I wrote last week about the one in 10 possibility of a hurricane hit on Hawaii this year. Today I continue the cautionary news with a prediction of negative economic trends ahead. Hawaii’s clouded
economic outlookThe University of Hawaii's chair-holding star professor of economics, David McClain, can muster up only "guarded pessimism" for the world economy in the near future. Since I heard him call the shots on Japan's troubles well before anyone else did I listen to him attentively.
What's more he was backed up, maybe even made to seem relatively optimistic, when First Hawaiian Bank's Business Outlook forum heard from a Tokyo-based economist, Henneth S. Courtis, a few days later.
Both talked about the interactions among the economies of Europe, soon to adopt the Euro as a common currency to become a tougher competitor, the U.S., which up until now has been strongly supported by capital inflows from Europe and Japan, and Asia, where things are in great ferment.
McClain also compared conditions surrounding the 23 percent U.S. stock market crash of 1987 with today. He has been a student of crashes ever since he wrote "Apocalypse on Wall Street" about the 1987 events.
He early on made the point to his Pacific and Asian Affairs Council audience that markets are far more global now than in 1997, something Courtis seconded. Both emphasized that what happens in Japan will be immensely important to Hawaii. For the long run it could be good.
In the short run it may be very rough on us. Its tourists may face tighter budgets and turn to cheaper vacations in Southeast Asia. Its investment dollars may stay home.
Japan is at a decision-making edge. Its stock market has dropped to a level that is beginning to undermine its international credit. This will force choices by policy-makers among such options as weakening or strengthening the yen, more repatriation of capital from abroad, deregulating internal markets, coping with internal interest rates now down close to zero, lowering taxes and relying less on the U.S. and more on Asia.
While all this is going on in Japan, China's economy is strengthening and Southeast Asia's is weakening. China is in its best shape ever with good prospects ahead thanks to its cheap labor supply.
Southeast Asia is in financial turmoil. Stock markets in Thailand, Indonesia, Malaysia and the Philippines have plunged 40 to 50 percent since Jan. 1. Currencies pegged to the yen or the dollar have been badly hit. Taiwan has allowed its currency's exchange value to slide. Hong Kong may disconnect from the U.S. dollar.
A key problem in Southeast Asia, says McClain, is that its booming growth has not been matched by the development of sophisticated financial controls. Things are so bad, Courtis thinks Southeast Asian stocks now may be a "best buy" for big long-term future profits.
MCCLAIN connects this international uncertainty to uncertainty for the U.S. stock market, which has surged upward on a path surprisingly comparable to what preceded the 1987 crash. Technically, we are in better shape than 1987. Our markets can handle immensely higher volumes. This should ease panic selling such as occurred in 1987 when "sell" orders became too numerous to be processed. We have quite a few other new restraints on panic selling.
But the global events will be much more important than in 1987 and will reflect the uncertainties he and Courtis have highlighted.
Thus we get to McClain's dour bottom line: Guarded pessimism.