We would first evaluate the performance of our projections for 2010 as outlined in our forecasts last year (http://www.marketoracle.co.uk/Article15943.html) before taking a shot at predicting the direction of the Global Economy for 2011.
KEY PROJECTIONS FOR 2010 AND THEIR LIKELY STATUS IN 2011
- The size of Governments and the cost of maintaining them are going to increase substantially worldwide.
2011 : The size of governments around the world and their interferences in smooth functioning of businesses and markets have substantially increased in last one year and is likely to go on increasing throughout 2011. They are increasing regulations on businesses, engaging in currency wars and protectionism policies, deciding which industries would get preference over others etc. Basically they are reacting to various crises as they unfold without any attempt to identify the underlying reasons that cause the crises and finding a long term solution to them.
- The experiment of trying to solve the problem of debt by taking on more debt is going to fail.
2011 : QE 1 and schemes like cash incentives for purchasing houses and cars caused a temporary pullback in the economy by bringing future demand forward but the economy has resumed it’s downtrend with rising unemployment and increasing loan defaults. Countries around the world are taking on more debt without any fruitful attempts to curb their expenditures. This has resulted in a much more fragile and artificially held up financial system which is on a much shaky ground than it was in 2008. In 2008 companies failed due to excessive leverage and debt and now countries are likely to default because they took on the same bad debt on themselves.
- The Governments are going to engage in protectionism policies to protect their own economies.
2011 : Politicians in developed countries are blaming the developing countries, who provide a majority of their own population with low cost products and services, for their own problems. They are engaging in curbing the visa limits for movement of manpower from the developing countries and engaging in currency wars with each other. The developed countries cannot create jobs in their own country by these practices as the major multinational companies have permanently shipped the manufacturing jobs to the low cost developing countries to maximize their own profits. (http://www.marketoracle.co.uk/Article21932.html) The protectionism and currency wars are likely to intensify in 2011 causing great damage to the earnings and living standards of a majority of the world population.
- The Cost of Borrowings of Governments is going to go up as their respective fiscal situation worsens.
2011 : 2010 saw the borrowing cost of many European countries like, Greece, Ireland, Portugal; Spain etc. facing higher fiscal deficits shoot up substantially. The bailout package of the European Central Bank provided only temporary relief to these countries and their investors which has already begun to subside. The borrowing costs or bond yields for theses countries are again at record highs for the year due to their deteriorating financial condition.
- The Governments will use every trick to squeeze out maximum tax revenue from businesses able to make profit or employees earning high incomes.
2011 : This is likely to unfold as various governments around the world find it more expensive and difficult to borrow money from external sources.
- The Governments worldwide will be forced to curb the risky trading practices of the banks and financial institutions after the next credit crunch and market crash. Strict rules too will be laid down for derivative trading to curb speculation.
2011 : The banks and financial institutions have emerged to be more powerful than earlier anticipated and exert greater influence on the political class and central bankers who are responsible to curb their activities. Not a single top shot banker has been charged with bringing the world financial system on the brink of collapse in 2009. They continue to enjoy record bonuses while the unemployment continues to increase and families loose their homes to foreclosure. They have successfully stalled all efforts to curb their speculative activities are now in total control of the movements in all the stock, commodities, bonds and currency markets thanks to the unlimited funds provided to them by the central bankers.
- The banks will revert back to making money by lending to businesses and consumers under strict rules. They will be stopped from using public savings to trade in exotic and risky financial products.
2011 : This is likely to unfold as the various governments around the world realize that if the banks and financial institutions are not refrained from speculation, their activities are likely to bankrupt countries causing hardship to a majority of the population. They are likely to become a major pain for the politicians and central bankers themselves, the very class of people who let the banks exist in their present form after repealing The Glass Steagall Act in 1999 and allowing them to thrive under their patronage.
- There is going to be a sovereign default of debt of a country, the rescue of which will not be managed. This will trigger a chain of defaults across the global markets and the credit markets will freeze up again as happened in the period Oct 08 – March 09. This time it will take much longer to thaw as the ability of Governments to rescue will be limited.
2011 : In 2010 we saw countries like Greece, Ireland facing bankruptcies due to increasing deteriorating financial position and increased borrowing costs. They had to be bailed out by the ECB and IMF. These problems are likely to spread to bigger countries in 2011 and the tipping point, which is likely to happen, next year, would be when one too big to bail out country defaults on its debts. This would start a chain of defaults which all the governments and central bankers in the world put together cannot reverse pushing the world economy on an extended path of slow or negative growth for years.
- There will be a rush to buy US Dollars as safe haven. The problems of US are well documented and observed. There will be major financial problems emerging from economies like U.K., Japan, Eurozone countries, Middle East etc. which will come out suddenly and dwarf the ones in the U.S.
2011 : This change in attitude is currently in progress in due to the problems emerging from the Euro Zone and is likely to intensify in 2011. A single currency for an economy as strong as Germany on one hand and relatively weaker economies like Greece or Ireland on the other is not sustainable in the long run. The idea of the stronger countries in the Euro zone to keep on bailing out the weaker ones repeatedly will be a difficult one to sell to the citizens of the economically stronger countries.
- A no. of banks worldwide will collapse due to the losses on loans on credit cards, autos, residential and commercial property etc. Also the banks will have to forego loan principles as the assets they hold as collaterals continue to fall in value.
2011 : The only reason the big banks are still in business is because of the unlimited cash infusion by central bankers and the change in accounting rules whereby they can evaluate the assets in their balance sheet at cost instead of market price. The losses are gradually being borne by the taxpayers and the general population as their entitlements and services are being reduced in the name of balancing the budget.
- The consumers and businesses will keep on de-leveraging till their loans can be serviced with their lower earnings. This is going to hit business profitability hard.
2011 : This process started in 2009 and despite all efforts by central bankers to prop up the various markets the demand for loans by individuals for consumption and businesses for expansion continues to remain weak and is likely to intensify in 2011. The reason for lack of demand for loans is uncertain future earning potential for individuals and the lack of customers for businesses. Jobless recovery does not exist as expense of one is the income for another in the economy. Cost cutting by firing employees results in one time profit for corporations at the cost of future sales.
- There will be mass protests against governments on small issues which will act as a trigger for venting out frustration of the common citizen towards their daily struggles. The governments will find great difficulty in controlling their countries in times of social unrest.
2011 : The governments are facing social unrest wherever they are trying to reduce deficits by either cutting salaries/pensions of government workers, increasing retirement age or increasing taxation. This is likely to spread to an increasing no. of countries in 2011 as the governments will have no other choice than to cut their expenses as the cost of borrowing and their tax revenues go down.
- The developing countries face a bigger probability of facing social unrest because the developed countries have in place a social security system whereby they take care of the basic needs of the poor and unemployed citizens. Any such social security system is absent in the developing countries like India and China.
2011 : The money printing by the central bankers in the developed countries (which is not being lent to individuals or businesses due to lack of demand) is finding it’s way into developing economies in search of higher yields. The emerging economies are facing a situation of massive inflow of hot money which is leading to higher domestic inflation and asset bubbles in their stock and property markets. Their central bankers are trying to reduce the flow of hot money to gradually deflate the bubbles. Any unexpected event of war or sovereign default is likely to cause a rush of this money back to the US. This is likely to lead to sudden deflation of bubbles in the developing economies and would weaken their currencies in 2011.
- The US dollar will continue to be the world’s reserve currency.
2011 : USD is likely to strengthen in 2011 as the banking and fiscal problems of other countries come out of the closet and intensify. Money is likely to move into USD as a safe haven as it rushes out of other Developed Countries and Emerging Economies as there is no candidate to replace the US dollar as a world reserve currency. 2010 was an year of risk on and 2011 is likely to be the year of risk off which is likely to benefit the USD.
- We have entered a phase of worldwide deflation in 2009 whereby the credit outstanding will shrink faster than speed at which the Central Bankers can print money. Moreover the consumers will not be willing to take on more debt for consumption even if it is available for free as their attitudes towards debt has altered for the foreseeable future.
2011 : This trend is likely to unfold in great earnest over the rest of this decade despite all the efforts of central bankers and politicians to avoid this. This is likely to continue till debt levels around the world reduce to such an extent which can be comfortably serviced by the lower levels of incomes of individuals, businesses and countries.
Stock and commodity market predictions
We believe that predicting of levels in stock markets or commodities markets is a futile exercise because these markets have become the casinos for the rich whereby the prices (which were traditionally determined by the actual demand and supply) are now determined by speculative positions outstanding using financial leverage (http://www.marketoracle.co.uk/Article23662.html). The major players who are now speculating in the markets are the financial institutions, individuals with deep pockets, hedge funds and the large high frequency traders using super fast computers. The small investor has lost the confidence in these markets and strongly believes that these markets are rigged.
The proof of this fact is that despite 29 consecutively weekly withdrawal of money from U.S. equity mutual funds amounting to more than $85 billion in 2010, the S&P index has kept on rallying. These markets are no longer an asset class whereby the common man can invest his hard earned money and expect it to increase in the long run with increased profitability of the companies. The exchanges have been reduced to gambling dens whereby the more powerful traders with deep pockets move the markets to maximize their own profits at the expense of the remaining not so powerful players. The big boys have enormous money power to move the markets in the direction which results in maximum profits for themselves. They effectively use the media to lure the other players in the market to a position where they would incur maximum loss. It is similar to rounding up maximum sheep before shutting the doors of the slaughter house. If a trader does end up making money it is more a factor of luck rather than talent.
The speculators who are in control of the markets are like termites that require wood to eat and thrive on. Here the wood is your savings and the money you use for trading the markets. The simple way to destroy the speculators is to keep your money out of their reach. Return of principle is likely to be of paramount concern in 2011 than return on principle. It would be better to keep your money in a government sponsored bank and earn low or no interest on it rather than to expose it to stocks or commodities where the risks to it’s health are enormous.
The taxpayer funded bailouts for banks lead to lower standard of living for all the citizens of a country except for the beneficiaries of the bail outs. The poor people in any country live hand to mouth and do not contribute to tax revenues. The others who earn their living by small businesses or salaries pay taxes at a much higher rate than the rich individuals or big businesses. This is due to the loopholes in the taxation system which enable them to declare maximum profits in countries which have the least tax rates. So effectively in the long run the governments route the money collected as taxes from the middle class of people to the banks so that the bankers can enjoy enormous bonuses. We are in times of privatizing the profits and socializing losses for those who are well connected to the governments and the law makers.
There is a widespread awareness and resentment brewing over this issue amongst the citizens of the countries engaging in bailouts. The majority of the population sees their own financial conditions deteriorating whereas the bankers and financial institutions thriving with bonuses and getting away with fraud and manipulation. This frustration is going to burst into the streets of these countries in 2011 and the governments will have a very difficult time trying to convince its citizens that somehow this is going to benefit the country as a whole in the long run. 2011 is likely to bring violent changes in the countries around the world and frugality will be the in thing for the foreseeable future.
We live in volatile times.
Disclosure: No Positions