It's common wisdom that most of the world is crazy-go-nuts about the Democrats taking control of Congress. Not that folks are so wild about Nancy Pelosi or Harry Reid, in particular. It's just that President Bush is so amazingly unpopular that any time he takes some lumps, it's greeted with cheers by many overseas. So I was a bit surprised to read this opening sentence in a note out today by Stephen Roach, chief economist over at Morgan Stanley: "The world is nervous about the implications of America's stunning political upheaval."
At least that is what Roach gathered after a post-election jaunt around the globe to the Bahamas, Doha, Singapore, and Hong Kong, where he met with investors, business executives, and senior government officials. There, he detected "growing concerns over Washington's post-election posture toward geopolitical risks and trade policy. If these fears come to pass ... financial markets could be taken by great surprise." In this way, overseas reaction mimics that of many U.S. elitesat least the ones I have spoken withwho worry about 1) the destabilizing effects on the Middle East of a rapid Iraq pullout and 2) the chilling effect on globalization of a more protectionist U.S. Congress.
Some specific takeaways from Roach's visits:
1. In an informal poll of about 75 institutional investors from the Middle East, 56 percent did not believe the election outcome would have a positive effect on the Iraq problem. And 62 percent of the group felt the U.S. election outcome would have no meaningful impact in resolving the broader Middle East conflict, including the Israeli-Palestinian question and the Iranian nuclear threat. Roach also quizzed the group about its thoughts on oil prices. The largest chunk of the crowd36 percentthought oil prices would fluctuate in the $50- to $59-per-barrel range, 28 percent were looking for oil prices to fluctuate in the $60s, 13 percent in the $70s, and 6 percent thought oil would move above $80 over the next 12 months. Only 17 percent of this group looked for oil prices to move below $50 per barrel over the next year.
2. In Asia, Roach focused on trade policy. To groups in Singapore and Hong Kong, he asked whether the Democrat-controlled Congress would improve the trade climate. "By a margin of about 3 to 1, both groups answered in the negativeexpressing fears of an increasingly ominous tilt toward trade protectionism by a pro-labor Democratically controlled U.S. Congress over the next year. Needless to say, these fears were immediately borne out in the form of congressional resistance to a U.S.-Vietnam free-trade zone proposal on the eve of President Bush's departure to APEC meetings in Hanoi. Make no mistakeAsia hears the drumbeat of protectionism loud and clear in this post-U.S. election climate."
3. Overall, Roach found Asians upbeat about the U.S. economy. They were confident consumers would keep spending and that the worst was over for housing. Having a reputation as a bit of a bear, Roach says he "took the other side of the debate on virtually all of those points, but my views were met with polite indifference as the multitaskers present at my meetings checked their BlackBerries for messages and market quotes as I spoke."