IMAGINE SOMEONE HAD TOLD YOU in early 2008 that the U.S.
stood on the verge of a financial market meltdown of
historic proportion and the longest and deepest
recession since the 1930s. Would you have believed it? What if
you were told that the euro zones very survival would
soon become a subject of front-page debate? Or that a wave of
unrest would soon sweep the Middle East, toppling autocrats
across the region, forcing Egyptian president Hosni Mubarak
into prison and plunging Syria into civil war?
Would you have believed that all of those things would
happen within five years?
Recent news appears more encouraging. The U.S. economy looks
to be slowly regaining its footing, and equity markets have
climbed to new heights. Europe, despite continued queasiness,
appears headed toward calmer waters. The upheaval in the Arab
world has so far generated limited global market impact. Yet
the convulsions of the past five years arose from structural
faults financial, economic and political that
have not been fully resolved. And there are new worries.
Economic growth among leading emerging markets has slowed
considerably as much-needed reforms have been postponed. In
particular, China on track to become the worlds
largest economy while still a poor country has lately
behaved in erratic ways on the international stage. Talk of a
peaceful rise rings increasingly hollow for many of
Chinas neighbors as its military picks fights with Japan
in the East China Sea; with Vietnam, the Philippines and others
in the South China Sea; and with India along the Line of Actual
Control that has divided the two states since 1962. A wave of
cyberattacks on U.S. companies and government agencies traced
to the Chinese military creates more friction. But the biggest
longer-term worry is that Chinas new leadership faces the
most ambitious economic reform process in history as its
unstable, unbalanced and ultimately unsustainable development
model must be rebuilt to shift wealth from politically
connected elites and state-run companies toward an increasingly
plugged-in and demanding middle class.
Adding to the volatility, were living in a G-Zero
world, in which no single power or working alliance of powers
has both the muscle and the appetite to provide global
leadership. Thats important, because the world needs
leaders that are willing and able to accept the costs and risks
of establishing and maintaining a coherent global order
putting out fires, writing the checks others cant afford
and imposing compromise to prevent conflict.
In a G-Zero world it takes a crisis to force cooperation
among, and sometimes within, governments. In the U.S. only an
obvious emergency could have persuaded so many lawmakers of
both parties to support big-ticket
bailouts and massive stimulus spending in 200809.
Only a potentially catastrophic market meltdown could have
induced China and other emerging-markets heavyweights, Europe
and the U.S. to agree on concrete actions to help pull
financial markets back from the brink. It took the threat of
systemic calamity to European banks and fears for the
future of the broader European project to create public
support for the sharp spending cuts that have inflicted pain
across entire societies and elite support for a redesign of the
euro zone. Only revolution could have toppled seemingly
well-entrenched autocracies and brought the beginnings of
long-overdue political change to the Middle East.
Unfortunately, the sense of crisis has lifted on all these
fronts, encouraging some to see in the changed landscape a
sustainable new normal, a period of painfully slow
but predictable economic progress, as forecast by Pacific
Investment Management Co. CEO and co-CIO Mohamed El-Erian, or
the more sanguine view of many investors willing to bet that a
surge in liquidity in the U.S., Europe and Japan makes for a
more robust way forward for all these countries and for
everyone else. Some believe U.S. lawmakers can now afford to
postpone tough choices, the Europeans will muddle through,
China can smoothly rebalance its economy, and fires in the
Middle East can be left to simply burn themselves out.
These are dangerous illusions. The deeper questions that
created the recent convulsions have not been answered, and the
easing of so much useful fear will make them much more
difficult to address. Thats why the uncertainty and
volatility of the past half decade is far from finished
and is almost sure to trigger new crises. Be sure your seat
belt is securely fastened, because nothing has really come to
rest. We have entered the New Abnormal, a period in which every
market assumption must be questioned and the wise investor is
prepared to be surprised.