Saturday, November 20, 2010

Predictions for somewhere down the line...

Something has to happen...

1
Greece being bailed out, Ireland next in line and Portugal or Spain soon afterwards has an eerie resemblance to the beginning of the financial crisis. It is rather possible that some of the mightier European nations decide to not support the weaker nations; One, two or more countries ought to break away from the Eurozone and create their own currency.
Painful in the short run but it's the only way I see the "Euro" sustaining itself.
May be China or Norway decide to support a country but it would be a futile exercise.
Events in the Eurozone ought to cause short term panic and disruptions in global trade (think about how global settlements will take place). I wonder if the countries which break away will accumulate Euro reserves as opposed to Dollar reserves - this does seem quite plausible.

2
Europe doesn't really scare me. Chimerica does.
America
- Bad, potentially overvalued assets lie on some banks' books.
- California, Illinois (may be Nevada) and some other states have sizeable budget deficits. If one state is bailed out, many other states are going to come with their begging bowls (Disclaimer: Bowls might have been made in China) - something that the US Govt. would definitely want to avoid.
- A sharp yield curve and rapid monetization of debt (The Fed. Reserve is probably the largest holder of US Treasuries). May be the yield curve can really steepen - which would be caused and cause mistrust in the supposed holding value of the USD. I don't see an auction failing, rather I do see higher yields being demanded.
- Unemployment and low morale in even the employed workforce ought to have a disinflationary effect on a system that's trying to inflate its way out of this crisis. Stagflation seems real.

3
China
- If the industrialized world has and had slowed down, what is driving China's import and export capacity? I believe that they are playing a nice game. Mark my words: Build infrastructure, build wealth, cheat others along the way such that we (China) will fall soon - however, the fall will be supported by the consumption we have created. The reserves and the assets that we hold around the world will keep us happy. After our fall, we will still hold many real assets which the world will crave. We already have 90+% of the world's rare earth, we are (possibly) hoarding iron ore, coal and other metals which we are, for now, showing as imports... You see, we are not really turning these goods into something else... We are going to keep this so we can hold the world to ransom later.
- Our inflation numbers are a joke. The buildings and infrastructure we create just add to our GDP numbers but the assets are quite useless. What I care?
- Our trade numbers have to be real... but I wonder how we are managing them...
- If we let our currency appreciate, many of our businesses will be, well, out of business. They are making losses already but we are supporting them for now. You see, our goods wont be as competitive as they are now... And that will change the entire trade dynamic.
- If we let our currency depreciate, accumulate more reserves, build a larger military, acquire more assets and throw our weight around while increasing our banks' reserve requirements... we can potentially become stronger.
- One thing you don't understand is that America depends on us. If America slows down, sure we will suffer but we will be able to take care of ourselves, America wont.
- First it was the UK, then the US, now it's time for China to proclaim its supremacy - it will take time but we are moving ahead.

India
- What in the world is up??!!
- I really want to take care of myself. Yes, I know that these foreigners are going to keep our markets volatile for a while but our Indians are becoming fatter - we consume what we have :)
Mostly.

Oil
- Woe is me!!
- $82 a barrel right now. $90 and many nations are going to be sad about forex payments. For many nations, oil imports are a big part of their import bills. Oil lower? I don't think so... not with the US destroying the value of its own currency.

Food
- I need 1 drought in Russia to increase wheat procurement costs of many countries by 50%
- China is losing water, India is too.
- My prices shall continually increase at a sustainable pace.

Gold
- I don't know what's happening to me. I don't know why people want me. I'm quite useless you see... It's called the self-fulfilling prophecy.

Metals
- Prices will not be sustained because global demand ought to wane.


Addendum:
Analogy for the China story.
Even though Japan has been suffering from 2 lost decades it is still a PPP 4 trillion USD + economy. People have suffered, of course, but only on a relative basis.
China's plan seems to be: "I know what Japan went through, I also know that I'm going to hit a trough; however, I'm playing an interesting game with my massive foreign reserves, covert technological developments and gradual purchase of foreign assets."

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