Business in Greece, China, and Iran
And, why it matters for US business
Many US-based business people will ask, why should we be concerned about what is going on in Greece? How do the negotiations in Iran impact my business? And, China? We know China is a huge factor, but does what happen on the other side of the globe really matter to US-based businesses? Let’s look at three very different parts of the world, and how each carries importance right down to the local Main Street business level for the United States.
Here is how US-based logic might go: “Greece is a small country. Why does it matter to Europe? It wasn’t one of the original members of the EU anyhow. Even if it matters in Europe, why does it matter to us?”
The overriding reason is that globalization has shrunk the world so much, and our financial interdependence now is absolutely amazing. While you may think what goes on in Greece doesn’t have, or shouldn’t have, much impact on the United States or on US markets, it has the potential to cause a lot of mischief.
A comparison that could be useful is this: World War I started out of some damn fool thing in the Balkans, as it was said at the time. (Thank goodness this is not happening.) The assassination in Sarajevo of the Arch Duke triggered a series of unfortunate events that led to World War I, a war that everyone thought would be over by Christmas, but unfortunately, continued horrendously for years. We want to avoid this type of a ‘trigger event.’
It looks like there will be an agreement between the main members of the EU, the creditor countries primarily led by Germany and Greece. Unfortunately for Greece, this will mean more austerity measures. The agreement will dial down the crisis-level management of the financial system, which has been extremely tough on Greek citizens. People in Greece have been limited to withdrawals from their bank of $66 a day. People can’t access their own money, or other other resources. This is a real hardship. I do believe this is easing and that will be good for everyone, globally.
Keep in mind that the international financial system has weathered a number of crisis over the years. This has been amazing to watch, and it is a sign of the system’s resiliency. Somehow it manages to work. It will, of course, work until it fails to. We do appear to be over the worst of the Greek crisis, which is a positive.
Long-term however, Europe still has some similar problem countries that could be far greater in scope and intensity than what has happened in Greece. Spain continues to be a problem, a much bigger problem economically than Greece. So the next crisis could be in Spain. Portugal is not strong. Italy is not strong. These are all debtor nations, the effect of which has put a tremendous strain on the EU as a whole.
This is of concern, because the EU is a major trading partner of the United States. If the EU suffers, the US will not end up exporting as much, which ultimately comes back to hurt US businesses and our economy.
That is a nutshell of what is going on with Greece in terms of why it might be important to us.
Now, China is much more significant and far more dangerous in terms of the warning signs. I’ve been bearish about China for US companies that depend on China for its supply chain for a long time. But now I’m widening the scope of my warning to those who are invested in China, and not just those who depend on it for goods in the supply chain, and there are several reasons for my warning.
One is that China’s debt has quadrupled in eight years. We have two bubbles that exist as a result of that tremendous increasing amount of debt. The first bubble is in the Chinese Stock Market. That’s been in the news, we have watched as the Chinese Stock Markets have taken a real tumble. They’ve fallen over 30% in less than a month.
There has been a little bit of rebound. China has actually intervened in the stock markets in an effort to try to prop up the markets. This policy is a serious mistake by the way, for a couple of reasons: the Chinese have no real history of knowing how to manage this kind of situation. And second, historically, the Chinese market has always been wild and woolly. Until China opened up, the only “China” Stock Market was the Hong Kong Stock Exchange, which, by our standards was plenty wild, essentially unregulated. Today the Hong Kong Stock Market Exchange is very tame and conservative for the most part and it’s the Mainland China Stock Markets that look so wild to us.
For the first time we have something that modern China has never confronted before and is trying to solve with government intervention of a type that it has never attempted before. That’s not a good formula.
The second bubble is the real estate bubble. A lot of that debt was taken on to build things that are essentially unoccupied. We have this huge overhang of commercial buildings, as well as entire blocks of apartments built for people who aren’t there, for jobs that haven’t been created in those areas.
These are assets but they are non-producing assets. These are empty assets. There is no rent derived from them. When you have all this creation of product, the effect is, at least in the short term, a build up the real estate market as a whole. With a rising middle class, those who can afford homes, for example, prices go up as a result. When the market ultimately crashes, it’s going to take down the value not only of those buildings that are unoccupied, it’s going to take down the value of the buildings that are occupied. That means that Chinese citizens are going to take a blow to their wealth.
Those are disturbing bubbles. Any bubble eventually bursts and when you have two that are likely to burst about the same time in a country that is a major partner of the United States in terms of so much economic activity, we could experience some repercussions from that.
Can the international financial system handle this? Yes, I think so. The real question is whether China’s systems internally can handle the burst. That’s a total wild card.
If China experiences serious problems economically, the repercussions will spread globally. When you consider that the US economy has been chugging along since coming out of the great recession for a number of years now, the economy is due, any time now, for correction. That correction could be induced by a serious blow economically to China. We have to be prepared for that.
One other factor, specifically for the US, is that we have our own debt crisis here. We depend a lot on debt. We rang out a lot of consumer debt as a result of the great recession. We didn’t get a lot of that kind of credit spending back, so we still have a big government debt.
If we were to have a perfect storm of multiple financial crisis heading around the world, it would stress our ability to spend our way through debt financing out of some of those problems, or certainly all of those problems. I am just not sure our financial system can handle another round of Q.E, that is Qualitative Easing III and IV.
The deal that has been presented to the US has to get through some process, which will take months. First, the United States congress must weigh in on the proposal, and then, it will take time to implement the logistics of this agreement.
The agreement, according to some, is better than no deal at all; others say the deal is worse than anything we could possibly imagined. Political opinion is very much divided on this.
Regardless on how you might feel about the proposal itself, for the US businessperson, the situation means uncertainty. While we don’t know what the proposed deal may mean yet, we do know Iran is in the most volatile region in the world. This ties directly to political risks that especially have an impact on the oil market.
No one can predict what will happen, either way, but we need to look into our own crystal balls to try to figure out the potential for both the short term and in the long term. Economically, what will be the impact if we eliminate sanctions, which is proposed under this agreement? What will that mean for US businesses? If this works as expected, will this eventually create a new opportunity to do business with Iran? Nobody can answer those kinds of questions today.
The first thing is to be careful. That means to consider, especially if a company has interest in the Mid-East at least in the short run, what impact the effect that we have an agreement with Iran may mean. Then long term we all have to think about what things will look like nine months, or in a year, as a result of this agreement.
Over the next few months more about this agreement will unfold, for good or for bad. We’ll have a much better idea about whether or not this is going to be a success.
Oftentimes US business people don’t pay attention to these world developments, because they think it doesn’t really directly affect them, but indirectly the impacts are significant.
We have to be prepared to seize opportunity when it comes up, and then to baton down the hatches when we think it’s going to be turbulent.