Nowhere to Hide

Amongst one of the most rapidly deteriorating world economic environments, we look at ourselves and ask if there is anyone who has the anecdote for the global freefall. The short answer is No, as the scale and scope of the downturn has shown that the globalization we have been witnessing for the last two decades has worked its way into ONE world economy.

A run through the roster of the big names: The US & UK are buried in a drastic recession that needs no statistics for validation. Half of 110 Russian oligarchs lost their “Billionaire” trophies over the last 12 months, in an economy that has boasted an average of 8% annual GDP growth since the turn of the century. Japans economy is shrinking at the fastest pace since the 1970s oil shock. China is watching its exports minimize as the purchasing countries fight dwindling market conditions at home; Chinese exports down 17% year on year and down 25% to the US alone. Although barely breaking the top 25 in GDP ranking, Saudi Arabia, the sole Middle East, has an economy set to contract 1.8% based on oil output cuts, a brutal hit from the dreams realized with $100/barrel oil. India will continue to grow, but will still struggle to attain foreign investment as the communication gap with regulatory bodies is the common stumbling block. Brazil has seen the Brazilian Real lose almost 30% against the US Dollar since the start of the crisis, costing $14 billion solely to balance reserve requirements. The list goes on but the news gets no better…

So what has been learned, and what are we learning? In the complex landscape of the world economies, the basic principles to learn a) how we got here and b) how we get out stay the same. There are infinite takeaways from the current economic climate, but four worth particular note.

Transparency: this starts with the derivatives and goes through political legislation – transparency is and continues to be the biggest factor in successful investment. The shortcomings of this decade: The fact that the financial products were too complex for their own good, asset valuations were based on future earnings, individuals had access to credit without financial knowledge, etc. Amongst it all, hardly anyone –banker, CEO, or ordinary citizen – could fully grasp the true story of their investments, company and pension plan respectively. And that is the foundation that started this mess.

Accountability: Do not sign your name on your mortgage application before you understand. Do not put your savings with an individual whose investments you cannot learn within 10 minutes on Google. Do not jeopardize your shareholders as a CEO with ill intentions. And finally, do not give your hard earned money away in taxes unless you know exactly where they are going. These are responsibilities we all must follow in the new world. No matter what country claims your residence or what government you work under, these are universal pillars to be followed.

Specialize then Diversify: At first a conflicting statement but just ask the fisherman turned currency traders of Iceland who bankrupted their Country about this one. Each country is blessed with a series of natural and/or human resources, whether its oil, specialized service, or whether its wheat and cotton – stick to your core business and secure your income streams before branching out. Conversely, the dependence on only one lifeline of income can be equally disastrous. But a competitive and equal balance of goods and services will limit the downside in any future cycle.

Realistic Expectations: The US is now learning that their elected President is a regular human and not a miracle worker. Russia and Saudi Arabia are learning that $140/barrel may not be back anytime soon. Western Europe is working to revalue every bank’s balance sheet on an asset by asset basis. These all are tasks and realizations falling under the blanket of humility that has spared no nation.

This cycle will take not only time, but significant effort from the citizens of the world economies. The interconnectivity of the global markets is a reality that is forcing reform on all ends of the globe. With a desire to fix what was broken, and take ownership of the future, this is not an insurmountable challenge but rather a crisis that will streamline the world economy.