I had lunch earlier this week with Lakshman Achuthan of ECRI. Our offices are a block apart, and from time to time, we get together to shake our heads in collective astonishment over the economic questions of the day.
We are both data driven, and look askance at the squishy gut approaches to economic forecasting. We were discussing an entire class of issues where many (if not most) observers consistently make the wrong call. Not just a panicked crowd selling into lows, but broad, erroneous perspectives on recessions (most missed it) and recoveries (ditto) along with all other manner of geopolitical issues.
Our conversation happened upon the following question — where we each expected the bulk of investors to be likely to make the wrong bet:
Over the next decade, what nation or region is most likely to have a spectacular implosion?
1. China 2. Europe, EU 3. India 4. Russia Japan 5. United States
The implosion could be an lingering budget problems to full economic collapse, or a military overthrow or outright revolution.
What would your answer be?
Laksman and I surprisngly agreed on our answers. I have it set to post here at noon.
Here is the noon update:
China!
6. Japan
Over the next decade? Sheesh Barry. ALL OF THEM! (See: Jamie Dimon, Congressional testimony.)
The more interesting question is to put them in chronological order which is also easy because given the lingering fragility of the world financial system an “unexpected event” in any one of them will bring down the rest.
So who will go first? Jim Chanos says China. So many say Europe (Santander is my pick for this century’s CreditAnstalt). India would have to be the contrarian favorite since it is so seldom mentioned as a possibility.
Who knows? Maybe Carlos Slim will be this century’s Ivar Kreuger (See this Frank Partnoy presentation for some background: http://vimeo.com/9963640 )
In the end does it really matter who?
1 of course.
Given the links between nations these days, don’t discount ‘all of the above!
More seriously.
1. The oil sector, and countries heavily leveraged to it. Everybody ‘believes’ in peak oil, yet the developments ex-oil in the energy sector are diverse and more than capable of substituting for oil given the right market price signals. Sure prices in the medium term for oil will probably rise, however are the heavily dependant oil exporters preparing for what could be a market shift toward cleaner technologies? Will they have incentive to do so if oil increases to $200, $300 a barrel, or will they live like kings for a while? I’m sceptical of human tendencies in this regard After all did we reach ‘peak whale blubber’ or simply find a better technology?
2. Also I don’t think it necessarily has to be a nation or region. Given the greater concentration of wealth and perceived power in a smaller percentage of the global population, is it possible there is an implosion in the class order for financial oligarchs (across the world) in other words the expanding legions of lower-classes and middle classes across the world decide to wrest some power back?
Revolution in Iran, 2018 at the earliest. The massive majority of the population is under 30 and has no memory of the Shah (and his true masters) and thus no sentimental allegiance to Supreme Leader/system of government. Just guessing based on my long chats with Iranian ex-pats with whom I studied.
China
Europe has extraordinarily bad demographics for their tax and social welfare systems, domestic consumption, and household growth. It is also more politically complicated to do anything there. On the other hand, I hope those countries get smart and open up to US emigration (reverse colonization?) – I’d rather be there than here.
BR asked:
Over the next decade, what nation or region is most likely to have a spectacular implosion?
1. China 2. Europe, EU 3. India 4. Russia 5. United States
reply: ————- None of the above.
No matter what happens in the US, the Fed will print money, congress will enact a bailout, Wall Street will use the rescue for a profit opportunity, the media will print whatever the press releases say, and people will lose jobs. But more amazingly, the spinsters will use their skills to redefine words and claim there are no problems, only permabears who won’t invest. Thus, there will be no real problems, only permabears who won’t get with the program.
China’s statistics will only show growth.
India doesn’t matter.
Russia’s next implosion won’t be noticed because Russia is always imploding.
If Dr Who were to fly to the end of time, the only notable thing left would be Japan’s zombie economy and the carry trade.
Europe has the PIIGS. That’s where the next action will be. But that won’t be in a decade.
6. All of the above.
The domino effect will take out the others within days, if not hours, of any of them imploding.
So why does it matter?
Another nation-state to be added to the list, and a seemingly improbable one:
Goldman Sachs
…. there’s a piece over at Jesse’s Cafe Americain that takes a look at banksters and their leverage … GS takes the prize, with a derivative exposure-to- total assets ratio of 457 as of the end of 2009.
http://jessescrossroadscafe.blogspot.com/2010/04/derivatives-exposure-among-us.html
I don’t care how good they are, or what degree of control they have over the markets. 457 is deep into the institutional suicide zone.
I am surprised to see the omission of Brazil and other South American nations. The population and development growth in those regions over the past decade has been huge. Brazil itself is booming, and has continued to do so, even through this recession. What makes it a non-candidate? Surely there are credit concerns there as well. Certainly there has been a demographic imbalance that has bubbled up somewhere in their economy.
When compiling a list of “most likely’s”, you have to include anyone that has unrestrained growth. No one should be left off. Even those who’ve had a rough time through this downturn, are not immune to another step-down.
1.2.4.5
india makes it out alive, there rich people are not thieves yet
Europe: as Krugman has repeatedly stressed, Europe got the cart before the horse when they achieved monetary union before political union. Greece, Spain, Portugal, etc. desperately need to devalue their currencies, but they can’t, because they no longer have their own currencies. Enormous economic stresses are building up and one of the most important relief mechanisms doesn’t even exist anymore.
China-US: The longer China stubbornly pegs the renminbi to the dollar, the more embarrassing its trade surpluses will become. The longer China delays the inevitable, the more tempting it will be for the US and other countries to impose tariffs on China because of persistent domestic unemployment. Blaming the US and others for not saving enough misunderstands the problem ( hey, if you need to save dough, you shop at Wal-Mart, right? that will do wonders for our trade deficit, I’m sure). Eventually China’s trading partners will wake up and realize they have nothing to lose by imposing a penalty on China until they let the renminbi float. Such a penalty might be a conventional tariff, or it might be something more creative, like a ban on Chinese purchases of US government debt (all the inflation hawks are crying “FIRE” during Noah’s flood…we’re stuck in a liquidity trap and although govt borrowing is up it hasn’t come close to making up the decrease in private borrowing so financing US govt debt is not a problem now, just look at the current rates).
But it could get very interesting as things go on. Until then, I’m just another Wal-Mart shopper proud to support Communism.
Greece-Portugal-Spain-UK.
And just about all of eastern Europe. (not a good trip for German banks and industry)
Read Full Article »