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 Black Swans Abound as Year of Tiger Shows Teeth: William Pesek

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Join date : 2009-05-13

PostSubject: Black Swans Abound as Year of Tiger Shows Teeth: William Pesek   Thu Jan 07, 2010 10:56 am

Commentary by William Pesek
Jan. 7 (Bloomberg) -- If many of us could have turned around the moment we entered 2010 and made obscene gestures at 2009, we would have.
After the wreckage of the past 12 months, 2010 has to be a good year, right? Good for governments staving off financial chaos, good for households struggling to stay afloat, good for investors wondering which rules of economics and markets still apply. It really is hard to see this year outdoing the last one in the doom-and-gloom department.
Yet the Year of the Tiger might live up to its name and be a fierce one. Here are five reasons why it may come with its share of sharp teeth and "Black Swans."
1. The bill for 2009 is coming due. Look no further than Japan, which has little to show for the hundreds of billions of dollars it’s throwing at the economy. Deflation is intensifying, unemployment is worsening, the ranks of the working poor are growing and Prime Minister Yukio Hatoyama is anything but focused on these fast-mounting challenges.
Now, he faces the hangover from the 2009 borrowing binge.
His 2010 budget won’t rein in deficits that threaten Japan’s Aa2 rating at Moody’s Investors Service. The plot thickens when you add a shrinking population and tax base. That’s why the cost of a five-year contract to protect $10 million of Japan’s sovereign bonds has climbed to $68,650 from $37,000 in August, when Hatoyama’s Democratic Party of Japan won power.
Japan is hardly alone. Governments are pouring untold trillions of dollars into economies financed with fresh bond issuance. The debt glut is as unprecedented as it is unsustainable. Expect credit-rating companies and investors to be sniffing around for potential debt crises, be they in China, Greece, Japan or Vietnam.
2. Global demand remains elusive. Singapore, where gross domestic product shrank in the final three months of 2009 -- the first time in three quarters -- tells the story. It’s on the front lines of global trade and the annualized 6.8 percent drop in growth last quarter is an ominous sign.
China’s almost 10 percent growth is helping commodity exporters such as Australia. Not so for the rest of Asia as it tries to fill the void left by a hobbled $14 trillion U.S.
economy. An undervalued currency greatly limits the spillover benefits of China’s stimulus efforts.
Skepticism is being voiced by leading economists on different ends of the ideological spectrum. Conservative Martin Feldstein, of Harvard University, and liberal Joseph Stiglitz, of Columbia University, say growth may falter as stimulus wanes.
Just ask Singapore how U.S. frugality is working out for Asia.
3. Trade tensions will explode. Expect China’s peg to the dollar to become even more of an issue as unemployment rates rise from Washington to Berlin.
The recent breakdown of climate-change talks in Copenhagen dispels any optimism about multilateral cooperation. It’s beggar-thy-neighbor time as global growth limps along, and no one plays the game better than China.
On Jan. 1, a free-trade agreement between China and Southeast Asia came into force. It consolidated a sixfold surge in economic activity over the past decade between countries representing a quarter of the world’s population. Yet countries such as Indonesia are already concerned about lowering their guard against Asia’s rising superpower. Expect fireworks.
4. Central bankers will be on the ropes. They must find exit strategies for their monetary largess as asset bubbles inflate. Tap on the brakes too much and markets might crash.
Apply them too timidly and inflation may accelerate.
India is one case of monetary policy being behind the curve. Officials from Seoul to Hanoi also face balancing acts.
Central-bank independence is a concern. It’s impossible politically to put rates back to reasonable levels anytime soon.
They must try, though, and those efforts will make for a volatile year in Asian markets.
5. Black-Swan risks abound. Umar Farouk Abdulmutallab’s attempt to blow up a plane over Detroit on Christmas Day is a reminder that terrorism can shake markets anytime. The assassination of a major world leader also would be an unexpected event with great impact.
Sovereign defaults can’t be ruled out, and troubles in small economies such as Iceland or Dubai have a way of spanning the globe. A huge dollar rally or yen plunge could upset so- called carry trades and bring down a couple of hedge funds. A crash in gold or oil prices would do the same.
Perhaps Japan will get its act together and recover for real. Or maybe things will go the other way: a debt crisis in Japan, the U.S. or the U.K.
Markets are hardly discounting hyperinflation, hyperdeflation, a global pension crisis, a collapse of North Korea’s repressive regime, social unrest in China or Iran, major earthquakes in Tokyo or California, or Somali pirates getting their hands on more than oil.
And, more basically, what if optimism that we dodged another Great Depression is hubris and markets tank anew?
Treating the symptoms of the financial crisis isn’t the same as removing the causes.
We have seen how the impossible has a way of becoming possible these last two years. The one ahead may hold its own surprises as the Chinese zodiac’s tiger roars.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
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