FT’s Lex sees 20% chance of disaster in 2011
Posted on 02 January 2011 with no comments from readers
The Financial Times’ last Lex column of the year put a 20 per cent chance rating on another financial disaster in 2011, though it thought muddling through a more realistic prospect at 70 per cent.
It is a sign of how sober commentators are about 2011 to see this in the FT. Its disaster scenario saw global bond markets unwilling to finance the US deficit and an existential crisis in the euro zone. Asset prices would plunge to levels not seen since the 2008-9 crisis.
Or recovery?
A third scenario, at 10 per cent probability, has the US consumer starting to spend and the Chinese growth engine revving up to produce a big rally in equities, and gains for everybody except bond investors.
Which will it be? ArabianMoney is more pessimistic than the FT. The muddling along conclusion does allow for a continued slow US housing market and higher interest rates and a volatile, sidewards move for financial markets.
But it is a continuation of the recovery from the market bottom of March 2009. We think the recovery in financial markets was too fast to be sustainable and liable to a correction that will come close to testing previous lows. Only then would a recovery be more lasting.
We would also point out that this financial crisis has yet to see a couple of phases that are normal to any crisis of this magnitude according to historical precedent. You would expect to see a bond market implosion, higher interest rates and a rush to precious metals.
1970s precedent
There has indeed been some sign of this but nothing like the all encompassing sense of crisis seen in other historical examples, even the 1970s. We know many business leaders and investors in Arabia also argue that another market crunch is coming before the crisis can be put behind us.
Artificially depressed interest rates and bailouts have staved off the crisis and produced an equally artificial recovery. That means higher volatility with another big shake-out.
Lex deftly managed to almost squeeze this into its core forecast, and that is perhaps a let-out for its analysts who really believe another disaster is looming but do not want to be seen precipitating it.
