ranging from monetary control to the environment – China as usual will lead the pack, as her wealth lies in it’s endless reserves of ultra cheap labour and unparallel ability to deliver cost leadership.
Russia by virtue of her vast oil reserves assumes a clout never seen before except during the days of the cold war. Unlike the family run oligarchs of the sheikhsdom who have always been cautious about investing in the West. The Russians have no qualms about hedging their foreign reserves in businesses in the West. The question with Russia is whether it is able to shed it’s zero business sense successfully and take to the sophistication of the role demanded. As for India expect it to move up the value chain in innovation. Unlike China that only has a numerical superiority. India leverages on it’s base of quality nowledge workers. In 2008, we are confident at least one major IT innovation will emerge from her.
(2) Oil, Oil all Around, But Not A Drop….
Will taxi fares continue to escalate in 2008? How much will it cost you to put a tiger in your tank?
Our prediction is the price of crude oil will continue to remain high for years to come.
2008 will continue to see increases, albeit at a controlled rate as oil extraction currently isn’t the main problem as much as bottlenecks in the refining process – these shortfalls will even out sometime in the first and second quarter of 2008.
I remember during university doing a paper on “peak oil” – the conspiracy theory that global oil production and prices will continue to defy the adage, “what goes up must eventually come down” – where the price of oil keeps going up and up for decades and then starts falling rapidly like the market in 1929 – the lecturer wasn’t amused and failed me.
In 2007 when the price of crude did an unexpected runner the black arts of economics went mainstream and started dominating much the fiscal thoughtware.
Just to give you a short historical trend line of how high crude has gone up recently – in the second quart of 2006, crude prices fell from $80 to $59.7 a barrel – the biggest drop in 20 years. Pundits expected it to fall further to $35 or even lower – within a span of a year throughout 2007, the price of crude crossed the $100 psychological level!
Apart from lending credence to my pet theory of the age of ‘peak oil,’ this also shows you how much of forecasting has to do with rain dancing and studying pig entrails – when you think that the price of crude has gone up by a staggering 87% from it’s Q2 benchmark of $59 that’s the main reason why we have been seeing the sharp shocks of the recent rounds of price increases – much of it is has to do with businesses knee jerking as they frantically try to adjust these increases with their financial projections earlier in 2007. And behaving very much like the crew on the Titanic 2 minutes before she rammed into the iceberg.
If 2007 was the year that businesses were completely blind sided by the sudden increases in oil. Expect 2008 to be the year when governments, firms and individuals begin to develop methods to deal with the paradox of how to sustain growth with ultra-expensive oil.
While some in blogosphere have been describing 2007 as the year of run away train inflation and they’re probably telling you, 2008 will see more of the same wild inflationary increases.
We do not believe this to be the case. Infact, we don’t even see the threat of hyper-inflation featuring in the local, regional or the global economy in 2008.
If you look at this type of scare mongering rhetoric it’s fostered largely by hitherto hawkish talk from central banks rather than industry watchers. And much of it is driven by ignorance and a lack of appreciation; how elastic oil prices can be under prolonged conditions of resource scarcity.
We believe 2008 will be the year when inflation remains relatively kwai kwai i.e stable. There will still be rises, but they will be tacked.
If 2007 was the year when most financial planners were caught with their pants down as they were blindsided by wave after wave of cost spikes.
In 2008, they’re all wearing chastity belts – and plenty of provisioning has already been factored in to dampen the volatility of rising oil prices [for at least 1.3 years, after that no guarantees. Tip: take this year to prepare for 2009]
There are several reasons accounting for why we are unlikely to see the run away type inflation that scissored its way across 2007.
Firstly we have studied three drivers; organised labour [cost of doing business] capital goods [machines that converts raw materials into goods] and money supply [how much cheap money in the market] in the West.
Wage cost is consolidating. This is good, it means 2008 is the year when less people will be talking about superman and extraordinary people. If 2007 was the age of the 2.2 million dollar man and master of the universe rhetoric.
2008 will be the year when many of us will be asking; why does Superman wear his undies outside? Why is his tongue sticking out? What is that green thing? Is it krytonite? Did we overdo it in 2007?
Expect 2008 to be the search for value; it is no longer; what time did you come back from work yesterday? That’s the easy part. The question is will be; what did you accomplish for the salary – 2008 will be big on value.
Real or actual, wage growth [salary rates] has been falling steadily in EU, US and Japan for the last 2 quarters – we have been monitoring this development very closely, as it also has a direct impact on our game - this is good and if all the indications are to go by, 2008 will see an end to the helium filled days of run away salaries.
Given that labor usually makes up 25% to 30% of most corporate cost bases [what firms usually spend in a year]. This should offset upward pressure from oil costs.
Second, if you look at the credit rating agencies [how much money is floating out there] there is a credit crunch [no one is money laundering these days], historically this tends to be deflationary rather than inflationary. So again this is a good – it means we are headed towards a soft landing rather than another round of price hikes.
Thirdly, the consumption of capital goods [machines that make stuff / used as aggregate to calculate MIC – manufacturing conversion cost] in EU and US is at all time low. So again this is unlikely to exacerbate the already high cost of oil to trigger off run away inflation. Stands to reason; less machinery = less electricity required = less demand on oil = stable to moderate price for oil.
(3) Food Glorious Food!
If 2007 was the year when the price of Maling Luncheon simply went up and up till it finally disappeared. Expect 2008 to be the year when it returns back to earth again, only in better shape and form albeit at a slightly higher cost. Due to a plethora of regulatory measures to be introduced by both the EU and the US next year and this is where it goes screwy – even oil shortages feature as ethanol a fuel substitute is made from corn. The problem is when it goes into the tank less of it goes into the wok and so the crop prices of corn goes up. Corn oil is in everything from potato crisp to giving mee pok that springy bounce. It’s added as a stabilizer to bind the flour.
Now don’t go catatonic and start hoarding maggi mee, we know that recently the USDA Economic Research Service observed the average American who spends roughly 10% of our household budget on food is expected to spend 15% in 2008. The alarmist say this 50% percentile increase signals the end of affordable food and heralds the age of expensive food for all of us. Not true, in both the Singaporean and Malaysian context.
Firstly Americans already enjoy the lowest price to ratio food in the world.
It becomes all too evident when one compares this with France, its almost double at 18.5%, in the UK shoppers typically spent 22%. Japan, over a quarter at 26%.
Another anomaly in the calculation is the type of food consumed , for example, I usually have laksa for breakfast, but the average Brit sausages, bacon and egg.
So just because the price of food is expected to go up doesn’t mean that it will go up by the same percentile basis points, there is considerable elasticity associated with the calculations – we have not been able to finish off the calculations as we are still compiling data on how much veggies and makan stuff come over from Malaysia etc, but it’s fair to assume with improvements in sourcing and supply chain technology food prices in 2008 will also be relatively well behaved – imported chiat kantang variety food is definitely expected to go up e.g imported fish fingers, chips and everything that gives you a heart attack.
This is largely a function of shifting values in how the average American has come to appreciate the benefits of higher quality foods. As they guarantee both proper nutrients and the right safety procedures such as educating workers not to regularly wipe their bum bum with chocolate cakes.
Food increases in 2008 is also a function of how marketers in the West are increasingly targeting oldies as major makaners observing their incidence of major health ailments including diabetes, high cholesterol and high blood pressure actually double or triple from munching lousy food.
2008 will be the year when food is really food. We are definitely observing a shift in policy. From one that moves away from spending more time and money to hire lawyers like Dotty to put out fires and issue out cover your ass health disclaimers to actually marketing the wholesome benefits of highly nutritious food.
As a quick recap The Outlook for 2008
1. Slow down in major markets in the world, US and EU / pick up in North and East Asia.
2. Don’t sweat the inflation – it will be quiet well behaved / 2009 may see another round of spikes, so take 2008 as a breather and it may be a good idea to defer those big ticket purchases.
3. Less interventionist policy expected in global and regional markets – may even see a shift from Fed style monetarism policies to something laissez faire policy.
4. The world financial system is weaning itself off the dollar as a reserve currency, expect a shift to Europe currencies – for example: UK – the most attractive fixed income market.
Happy New Year from all of us. Remember only Dummies drink and drive!
[This report has been compiled by the Council of the Wise /All the Guilds of the Interspacing Fed / Vollariane. Memphisto. Cerebus / Kadjel, Harphoon, Scholarboy, Atomic Monkey, Pumpman, Astro-Boy, Keith Ho – guest readers LHL, Dr Lee TB, Chandra and all the members of the Imperial College Mafia – The brotherhood Press 2007]
Disclaimer: We are all idiots here, so please don’t believe everything you read in the internet, check it out yourself!
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