Indonesia - Progress Report

Indonesia has never looked stronger as all factors conspire to progress the country. The only setback was the Asian tsunami that destroyed the province of Aceh. Perhaps that tragedy provided the goodwill for the recent piece settlement. The strengths of the country are:

1. Highly prospective for resource exploration - which can serve as a basis for mineral & agricultural export industries
2. New popular leader able to drive policy direction
3. Peace agreement in Aceh which will facilitate investment
4. Tax reform being adopted by the President
5. Petroleum revenues helping the country to preserve its energy self-reliance

The Indonesian Archipelago is however not without its problems, the most important being:

1. High levels of corruption & business
2. Lack of public accountability in goverment and corporates
3. Ethnic and religious tensions which divide the country and remain a basis for tension. Prior resettlement policies could incite such problems. Regional autonomy will be critical.

The Indonesian government and Acehnese rebels have reached a landmark peace agreement after 30 years of fighting. The Free Aceh Movement (GAM) has surrendered 25% of their weapons, and will surrender the balance on 31st Dec’05. The Indonesian government is responding by gradually withdrawing its troops from the province. This peace agreement will be a big boon for Indonesia.

Russia - Progress Report

Political Reform
Russian politics matured considerably in the 1990s. Following the election of President Putin, the Russian leadership has come to terms with the need to countenance public opinion. Putin released this after a few mishandlings of issues, eg. The Checheyan terrorist attacks, the failed rescue of naval personnel from a nuclear submarine.

The Russian government continues to oppose US foreign intervention (often with China) in an attempt to limit its influence in the Asian region.

Russian Society
Russia is divided between those with money and those without. Alot of those without money drink excessively or resort to crime. Youth delinquency is a major issue as social problems escalate. The nationalist movement in the country is strong - particularly among naive youth attracted into the movement. Corruption is rife. On the positive side, Russia has a credible education system and the importance of education is widely recognised.

Russian Economy
In 2004, the Russian economy grew by 7.1% primarily as a result of strong commodity exports, the most important of which is oil. Urban growth was much stronger in St Petersburg, which recorded growth of 14% - establishing itself as a centre of future economic development.

The biggest investors in Russia to date have been the Europeans & US, with Japan trailing because of security concerns and existing tensions between the countries over Russian annexation of Japan’s northern islands in the closing days of WWII. Some Japanese companies already have a big presence – with Toyota the best selling foreign car company. Toyota will also open a car plant in Dec’07. Japanese companies have invested just $1 billion to date.

United States - the bursting economy

The United States is the largest `relatively` free country on the planet. It is however more than its politics - it has a superior sense of life than any other country. It is a country that gets things done by virtue of its values. Sadly its grounded in religious rationalisations, making them such `hopeful` hypocrits.

US Political Organisation
The US political system is as good as most by virtue of its strong voter participation and the general ethos of self-reliance that permeates the whole country, including the Democrat Party. The protracted political process is effective at rooting out dubious presidential candidates. The only disappointment is that its not a preferential voting system. The implication is that even if you are a Libertarian, you`d probably vote for George Bush to make your vote count.

Prior to WWII the US had no interest in global affairs, but it has since taken national pride in being the `global policeman` - in extending freedom to the rest of the world. Sadly this policy has lacked integrity and any strategic direction. It has been poorly executed.

The US Economy
The current economic cycle (1992-2005) has delivered the US an average GDP growth rate of 3.2% (?) per annum. Initially growth was soundly based on rising incomes and production, however in the late 1990s expansions monetary policy have created a `money illusion` that has artificially stimulated domestic consumption. Record low Fed rates, tax cuts and easy credit growth artificially pushed up housing & equity markets, giving Americans the illusion of wealth creation. On the east & west coasts property prices have risen by 120% over this period (compared to base line growth of ??).

The consequence is that the US is now recording record budget deficits of 6.8% of GDP and monthly current account deficits of $US60billion at a time when interest rates are at record lows. Its true that the US has a capacity to absorb more debt than any other economies because its debt is denominated in its own currency. But this debt poses a huge concern because the spending is being undertaken on the premise that income and consumption growth (and this housing & equity prices) are sustainable.

In Aug05 we are seeing the first signs that this boom is not going to hold. The risks posed to the market are:

1. Oil prices: In current $US terms, oil prices in 1981 reached $93/barrel compared to $US70/bbl today. This is a rationalisation used to justify asset prices rising higher. But consider that oil prices are still rising, households are more indebted than the 1980s and the trade imbalance.
2. Inflation: There are signs of inflation which will eventually feed into higher interest rates. Inflation in itself is not bad for asset prices, and it can be ignored by the Fed Reserve at the economies peril. Inflation has a nasty habit of running away as production slows and more money is chasing fewer goods. In the expansion phase inflation is countered by falling unit costs (productivity).

The US has record debt levels at a time when Asian economies are clinging to mercantilist policies. The EU is struggling to unite. Where is the prospect for future global growth when western markets are so indebted. There is no capacity for the Chinese to spend, Japanese incomes are flat, and it will be years before the LDP Party will be able to see the benefits of reform. The US is facing an aging population, however it has some capacity to easy this burden through increased immigration.

Whilst households are indebted, US S&P500 companies are sitting on $US621 billion in cash. There are several reasons for this. Since 2003, companies have been taxed directly on dividends, rather than having them taxed at the marginal tax rate. For this reason, some companies have adopted capital returns, but the majority are clinging to cash in preparation for a `correction`. This provides them with the funds to engage in takeover activity. Buybacks make alot of sense too because the add value to executive stock options, but not much longer as expensing options becomes a compulsory requirement. The S&P500 dividend yield is currently 1.7%, compared to an historic average of 4%. When the global economy slumps, earnings expectations will look highly unrealistic.

The US is facing a $US50billion clean-up bill relating to the New Orleans flooding. Thats on top of already strained public coffers. US retail sales plunged by 2.1% in Aug'05, even before the impact of Hurricane Katrina. This is the largest fall since Nov'01 (2.9%) in the wake of Sept 11th. The bulk of the fall was caused by a 12% fall in car sales, otherwise non-car retail sales were up 1%. Regardless the increase reflected higher petroleum sales (prices). On the positive side, the PPI fell in Aug'05 and the trade deficit narrowed. Might this however reflect the stronger $US.