When the New Year comes around, we all celebrate and wish each other a Happy New Year. We hope for things like prosperity, health, wealth good cheer and so on. But are we really expecting a Happy New Year in 2012? Perhaps instead what we are expecting is fundamental change to our political and economic status quo. There is an air of pessimism from the financial markets about the prospects for 2012 and with good reason. While we think about the year ahead, what are some of the more obvious economic triggers for the markets’ pessimistic mood?
Will the European Union collapse?
There is no doubt that the eurozone is in deep trouble. It is fighting for survival and at the heart of the problem remains the issue of debt. Some of the members of the European Union have debts that they cannot pay no matter how harsh the austerity measures they implement. In 2011, it was Greece that stole the headlines with civil unrest against the government and the banks. There has been no resolution to the Greek problem, only further debt to pay debt, which is not a solution. In 2012, the problem is not so much Greece, but other members who may also not be able to repay their debt. The most likely candidate is Spain, and possibly Italy. If in 2012, one or both of these countries may join Greece in the “cannot pay our debt” basket, which for Spain is highly likely, then the eurozone will be in for a very rough ride. The financial markets’ pessimistic view for 2012 seems justified, and this will mean no growth, shrinking trade and the need for debt write downs across Europe. The Union will survive, as will the euro, but some of the banks and European governments will not. Lower oil prices will help.
Will China crash in 2012?
A year ago I wrote the article Will China Sneeze in 2011. The idea that China is the powerhouse economy driving the rest of the world and that if China slows, then the world will slow is true. However, if Europe continues to slow, which I believe will be the case, then trade with China will slow and China’s growth will slow. China still enjoys growth of around 8%; however, the noises coming out of China about a property bubble about to burst is growing louder and if its growth comes in at 2% to 3% for 2012, then this could quite reasonably be considered as China sneezing. China is not likely to crash in 2012, but it will experience a slowdown and that will mean factories closing, jobs going, and the potential for civil unrest. When you have a population of over one billion people, it cannot be ignored. The likely outcome will be that China concentrates its financial resources inside China rather than outside China. This will add to a slowing in demand in Europe, America and Asia, confirming the pessimistic outlook for 2012.
Will commodity prices collapse in 2012?
The oil producing nations of the world obviously want to see a high oil price. The consuming nations would prefer a lower price. A happy medium is what market forces should provide. Based on the pessimistic view of the financial markets by many of its participants, my colleagues and I favor a steep decline in the oil price in Q1 of 2012, the only caveat being if there is an attack on Iran, which of course would send oil prices sky high. We believe that the likelihood of an attack on Iran is extremely low, so I am sticking to a low oil price scenario. While this will give some relief to China and struggling parts of Europe, it will be a disaster for Saudi Arabia, which is fighting off the threat of a popular uprising by throwing money at their citizens, and Russia, whose ruling leadership is rearranging the deck chairs on the Titanic in response to public rallies against fraudulent government elections. An oil price collapse to $50 per barrel or below will magnify the political tensions in Saudi Arabia and Russia, while providing some relief for Europe and a slowing China. Since oil is the driver for most other commodity prices through production and transportation costs, and I believe 2012 will see lower oil prices, a significant drop in commodity prices is expected. I also expect gold to remain under pressure, especially paper gold.
So the pessimism from the markets for 2012 does seem justified. Political instability will add to economic uncertainty with presidential elections in Russia and the United States in 2012. However it’s not all bad news. The global political and economic status quo are going through profound and fundamental change and this will accelerate in 2012. The result will be a fairer, more transparent political and economic paradigm, and that is definitely good news. Happy New Year!
Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.
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