The Global Economy(and What Peter

Learned At Band Camp)

Peter ZeihanStratforMay 12, 2009

The Geography of Economy:The United States

US maritime transport network Mississippi/Missouri/Ohio/

Red/Tennessee Ragged coastline (Intercoastal

and San Fran) Contiguous Midwest

Lack of security competition Canada -- too cold, only useful

maritime network is shared Mexico -- too

dry/mountainous, no maritime network

The Way Down: The United States Subprime trigger ABS scared banks Result was a liquidity

crunch that has since been corrected

Now ‘just’ a ‘normal’ recession

No systemic weakness in the American system (not even in housing)

Things to Look For: United States

70% of GDP locked up in consumer spending

Sharpest inventory decline on record

Just-in-time v just-in-case

What Peter Learned: Its not so bad

85% of the retail sales drop is from cheaper gasoline and fewer car sales

Most of the Q4/Q1 GDP declines are from investment declines, the rest is from inventory declines

Consumption already recovered

What Peter Learned: Its not so bad

Real disposable income is up

CA home sales already back to 2000 levels

FL, NV and AZ still fucked (not enough pop pressure)

What Peter Learned: Tricksey Jews

Paulson: new housing plan won’t help anyone who is underwater, short-selling subprime is fun!

Greenspan: best thing for economy is for underwater lendees to default, go down the street and buy another house (and for legislation to allow them to do it)

Chinese Geography

Yellow River difficulty Yangtze Basin is

subtropical Coast is rugged or

muddy – few natural ports (and most of those are in the south)

Inland region very different culturally

Chinese Implications: Subsidized Finance

Result is a country that isn’t deeply integrated and doesn’t hold together well

Unification becomes a political imperative, but is a geographically complicated task

Must use infrastructure (expensive!) to attempt to bridge the differences and exert central control – the costs make China capital poor

Need to give the regions incentives to defer to the center => economic development via (very) cheap money

Chinese Implications: Subsidized Finance Maximize employment, firm size, market

share, activity and throughput Capital pooled into the state’s hands,

funneling it to achieve national goals; interest and payments negotiable

Debt levels, profitability and return on capital irrelevant$600 billion on recapitalization effortsNo NPLs actually disposed ofAsia’s most financially penetrated state

The Way Down: China

Did not suffer a liquidity or financial crunch Exports, exports, exports

Cannot recover until her customers do

The Way Down: China

Europe down nearly 30%

China down over 50%

Things to Look For: China Efforts to stimulate domestic demand

failingPeople who farm by hand only need so many

dishwashers Consumer market roughly equivalent to Spain

Chinese banks may not be as capital rich as we thinkThe story of the AMCs – the $300 billion

questionCurrent overlending – the $1 trillion question

Things to Look For: China

The reality of “6%” growth

All this to hit 0% growth?

What Peter Learned: How Asia ranks Four factors determine

self-generated growth chances General health of the

banking sector Can the banks lend Fiscal ability of the state Institutional capacity to

spend/function

Best to worst Indonesia Singapore South Korea Hong Kong China Taiwan Thailand Malaysia Japan

•New US restrictions on capital/operations will push many American financial operations to relocate to HK/Singapore•Look out for China’s mid-sized private banks

What Peter Learned:Mad props to Korea

Loan/deposit ratio hit 140% in 2008

Won tanked Banking sector

reinvented Will lead the East

Asian housing boom

Corporate bonds looking very good

The Geography of Europe Peninsulas Islands Mountains Coastlines Rivers Northern Plain Very small

space

Result:

Trade

and

War

European Implications: Chaos and National Plans No clear sovereign Different geographies tweak governance demands and

tools in different directions Collectively Europe has a fairly good natural transport

network making it moderately – but unevenly – capital rich

The German example: Rivers and coasts not naturally integrated, all shared Successful economic development means integrating with security

competitors and compensating for a complex geography Germany must have a national development plan for the allocation

of capital

The Way Down: Europe Total European

exposure to American ABS is probably about $100 billion

The Way Down: Europe Europe lacks positive

demographics

The Way Down: Europe Yen/euro loans to

local currency loans Foreign denominated

wholesale/retail loans

The Way Down: Europe Austria $300 billion Sweden $135 billion Greece $63 billion Italy $212 billion

The Way Down: Europe Freshly euroed states The benefits of EU

affiliation No debt from Soviet

era

The Way Down: Europe Snapping like twigs “Summer of Rage” Germany unable to

assume leadership right now

That little Lisbon...thing

Things to Look For: Europe EBRD already

estimates that over 20 percent of all loans in Central Europe are non-performing

Spanish NPLs already at 4 percent

No meaningful program to address banking failures has begun

Things to Look For: Europe Germany is taking the long view

High-value export-oriented economy means local stimulus will not work, so why try?

Banks take long-term corporate view – as opposed to short-term retail – so are not bearing brunt of recession

September election and EMU limit options Impose conservative German lending

policies on the rest of Europe Negligible effort to addressing the wider

banking problem

Things to Look For:Europe General recession now

shifting the burden to non-capital market banks

So even those who were healthy are now coming under extreme pressure

Banks far more important for capital generation in Europe than in the US, and so they get hit much harder in recessions

Monetary Union debt procedures

Germany’s Landsbanks

What Peter Learned: Poor Stupid Europe The Europeans really don’t realize that it is

bad (and they hate Moody’s)

What Peter Learned: Frac off

What Peter Learned: Party’s Over

Final thoughts Global productive

capacity too big for global income/demand

Deflation set to be a major international feature for much of Asia