2010: gazing into the tea leaves

So from my last post, you know that I’m giving myself ticks for my 2009 predictions. I have now gazed into the crystal ball and here’s what I think could happen in 2010.

Global Financial Crisis: I’ve said I’m no economist, so am happy to be corrected but I don’t think the GFC has finished with us yet. Let’s take the US as an example. With US $787 billion in Government stimulus packages and $700 billion in bank bail outs, I think the financial crisis will be of a different form in 2010. It will be a crisis in public finance. The US Government deficit seems to be spinning out of control. Total US debt is bulging and is now $12.1 trillion (and growing by an average of $3.81 billion per day).  In 2010, Congress will seek to rein it in or at least stabilize it.

Government debt is also known as public debt, national debt or sovereign debt and refers to the money or credit owed by any level of government eg Federal, state, local. It includes any money owed to foreign countries (referred to as individual investors). Public debt soared from $5.8 trillion to $7.6 trillion in 2009 and and is more than half the size of the US economy for the first time since 1956. And annual interest on the public debt will be around $800 billion by 2019.

What does this all mean? Apart from the US needing to go on a serious budget diet, it means that there has been a massive expansion in the scale of public finance in areas such as bank bailouts, mandatory expenditure on unemployment and related social needs, housing, funding the disastrous wars in Iraq and Afghanistan, infrastructure spending and so on. But some states have literally run out of money – California is a good example. And the money being spent is borrowed money. There’s a huge risk here and one that’s not talked about much – Governments are gambling on the stimulus spending creating economic growth and jobs, which then allows Governments to make debt payments and continue spending (hopefully without raising taxes).

The risk I think is that in 2010 a crisis in public finance will start to weigh heavily on all public expenditure and that will affect you and me. Let’s take Japan (the world’s second largest economy) as our example. Big business has been asking Japan’s new Prime Minister, Yukio Hatoyama, to slash social spending and rein in public debt, which is expected to soar above 200% of gross domestic product in 2010. In 2009, Japan scrapped controversial plans to reduce social security spending by 220 billion yen a year – basically, it would have meant putting a cap on social security spending which is higher when there is more unemployment and a large aging population, as in Japan’s case. Malaysia is also cutting its spending in 2010 by 4.4% to rein in its ballooning deficit. So I think we’re going to start to see a public finance crisis. Governments will say they will cut costs not services but cuts or reductions in growth of spending on education, health care and other programs will happen. Or we’ll see tax hikes. Take your pick.

So Federal governments will cut back and then State governments will cut back, leaving local governments screwed. This could mean that local councils will increase property taxes for example. Or you might find garbage/trash services cut back.  Or local area health services are given a haircut. Or it could mean laying off government or local council workers. You get the idea.

Globally, the public debt dilemma is very worrying. Just look at what’s been happening to Dubai – no longer the rich oasis it used to be and needing Abu Dhabi to help bail it out of $59 billion worth of debt and asking for a 6 months’ moratorium. The total global debt in 2010 is predicted to reach at least $49.5 trillion. Even Moody‘s is warning that 2010 will see sovereign debt spiralling and warns of social unrest. And you also get financial markets losing confidence in the ability of countries to cough up what they owe after borrowing vast amounts. From this scenario, it’s not a big leap to imagine financial markets steering clear of official debt instruments—such as treasury bonds—and this would deprive countries of fresh cash.

So my prediction is: 2010 is the year for a crisis of public finance and the year we see government spending pruned. The European Union will lead the way. Look at what’s happening with Greece with its crisis budget.

UPDATE: 16/1/10 I could be tracking well with this prediction already. Marc Faber (Swiss investment analyst) is saying the next crisis will be sovereign debt and he thinks it will particularly affect the “PIIGS”: Portugal, Ireland, Italy, Greece, and Spain. Watch this video of him talking about sovereign debt.

UPDATE: 8/1/10 seems the State is already screwing school districts – the state misses grant payments to all 871 Illinois school districts and leaves a $4.5 billion IOU for services from schools to homeless shelters.

UPDATE: 4/3/10 Federal Reserve Chairman, Ben Bernanke, warns that the United States could soon face a debt crisis like the one in Greece.

UPDATE: 10/3/2010 Financial Times opinion piece on how to handle the sovereign debt explosion.

Climate Change Fatigue: because some scientists behaved badly and emails suggesting that climate change data had been manipulated leaked on the Internet, 2010 will be a battleground for climate change. Public concern and belief in anthropogenic global warming is on the decline already.

A recent Pew Research Center poll (conducted in late 2009) showed that only 57% of Americans think there is solid scientific evidence to support the global warming thesis, compared with 71% in April, 2008. I know in my own area of Australia, a recent radio poll showed that two-thirds of people doubt climate change is caused by human activities.  This green fatigue will lead to confusion over what to believe and cynicism. There are mixed messages: we’re told that the planet is heating up yet we continue to see airplanes flying around, runways being built, coal being mined and so on. I think there will be mounting resistance to any form of “green taxes”.

But if the climate experts are right, in 2010 we’ll really start to see the planet heating up and wild weather patterns will increase.

China crashes or doesn’t. I’m hedging my bets on this as I’m not sure. I think China will continue to flex its muscles (as it did at Copenhagen) and might stop buying up American debt, which of course would plunge the US into crisis. Newsweek is predicting that the China stock and real-estate bubble will collapse, leading to a destabilizing bout of global deflation. I’m inclined to lean in this direction. Certainly, China seemed to navigate through the GFC storm easily, but there are a number of factors at play: property prices are forming a bubble; exports are weak (because the West, which is China’s major market, is curbing spending); the Chinese are dangerously overheating their economy by erecting cities (70 at last count) at a rapid rate; and they boast luxury stores and malls for which there is hardly any demand. So is there an illusion of progress? Is China more a paper tiger than a roaring dragon?

Jim Chanos (the short-seller who was the first to see that the accounting of Enron was dodgy) is saying that China will be “Dubai times 1000, or worse”. I think China is starting to look a lot like Japan in the late 1980s  – and we know how that turned out. So prediction is that China teeters.

Major food shortages. I’ve blogged many times about how I think the future will be one of water and food scarcity. I think we’ll really start to see things happening in 2010. A perfect storm is coming: there are continuing droughts; the world population is growing rapidly; there is a wheat fungus causing problems and there are crippling crop failures – when you put this all together, you get the frightening possibility that global food supplies will be in trouble. Let’s look at some examples, starting with Ug99. This is a wheat fungus (known as stem rust) that I’d never heard of until recently. But crop scientists fear this fungus could wipe out more than 80% of worldwide wheat crops. If the fungus spreads to the US (which is considered inevitable), US $10 billion worth of wheat would be wiped out. And the result would be a ” significant humanitarian crisis” according to Rick Ward, the coordinator of the Durable Rust Resistance in Wheat project at Cornell University in Ithaca, NY.

I think the lack of monsoons in India is also something to be concerned about. In 2009, India’s monsoon season was 29% below average from 1 June –11 August and caused drought in 278 of the country’s 626 districts, damaging crops of sugar cane, wheat, rice and oilseeds. India is an important producer of wheat (number 2 in the world) and it dominates the world’s rice harvest. What happens when there is no bumper wheat harvest in India? There is significant loss in yield, wheat quality is affected, prices go up and civil unrest occurs.

There are many more examples of global food supply concerns I could give you. Just read here and here to start. And make sure you read 2010 Food Crisis for Dummies and all the links in the article. It’s a comprehensive run-down of the crisis we’ll be facing and you will end up being as concerned as I am about global food supplies.

Obama.  IMHO 2009 was an unpromising year for Obama. And I think in 2010, his ratings will take a dive. Mind you, it’s already pretty low with an average 48-50% in the lead up to Christmas 2009 and it’s down 15 points since the start of 2009 (I think this is the worst third quarter decline in public approval ratings for any elected president since World War II). Heck, even Oprah’s ratings have taken a plunge since she openly supported Obama (known as the O2 effect).

Americans will start to blame Obama for worsening conditions in 2010 and Obama will no longer be able to blame Dubya. His approval ratings could sink to 40% or lower in 2010 as Americans (and the world) wonder what Obama actually stands for. His campaign and the massive movement that swept him into office was largely personality, not issues, based.  The Obama campaign raised such enormous hopes and in his first year of governing, the Prez has disappointed many. The bank and auto bailouts have been broadly unpopular during a time of significant unemployment. I don’t see him as decisive – look at how long his deliberations over Afghanistan have taken (a speech in March 2009 announced a new strategy but it was almost eight months later that he announced additional troops would be needed).

Americans have most likely felt betrayed by a Prez who has bailed out banks (close to $1 trillion and used to pay bonuses for senior executives) without demanding significant reforms; failed to close Guantanamo Bay; failed to withdraw US military forces from Iraq; failed to end the conflict in Afghanistan; stuffed up health care reform; and seems to have the same stance on Gaza as Dubya.

I think Americans will fret over the escalating national debt, continuing unemployment problems, Obama’s health-care reform and the decline of the US as the world’s only superpower (watch out for Brazil in 2010 – an economic powerhouse on the rise). And many will question the wisdom of expensive reform during a time of unprecedented economic distress. So prediction is – brand Obama takes a nose dive in 2010 as people realise he’s the consummate campaigner and a masterful orator but an inexperienced politician with an administration that is floundering. The actions sadly don’t match the rhetoric.

Really, I’m hoping I’m wrong and 2010 will be a rosy year but from all I’ve been reading, it’s a Nyet on that.