The Black Swans of 2011 (reedited)

The ‘black swan’ is, by definition, an unlikely event, in the image created by the essayist Nassim Taleb. At the end of 2010, the prediction of analysts was the risk of a relapse into a double-dip recession. Eventually emerge in the lake a ‘black swan’ – a wave of pre-defaults in the euro zone, one of the monetary battleships of the world. What was a mad case in the icy Iceland and a subject of political chicanery in the hot Greece in 2009 turned out to undermine the sovereign debt market and become the year’s crisis. Skeptics in the risk of default in the world of the rich surrender to the evidence.

For 2011, there were several ‘black swans’ in the horizont: the fragmentation of the Eurozone, the unexpected break out of a war with international projection, eventually in Asia (a region where “no neighbour seems to like the other” as Michael Pettis pointed); the pound and the dollar decide to merge, disturbing the euro and the renminbi even more, as suggested by Sheshabalaya Ashutosh; India and China, despite the reciprocal hatred, solidify an Asian alliance against the American supremacy in the world; the European Union and Russia formalize the “courtship” with the same objective.

But there are two other “black swans” that stand in the consensus of the 11 analists interviewed by Expresso on several continents. China and the commodities are at the center of the uncertainty – the burst of speculative bubbles dismissed as pure fantasy.

11 issues by 11 analysts for 2011

The Dollar holds out

The “stars” continue to favor the greenback as the international currency. “The euro will have a difficult decade and China will have to make serious adjustments, and to control the process, may have to reverse the internationalization of the renminbi that began timidly in 2010,” told Michael Pettis, an American professor at Peking University’s Guanghua School of Management. But that does not mean that the current status will live forever: “The dollar is already losing its leadership role. The process will take years, but is already underway, have no illusions on that” said American David Kotok, a financial expert, president of Cumberland Advisors, in Florida.

The Euro remains but with new design

Kevin O’Rourke, a professor at Trinity College, Dublin, openly admits to being pessimistic when asked on the eventuality of fragmentation of the Eurozone: “Eventually.” And sees the disintegration of the euro area as a potential “black swan” in 2011. The Indian Ashustosh Sheshabalaya, from New Delhi, is more radical on the furure of the euro: “The euro is in an exit ramp. It lost it’s golden opportunity between 2000 and 2006.” Gylfi Zoega, Professor of Economics, University of Iceland, strikes: “No, no way, it will not happen.” The Non-European of this group of 11 analists are less Eurosceptics. “The euro will survive, but with a different configuration, with political and budgetary union or restricted to a smaller group of countries. With the current setup there is no chance of survival.” said Michael Pettis. “The Euro can resist the pressures to dismantle it” add Peter Drysdale, Emeritus Professor of Economics at the Crawford School of Economics and Government at the Australian National University, in Canberra. David Kotok is the optimistic: “The euro area will remain intact and will come out stronger after the crisis.”

ECB Vs Federal Reserve

“The dollar holds out because of internal weaknesses of the euro zone,” admits Ansgar Belke, the German professor, director of the IBES, an institute of the University of Duisburg-Essen. “The Chinese and Russian capitals and the international liquidity will flow into the Eurozone if the markets begin to steadily lose confidence in U.S. macroeconomic policy.” There is an opportunity there for the Europeans “if the ECB knows how to get out of the expansionary monetary policy,” concludes Belke.

ECB turns into a sovereign debt bad bank

“It started to become that – since the second week of May 2010 that the main focus of the ECB with the Securities Markets Programme, is to purchase debt securities of certain governments, that we can consider ‘toxic’ debt” refers Ansgar Belke, with indignation. He foresees this new side character of the ECB rampant in 2011. This “bad bank” character is one of the characteristics that most disturbs also non-Europeans. “In a sense, it’s just that,” agreed Peter Drysdale and Ashustosh Sheshabalaya. Sheshabalaya sees the IMF as “a second level of safeguard” in this abnormal process. But he draws attention to the fact that the IMF will not remain the same as before: “Get ready: new powers – the emerging economies – will play greater role there.”

Re-structuring of sovereign debt in the euro area

Eventually, the best option. Pettis thinks Eurozone countries in trouble should refuse help and “focus on getting a substantial debt haircut. Without that they will fail to grow – the historical precedents are clear.” Italian Cinzia Alcide, from the Centre for European Policy Studies in Brussels: “We need a radical solution, not one just partial and temporary.” The critical period for this shift could well be the second half of the year, when the bulk of the financing of sovereign debt in Europe, Japan and the United States (including municipalities and the states of the federation) will converge. Eight trillion Euros will be needed to handle the budgets of rich countries, 16% of 2011 world GDP.

Risk aversion in technology will remain

“The coming years will continue to be risk-averse – and this will affect investment on new technologies,” said Michael Pettis. Peter Cohan, a specialist in technology investments, said he did not expect on 2011 “something I might characterize as a functional technology – a productivity leap that would force a wave of leading organizations to invest and change the way they operate.” David Caploe, chief economist at EconomyWatch in Singapore also underscores another pessimistic note: “The scenario of high technology is moving from an entrepreneurial space to a dynamic fundamentally oligopolistic, where the current players become the big players. And in this frameset, there is little room for start-ups.”

From G2 to G5

It’s the issue that generates more mixed opinions. While Ansgar Belke thinks a G2 – United States and China – will continue to impose itself as the “engine” of the G20, Michael Pettis finds a G5 (U.S., China, India, Japan and the European Union) as a “more significant” geoeconomic reality taking shape. Cinzia Alcide sees high risk in G2: “What we see is that China opts for a dialogue with the United States first and only marginally with Europe. This suggests that the dialogue will end up being more bilateral than multilateral.” But the G20 is not in danger of falling apart, despite appearing to be more rhetorical than practical: “It is a global stabilizer,” refers Drysdale.

China, the “imponderable”

“The next generation that will take power in Beijing in 2012 has already begun trying to figure out how to manage the change in China’s growth model. And the process will be very factional,” pointed Pettis, watching this reality in the capital of the Asian giant. In between, there is the risk of the crash of the speculative “bubble”, say Peter Cohan and Gylfi Zoega. This would be a real “black swan”. David Caploe even considers the Chinese economy as “the greatest imponderable of 2011.”

The burst of the commodities bubble

The “bubble” in commodity prices can suddenly break out in 2011, admits Peter Cohan: “It was fed by the Federal Reserve policies while throwing money onto the global economy.”

BRIC is a marriage of convenience

No one believes that there is a geopolitical alliance between BRICs – the acronym coined by Goldman Sachs to characterize, in the early 2000s, the emergence of the four economies (Brazil, Russia, India and China) out of the G7, the forum of seven richest countries, which then led the world. Sheshabalaya calls the acronym BRIC a “marriage of convenience.” Pettis even claims that “there has never been a substantial alliance, because the interests of each one in the group are radically different.” The media attention is probably a “legacy” of “idiotic policies of George W. Bush, rather than a natural tendency,” he adds in Beijing. And Peter Cohan considers that: “The BRICs feel that there are limits. If they pushed too hard, they would be cutting their own throats.”

The Era of Hiper-transparency

In 2010 we had the first samples with Wikileaks. The era of “hyper-transparency” will arrive in force to the economy and finance, after diplomacy, notes the Canadian Don Tapscott, a professor at the Rotman School of Management, University of Toronto. “So, if your company is going to get naked – and has no choice – it is better to be ironclad,” he concludes.

11 quotes on 2011 Black Swans

“The European single currency project is putting the cart before the horse. The point of radical change can happen when France sees its rating downgraded and the risk of its debt against Germany’s, significantly increased”
Ashutosh Sheshabalaya, economic consultant, New Delhi, India

“The fate of the dollar as reserve currency will be determined in a direct battle between the Federal Reserve and European Central Bank. If the latter is the first to leave expansionary monetary policies, it may be in a position to win this battle”
Ansgar Belk, director of the IBES, University Duisberg-Essen, Germany

“It is now clear, on the European debt crisis, that temporary and partial solutions do not work. All add to the future cost of the resolution. At one point, the list of possible solutions can be really short”
Cinzia Alcide, researcher, Centre for European Policy Studies, Brussels, Belgium

“Something bad can happen to Spain. If it occurs, we could see a domino effect, with Italy (not in great shape) and, further down the road, with France.”
David Caploe, editor EcononyWatch, Singapore

“Many peripheral countries of the Euro will have to be supported by re-structuring of debt. Very stressful, but I do not expect technical default. The Euro area will stay intact and stronger post-crisis”
David Kotok, financial advisor, chairman of Cumberland Advisors, Florida, USA

“We will watch the collapse of Apps. Instead of writing applications to run on separate mobile operating systems, developers will return to the uniformity of the web sites accessed through browsers”
Don Tapscott, tech writer, a professor at the Rotman School of Management, University of Toronto, Canada

“China has yet to establish itself as the world’s number two. And will not get there only through the export model. They will need strong institutions, efficiency, innovation and entrepreneurship”
Gylfi Zoega, economist, University of Iceland, Reykjavik, Iceland

“The disintegration of the Euro is the ‘black swan’ that might surprise us. There is the possibility of the Euro to go down the drain with the fragmentation of the European Union project”
Kevin O’Rourke, professor, Trinity College, Dublin, Ireland

“Maybe it will make more sense to start talking about a G5, which includes, besides the United States and China, India, Japan and the European Union, if the latter learn to behave in a mature and intelligent way”
Michael Pettis, professor, Peking University, Beijing, China

“I see nothing on the horizon next year that can be characterized as a new functional technology. This happened in the 1990s but I do not see anything similar, even with the advances in search engines and social networks”
Peter Cohan, technology and financial analyst, Boston, USA

“The biggest dangers remain unforeseen political events, which could trigger, like a match; a confrontation in the Korean peninsula, an unexpected conflict in the South or West of Asia, or in the Middle East”
Peter Drysdale, Professor, Australian National University, Canberra, Australia

Source: Os cisnes negros de 2011 | Jorge Nascimento Rodrigues | originally published in Dec 31st, 2010

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