What economic crises lie ahead for 2011?

Posted on 12 December 2010 with 2 comments from readers

The alternative financial commentators are pretty battle weary after more than three years of gloom and doom. But after a long period of lurching from one economic crisis to another there is little to suggest that 2011 will be any different, somewhat on the contrary in fact or fiction.

Forecasts are always fiction because nobody can really know the future. All we have to go on are the best guesses by the guys who guest best in the past.

In recent years those honours go to Marc Faber (autumn interest rate call), Nouriel Roubini (2008 debt call), Jim Rogers (Mr Hot Commodities) and even George Soros (1929 parallels) among financial analysts while Ambrose Evans-Pritchard of the Daily Telegraph has got it right most often amongst financial journalists and Bill Bonner comes a close second.

US investor confidence

ArabianMoney notes that confidence among US investors is said to be back to the pre-crisis levels of early 2008. Then we wrote that US investors were deluding themselves (click here). We don’t feel substantially different now. Indeed, there is a considerable sense of deja vu looking at the outlook for 2011.

The warning signal over the past month is the 25 per cent rise in the yield on US treasuries. That is an enormous increase in the cost of borrowing, and since when have rising interest rates ever brought anything except pain for debtors?

If the world can no longer roll over its debt at ultra-low interest rates then we are in a different ball game. Rising interest rates will set off a wave of crises for sovereign debt, corporate debt, stock markets and real estate. Commodity prices will be volatile, rising and falling in unpredictable waves.

Is it churlish to point out that stocks have only been looking cheap recently because bond yields were so low. Does that not make them increasingly expensive assets now?

So who and what will be the winners and losers in a process of debt destruction? If this was a simple private individual then the loser is obviously the debtor. But the whole interlocked spyders web of debt makes the whole system vulnerable.

Germany calling

Germany, for example, has its debt levels under control but sadly is also the biggest lender to the other nations of Europe whose financial condition now looks impossible. Germany’s recent GDP upturn is also down to Chinese imports that could evaporate if global trade once more goes into crisis.

Is that not another trade crisis in the making with interest rates going up? The cost of trade finance is rising sharply and another freeze on credit is surely another economic crisis to look out for in 2011. The counter party risk that central banks sought to remove with low interest rates and big bailouts will return with a vengeance.

More bankruptcies or mega bailouts on the lines of General Motors and Citi seem inevitable. But for the moment investors seem to have their heads stuck in the sand and want to party like there is no 2011. Optimists who are fully invested in stocks or even pessimists long on bonds are entering a very dangerous phase. No wonder gold and silver are in such demand.

The ArabianMoney investment newsletter will go into more detail about the outlook for 2011 in the January issue (sign-up here to pre-order today).