Here’s a friendly reminder on investing: pay attention to the rest of the world.
Just yesterday, U.S. markets fell sharply when Moody’s cut its ratings on a host of Dubai government-controlled companies and after Fitch downgraded its credit rating on Greece (pictured) to BBB- from A-, highlighting “the weak credibility of fiscal institutions and the policy framework in Greece,” according to the Wall Street Journal.
That “weak credibility” is all over the world.
In no particular order, we round up the 10 economic time bombs whose explosion — some very possible in the next year — could have serious consequences for global markets.
title=”Israel attacks Iran”
content=”Risk: Trouble in Iran means disrupted oil supply, and the volatile country is again on the brink.
Peter Zeihan, VP of Strategic Analysis at Stratfor, a global intelligence company, says Iran’s nuclear program has ‘reached the point Israel feels it has to stop.’ That’s serious.
If Israel attacks, Iran would likely counter by interrupting traffic in the Persian gulf, says Zeihan. The would have ‘some pretty disastrous consequences in the short and medium term’ on oil supplies and prices.
And if Israel ally the United States tries to forcibly reopen shipping in the gulf, Iran would likely cut off as much as 3.5 million barrels of crude exports, according to Zeihan. On a much smaller scale, some liquefied natural gas also wouldn’t make it out of Qatar and UAE.
‘That’s not exactly the kind of thing the global economy would like right now,’ says Zeihan.
CIA Factbook economic background: Iran’s economy is marked by an inefficient state sector, reliance on the oil sector, which provides the majority of government revenues, and statist policies, which create major distortions throughout the system. Most economic activity is controlled by the state.
Export partners: China 15.3%, Japan 14.3%, India 10.4%, South Korea 6.4%, Turkey 6.4%, Italy 4.5% (2008)
Import partners: UAE 19.3%, China 13%, Germany 9.2%, South Korea 7%, Italy 5.1%, France 4.3%, Russia 4.2% (2008)”
title=”Pakistan destabilizes India”
content=”Risk: India and Pakistan’s long-standing conflict continues to fester, but the renewed importance of Pakistan on terrorism and India growing in the world economy make it all the more scary.
Ian Bremmer, president of risk projecting Eurasia Group, says conflict looms: ‘For the first time in several years, shifting security dynamics could push India and Pakistan toward confrontation.’
Bremmer notes that militants in Pakistan are still able to launch attacks domestically, but worse, in India.
‘India’s Congress Party leadership wants to keep simmering tensions with Pakistan from reaching a boil. But to minimize the damage from opposition charges of weakness following the Mumbai attacks, India’s government demanded that Pakistan take decisive action to disrupt cross-border terrorist operations,’ writes Bremmer.
‘The Pakistanis have done very little in response. Another major attack would all but force the Indian government to take a much more hostile approach to Pakistan’s government, allowing Pakistan’s military leadership to set aside attacks on local militants and turn their attention to an enemy they feel less reluctant to antagonize.’
CIA Factbook economic discussion: The [Indian] government has reduced controls on foreign trade and investment. Higher limits on foreign direct investment were permitted in a few key sectors, such as telecommunications. However, tariff spikes in sensitive categories, including agriculture, and incremental progress on economic reforms still hinder foreign access to India’s vast and growing market. Privatization of government-owned industries remains stalled and continues to generate political debate; populist pressure from within the UPA government had restrained needed initiatives.
Export partners (India): US 12.3%, UAE 9.4%, China 9.3% (2008)
Import partners (India): China 11.1%, Saudi Arabia 7.5%, US 6.6%, UAE 5.1%, Iran 4.2%, Singapore 4.2%, Germany 4.2% (2008)”
title=”Brazil can’t prop up Argentina”
content=”Risk: Investors are going wild for Brazil, but Argentina’s economic disaster could drag both countries down — ‘Brazil and Argentina are two sides of the same coin,’ says Zeihan of Stratfor.
Argentina is in such bad financial shape that it will probably be a food importer within five years, says Zeihan. ‘Through a seeming pathological addiction to bad policies, they’ve gone from being the world’s largest beef exporter and one of the top exporters of corn and wheat to being a beef importer and they’re well on their way to falling off the corn and wheat markets as well.’
That shift spells big trouble. ‘If anything, they’re speeding up towards their financial Armageddon,’ says Zeihan.
‘On the flip side, Brazil is doing everything right and maybe able to make up for the difference [in Argentina],’ adds Zeihan. ‘Should Brazil have an off day and Argentina continue down their path, I wouldn’t say we’re looking at global food shortages or anything like that, but having a major exporter just fall off the map could be pretty dramatic.’
Bremmer of Eurasia Group says that off day could come from the deepening state control of the energy sector, which is ‘clouding the investment picture.’ Regardless of whether legislation to do that happens, ‘Brazil’s energy sector will be much less investor friendly for the next several years.’
CIA Factbook economic discussion: Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Although one of the world’s wealthiest countries 100 years ago, Argentina suffered during most of the 20th century from recurring economic crises, persistent fiscal and current account deficits, high inflation, mounting external debt, and capital flight.
Export partners (Argentina): Brazil 18.9%, China 9.1%, US 7.9%, Chile 6.7%, Netherlands 4.2% (2008)
Import partners (Argentina): Brazil 31.3%, China 12.4%, US 12.2%, Germany 4.4% (2008)”
title=”Russia and Ukraine cut the pipes”
content=”Risk: Upcoming Ukrainian elections could cause disruption in European energy supplies and prices — no matter who wins.
Zeihan of Stratfor predicts presidential elections in January will reverse the progress of the Orange Revolution when pro-Russia politicians will take over for Viktor Yushchenko.
That won’t happen without a fight. Yushchenko — who said recently he will not be prime minister if he loses presidential election — ‘has a vested interest in causing a crisis and I think he’ll use natural gas to do that.’ That could mean a gas cut-off to Europe.
At the same time, Russian control of natural resources is growing and, as Zeihan notes, that could mean disruptive leverage on the European energy market, especially Poland down to Croatia, and the states in between. ‘Russians have a vested interest in using energy as a political tool,’ says Zeihan.
CIA Factbook economic discussion: The drop in steel prices [the top export] and Ukraine’s exposure to the global financial crisis due to aggressive foreign borrowing has lowered growth…However, political turmoil in Ukraine as well as deteriorating external conditions are likely to hamper efforts for economic recovery.
Export partners: Russia 23.5%, Turkey 6.9%, Italy 4.4% (2008)
Import partners: Russia 22.7%, Germany 8.4%, Turkmenistan 6.6%, China 6.5%, Poland 5% (2008)”
content=”Risk: If people are nervous about U.S. debt — north of 10% of GDP — that’s where Japan was 10 years ago. Indeed, Japan’s distinction as the world’s most indebted country (some 220% of GDP) means near certain collapse, says Zeihan of Stratfor.
Factor in a rapidly ageing and shrinking population and the ‘chances of ever getting out of their fiscal hole is now nil,’ says Zeihan. ‘Sooner or later Japan is going to financially collapse. The specific impact of that we’re really not sure of — a first world country has never collapsed in human history.’
Even though Japan is relatively isolated economically, the collapse of a $5 trillion economy would be ‘massive,’ warns Zeihan. East Asia will would suffer from a collapse most, but trillions of dollars worth of defaults could hurt countries far away, including the U.S., even if foreigners own less than 5% of its debt.
The question seems to not be if but when. Zeihan says it definitely won’t happen in the coming months, and could take up to 20 years. But, he warns, ‘it’s definitely irreversible at this point.’
‘The last time Japan faced a major financial problem, they invaded everybody,’ says Zeihan. ‘Something’s going to happen, but I don’t know what.’
CIA Factbook economic discussion: The Japanese financial sector was not heavily exposed to sub-prime mortgages or their derivative instruments and weathered the initial effect of the global credit crunch, but a sharp downturn in business investment and global demand for Japan’s exports in late 2008 pushed Japan further into a recession. Japan’s huge government debt, which totals 170% of GDP, and the ageing of the population are two major long-run problems. Debate continues on the role of and effects of reform in restructuring the economy.
Export partners: US 17.8%, China 16%, South Korea 7.6%, Hong Kong 5.1% (2008)
Import partners: China 18.9%, US 10.4%, Saudi Arabia 6.7%, Australia 6.2%, UAE 6.1%, Indonesia 4.3% (2008)”
title=”Mexico runs out of oil”
content=”Risk: Mexico is the world’s 12th largest economy, so it’s worth paying attention to.
The agony of the drug war aside, the primary issue is energy. ‘All of their producing fields are in terminal decline; all of them are failing at some of the fastest rates in the world,’ says Zeihan. Within 10 years, he predicts Mexico will become a ‘major’ energy importer.
As the Oil Drum blog has noted on Mexico’s oil, ‘suddenly and soon the questions as to where the replacement hundreds of thousands of barrels are going to come from is going to stop being an almost academic exercise.’
Adds Zeihan: ‘What happens when all of a sudden its primary source of income disappears? Mexico is flirting with failed state status now.’
CIA Factbook economic discussion: The administration continues to face many economic challenges including the need to upgrade infrastructure, modernize labour laws, and allow private investment in the energy sector. [President] Calderon has stated that his top economic priorities remain reducing poverty and creating jobs.
Export partners: US 80.2%, Canada 2.4%, Germany 1.7% (2008)
Import partners: US 49%, China 11.2%, Japan 5.3%, South Korea 4.4%, Germany 4.1% (2008)”
title=”U.K. loses its credit rating”
content=”Risk: In Europe, Britain isn’t as bad a Greece, but a serious fiscal crisis is still possible.
Zeihan of Stratfor says that between upcoming elections and a government that ‘feels it can’t stop the stimulus or face a recession,’ the United Kingdom could be the first of the AAA states to lose its credit rating in the next year.
‘Credit ratings come and go, but the U.K. is a major centre of power in the global system. The city [London] is critical to the operating of the global financial industry, and if the United Kingdom loses that position, you’re going to see a massive volitility in financial markets,’ says Zeihan.
CIA Factbook economic discussion: The global economic slowdown, tight credit, and falling home prices, however, pushed Britain back into recession in the latter half of 2008 and prompted the Brown government to implement a number of new measures to stimulate the economy and stabilise the financial markets; these include part-nationalizing the banking system, cutting taxes, suspending public sector borrowing rules, and bringing forward public spending on capital projects.
Export partners: US 13.8%, Germany 11.5%, Netherlands 7.8%, France 7.6%, Ireland 7.5%, Belgium 5.3%, Spain 4.1% (2008)
Import partners: Germany 13.1%, US 8.7%, China 7.5%, Netherlands 7.4%, France 6.8%, Norway 6%, Belgium 4.7%, Italy 4.1% (2008)”
content=”Risk: China as weathered the financial crisis well, and GDP is expected to grow nearly 9% in 2010.
Yet, as we’ve noted, the government has massively distorted the nation’s economic system over the last few decades, leading to a series of dangerous Chinese excesses, each of which is only sustainable through inflation of the others.
The ‘dominoes of destruction‘ include huge dollar holdings, reliance on exports, excessive liquidity, inefficient companies, and more.
CIA Factbook economic discussion: The Chinese government faces numerous economic development challenges, including: (a) strengthening its social safety net, including pension and health system reform, to counteract a high domestic savings rate and correspondingly low domestic demand; (b) sustaining adequate job growth for tens of millions of migrants, new entrants to the work force, and workers laid off from state-owned enterprises deemed not worth saving; (c) reducing corruption and other economic crimes; and (d) containing environmental damage and social strife related to the economy’s rapid transformation.
Export partners: US 17.7%, Hong Kong 13.3%, Japan 8.1%, South Korea 5.2%, Germany 4.1% (2008)
Import partners: Japan 13.3%, South Korea 9.9%, US 7.2%, Germany 4.9% (2008)”
content=”Risk: Greece will likely be the first Eurozone country to default on its debt.
‘Anywhere else in the world, this would be a minor detail. Defaults happen,’ says Zeihan of Stratfor. ‘But this one is in the Eurozone — this one is linked in to NATO, this one is linked into the EU — and the first default there is going to have catasthropic consequences for the European banking sector, which is pretty flimsy already.’
That could set off a nast chain reaction. ‘Greece is going to be plowing the way, and where Greece goes, Italy may follow. Spain may follow shortly thereafter,’ says Zeihan.
‘I don’t see a single thing the Europeans are doing to prepare for that,’ says Zeihan. ‘We just don’t know what’s going to happen.’
CIA Factbook economic discussion: Public debt, inflation, and unemployment are above the euro-zone average, but are falling. The Greek Government continues to grapple with cutting government spending, reducing the size of the public sector, and reforming the labour and pension systems, in the face of often vocal opposition from the country’s powerful labour unions and the general public. The economy remains an important domestic political issue in Greece and, while the ruling New Democracy government has had some success in improving economic growth and reducing the budget deficit, Athens faces long-term challenges in its effort to continue its economic reforms, especially social security reform and privatization.
Export partners: Italy 11.5%, Germany 10.5%, Bulgaria 7%, Cyprus 6.2%, US 5%, UK 4.7%, Romania 4.4% (2008)
Import partners: Germany 13.3%, Italy 12.8%, China 6.2%, France 5.6%, Netherlands 5.1%, Russia 4.7% (2008)”
title=”American recovery stalls”
content=”Risk: Remember that the U.S. is the world’s largest economy with more consumer spending and disposable income than the rest of the world combined.
‘It’s pretty straight forward that whether or not the U.S. sinks or swims has massive impact on the rest of the system,’ says Zeihan of Stratfor.
Don’t worry, Washington and Wall Street will fix all that.
CIA Factbook economic discussion: Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an ageing population, sizable trade and budget deficits, and stagnation of family income in the lower economic groups. The merchandise trade deficit reached a record $819 billion in 2007 and $821 billion in 2008.
Export partners: Canada 20.1%, Mexico 11.7%, China 5.5%, Japan 5.1%, Germany 4.2%, UK 4.1% (2008)
Import partners: China 16.5%, Canada 15.7%, Mexico 10.1%, Japan 6.6%, Germany 4.6% (2008)”
title=”Now, the safe spots”
content=”12 Places To Go If The World Goes To Hell“
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