NEWS / Foreign Exchange

Preparing For Change

By Elliott Gue

The Silk Road to Riches has at its core an economic change premise: Economic leadership changes over time, and the world is now entering a period of such change. As this period advances, Asia will emerge as the leader in global economic growth, while the West will enter a more subdued growth cycle.

A big part of the investment community dismisses this argument as nonsense. Very few contemplate imminent change at a time when America?’s economic and military powers seem boundless. Yet, historically, these are the times when change begins, when expectations are low. As myriad arguments are floated as to why the status quo will persist, those who fall for simplicity will be caught off guard.

Many skeptics will demand more concrete data in support of our conclusions and the underlying assumption upon which such are based. We do not contest the rationality of this point of view, but the reality of structural change is that its evolution begins before hard data becomes available. Far-sighted investors must be ready to explore opportunities before indisputable proof emerges. Once it does, everyone will--or will already have--jumped, making it a more difficult, less profitable game. The old axiom that whatever everyone knows is not necessarily worth knowing is another underpinning of this book.

The main challenge, as with any macro-related investment decision, is to assess the impact of Asia?’s rise on the global economy and the region?’s role in the new world. Making the right call regarding India?’s and China?’s future will be critical for successful investing. China?’s size and rapid development has taken the world by surprise, making it very difficult for people to approach the problem with clear minds.

Big corporations have made Asia the center of their respective production operations. Although lower costs were initially the reason, the use of technology and the introduction of other Western business practices have been instrumental in increasing the productivity of the average employee. True productivity growth started from a lower level and has combined with a low cost base to form an integral part for the multinational corporation?’s production line. And as long as cutthroat competition remains the name of the game, there is nothing anyone can do to stop the trend.

As the productivity gap between the West and the East has tightened, the wealth gap, too, has begun to disappear, albeit at a much slower pace. In the meantime expect an array of political moves in America and Europe designed to protect their workers. The process might be slowed, but the outcome is inevitable: The integration of China and India into the capitalistic system and their resulting claim for a bigger piece of the economic pie.

And here is the big question: Does Asia need the West more than the West needs Asia or vice versa? The answer is that both need each other.

The economic dynamism Asia now projects will eventually lead to a structural rise in domestic demand--this will allow Asia to become more independent. Not long after the British left the Colonies, the New World not only outgrew its reliance on the UK, the Old Country became America?’s dependents. Asian development will trace the same arc. And as with the young United States, certain parts of Asia will grow not only economically, but politically and militarily as well.

On January 28, 2002, Barron?’s dedicated its cover story to hedge fund manager and legendary short-seller James Chanos because of his famous call on Enron, issued when the now-defunct energy trading giant was still riding high. In that interview Chanos identified Tyco as the next problem. He was proven right. After the story ran, Barron?’s received letters from angry Tyco stockholders demonizing Chanos in particular and short sellers in general as enemies of America?’s economy.

On a different level, widely read financial newsletters that had been recommending Tyco to their subscribers were reprinting the company?’s investor relations?’ press releases in an effort to persuade individual investors that there was no reason to worry. Such is the passion with which investors defend their actions.

Although such actions do, in retrospect look silly, at the time, people believed that the sad arguments put forward by the company to defend its actions were not only true but also justified holding Tyco shares.