Tuesday, 29 December 2009

Global threat assessment 2010

John Mangun
Outside the Box
Business Mirror

The year 2009 was not an easy time. Do not expect global conditions to be much better in 2010. In fact, there is a high probability that things economically and politically will become even more problematic.

Focus will be on the US economy and there is very little indication that the situation is going to improve in the months to come. An optimism that you hear about that economy is, at the least, spin; and at the worst, propaganda.

The bright spots that you might see highlighted are nothing more than “cherry-picking,” that is, looking for any specific numbers that could be used to justify a favorable outlook.

The stock market in the US is trading outside the bounds of reality. However, if you could borrow money for almost nothing in order to buy shares, then it would make sense to do so. And if enough people jump on this strategy, prices are going to rise. Listen to words of the CEO of Mohamed El-Erian of the US investment company Pimco which manages $1 trillion in assets, including the world’s largest mutual fund. “We’re on a sugar high. It feels good for a while but is unsustainable.” His point is that the recent burst of economic activity fed by government spending and near-zero interest rates will soon wither away. Mr. El-Erin forecast for the US market: Stocks will drop 10 percent in the space of three or four weeks.

The fact the holiday spending did not collapse entirely is due to Americans having put off purchases for many months and now pulling cash, not credit cards, out of their wallets to buy things at heavily discounted prices. This is not a sign of sustainable economic recovery.

Further, the US government must refinance some $2 trillion of short-term debt in 2010 or default on existing treasury debt. Where exactly is that money going to come from? Foreign governments and investors have reduced their purchases of US government debt by such an extent that the largest buyer of US government debt is the US government itself, through the Federal Reserve. The US Department of Treasury (or Finance in the Philippines) issues the debt and the US Federal Reserve (Bangko Sentral) is the buyer. This is a Ponzi scheme as the Federal Reserve has no assets to buy and is merely using newly printed dollars to give the illusion of that there are buyers of this debt paper.

The dollar will fall and gold will rise; potentially, gold could skyrocket.

The odds of a sovereign government going bankrupt and defaulting on its loans are almost a certainty. Greece and Ireland are on the brink. Iceland already did early in 2009 but the amount was covered by the European Central Bank (ECB). The ECB cannot afford to bail out a Greece or an Ireland. Oil producer Venezuela is already in default on its government obligations. They owe the oil companies some $5 billion that has little chance of being paid. If the oil companies do not get paid, they will continue to pull operations out of the country, forcing oil-generated revenues to fall further, eliminating the fund necessary to pay the sovereign government obligations. In Europe, the Ukraine is touching on being a failed state, both economically and politically.

The situation it the Middle East is rapidly going from bad to worse as Iran inches closer to nuclear capability and faces massive domestic political unrest and rioting. Can the outside world contain any Iranian political fallout from affecting world oil prices? No one knows for sure.

China could be the biggest story of 2010. Note this carefully: China has used its economic stimulus to keep factory production high in order to keep employment stable. That accounts for its good economic-growth numbers for 2009. But those goods are not being sold either internationally or domestically. World demand for Chinese-produced goods has not returned to the levels of 2007, and Chinese production capacity is well above what it was in 2007. This bubble cannot last forever and may burst toward the middle of 2010, if the US spending pattern stays on the current downward-to-flat track.

The most interesting attribute that will make 2010 will be a further push to new global realignments away from dependence on the US economy and toward more regionalized cooperation. We see this already with Japan moving as quickly and as closely as possible to a stronger alliance with China. Europe also is consolidating rapidly while reaching out to Russia.

The greatest threat to global stability lies in general with a resurgence of Islamic terrorist activities and greater open conflict, as witnessed in recent continuous bombings in Pakistan and military action in Afghanistan. Obama’s disastrous foreign policy has increased global danger from North Korea to South Asia to the heart of Europe.

The one nation that has the greatest potential for economic disaster with an enormous ripple effect is Great Britain. The political scene is chaotic with Prime Minister Gordon Brown teetering on being forced out through new and early parliamentary elections. Its credit rating should have been lowered one quarter ago, but the impact of a G-7 country having its debt a “junk” status is almost too much to consider. And if Britain goes, then the smaller nations in trouble (Greece, etc.) are doomed.

As for the Philippines? Come back here on Thursday.

E-mail comments to mangun@gmail.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it . PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc.

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