Cuts, leaks and atom smashing

By FT writers

Published: December 30 2010 20:17



Once again, a panoply of FT pundits have put their reputations on the line to divine what the new year will offer. They have a lot to live up to, after the success of last year’s commentators. Martin Wolf rightly predicted the eurozone would not let a member state default, Chris Giles backed the UK to avoid a double-dip recession – though the question remains apt – and Alan Beattie foresaw guerrilla warfare in trade.
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But voters proved less predictable. Clive Crook thought the Democrats would hold the US House of Representatives; Philip Stephens foretold an overall Conservative majority in the UK. Simon Kuper scored an own goal betting on Brazil for the World Cup. But we may have to wait until the stroke of midnight for the final reckoning on Clive Cookson’s prediction for 2010 – that this could turn out to be the hottest year in recorded history.

Rosie Blau
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Will the euro survive?
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Yes. Despite the rolling wave of crises in peripheral European countries, the will of members to keep the eurozone functioning has proved strong enough to prevent an outright default, let alone a departure from the currency union. It is probable that defaults will also be prevented in 2011. But, in the longer run, defaults – or, more precisely, debt restructurings – look inevitable, not least because that is what Germany wants to happen.


The big question is whether countries that have experienced a public sector default will be prepared to soldier on within the currency union. The costs of departure will certainly be lower in these dire circumstances. If, as seems plausible, the alternative is years of deflation and depression, some countries might choose to leave. But 2011 will not be the moment for that truth.


Meanwhile, the euro will surely survive, even in the long run, if in a diminished form, as a union among the economies that are able to live with Germany.

Martin Wolf


Will Europe allow a bank to fail?


Yes. In most European countries, bank balance sheets are riskier than public finances. In 2011 it will become increasingly clear that the greatest threat to sovereign solvency is the continued insistence that taxpayers will make bank creditors whole. So, the choice – and not just in the eurozone – is between propping up banks and keeping public finances afloat. Next year, Europeans will choose to save their states rather than their banks: 2011 will be the year not of sovereign defaults, but of haircuts for banks’ senior bondholders.

Martin Sandbu


Will China’s bubble burst?


There is no China bubble, so it cannot pop. Some parts of the economy – property prices in first-tier cities, for example – are a bit frothy, but the idea of a generalised bubble is folly. Surges in lending in 2009 and 2010 have helped to generate inflation in asset and food prices. Though serious, these will be controlled in 2011. Much lending has been put to productive uses – not excess. Rural China, with a population of 721m, is rising from relative economic obscurity into a genuine growth driver. A new cohort of 250m to 300m rural discretionary consumers has emerged. The result is not the writing on the wall for China’s boom, but the opening lines of a new chapter in the narrative.

James Kynge



Will Korea reunify?


No chance. Reunification is the most desirable outcome for the Korean peninsula, but the least likely – for now. Certainly the situation is volatile. Kim Jong-il has begun a potentially destabilising handover, and Pyongyang has become more aggressive. With things in flux, reunification should be more likely. But Seoul shows little appetite for this gargantuan undertaking. More important, China, which refuses to condemn Pyongyang, continues to back it economically. Beijing appears unwilling to accept the risks of a collapsed North Korea, nor the prospect of a united Korea hosting US troops. Reunification may happen one day. But not in 2011.

David Pilling


Will WikiLeaks retain its potency?


Yes, but it will no longer monopolise the market. Julian Assange’s fame has grown since his early revelations about Afghanistan and Iraq, but his reputation has been tainted by allegations of rape and WikiLeaks’ scattergun approach in releasing the US diplomatic cables.

Attempts to disrupt the operation have largely failed, while a stream of leaks continues to embarrass and intrigue. More will follow next year. WikiLeaks will soon face a greater challenge, however: competition from a growing number of copycat leak sites. Just as Napster pioneered music downloading but was soon surpassed, in the next year one of WikiLeaks’ imitators will overtake it.

James Crabtree



Will the US and its Nato allies start winning the war in Afghanistan?


Yes, events should begin to go Nato’s way. The US and its allies are pressing the Taliban in its heartlands. The Afghan army is growing in numbers and quality. Nato has the combat troops and numbers necessary for success.


Of course, problems lie ahead. The US will be more vigorous in demanding that Pakistan attack insurgents operating on its Afghan border. Allegations of corruption and abysmal governance will continue to plague President Hamid Karzai. Though there will be setbacks, allied troop casualties should be less alarming than in past years. Twelve months from now, Afghanistan will haunt western leaders a little less.

James Blitz



Will the Mubarak era end in Egypt?


Not if the Mubarak family has its way. Ailing Hosni Mubarak, Egypt’s ruler since 1981, has no intention of relinquishing his job, unless his health demands it.

But if he cannot run for re-election in 2011 his ambitious son Gamal may not be able to take over. The favourite of a young, economic reformist wing in the ruling National Democratic Party, Gamal faces resistance from a powerful old guard and the army may not accept him. If the elderly Mubarak is truly planning to install his son, he must engineer the succession in his lifetime. If he is gone, a figure with closer ties to the security establishment is likely to become president. The Mubarak era would then truly end.

Roula Khalaf



Will there be civil war in Sudan?


At any time conflict rages somewhere in Sudan. January’s long-awaited referendum on the independence of southern Sudan will inflame tensions, but will not lead to full blown civil war. Neither Khartoum nor the former southern rebels wants to reignite Africa’s longest civil war – they depend on each other to produce the oil that bankrolls both regimes. But if, as is likely, the south votes to secede, leaders will not be able to manage expectations or control armed affiliates. The emergence of the world’s newest state will be neither peaceful nor orderly.

William Wallis



Will social unrest worsen in Europe?


In all probability, yes. Across the European Union, governments are cutting spending and unemployment is rising. This month, violent protests erupted across Europe. The immediate cause varied, but economic austerity was the common backdrop. That climate of austerity is likely to worsen and spread in 2011, as Greece and Ireland press on with International Monetary Fund-backed cutback programmes – and Portugal, Spain and perhaps Italy and Belgium struggle to ward off sovereign debt crises. Cuts will also be the order of the day in Britain. Meanwhile, the unpopularity of President Nicolas Sarkozy in France and his allegedly “bling” style – plus the approach of a presidential election in 2012 – makes unrest probable. Europeans have demonstrated in the past (1848 and 1968 spring to mind), that an atmosphere of social disorder, protest and unrest can easily spread across the continent’s national boundaries.

Gideon Rachman



Should investors switch out of bonds into equities?


Yes. Picking assets, at least at the start of the year, will be about choosing the least worst option. Equities have risen a lot since their 2009 trough. Bonds have also enjoyed an impressive ride, although theirs arguably started earlier, in the 1980s. US Treasury yields have fallen from 16 per cent to 3 per cent over that period. But assuming – and it could be a big assumption – that western economies continue to recover, equities should do better than bonds, where yields could rise sharply.

Investors looking for yield may plump for dividend-rich stocks. A worsened eurozone debt crisis could knock the stuffing out of equities. In 2011, markets could also wake up to the fact that authorities are potentially just storing up problems for 2012 and beyond.

Richard Milne



Will bonuses shrink?


Yes – but not for the reasons politicians and taxpayers hope. The incentive pool from which investment bankers’ bonuses are paid will be down by about 20 per cent. That has little to do with self-restraint and a lot to do with a difficult 2010. The absolute amounts that top performers and senior executives receive will still be high enough to fuel a new round of popular anger. Politicians seem torn: having agreed austerity measures for the general population, they cannot endorse lavish pay in high finance. But while new rules are changing the structure of compensation – upfront cash bonuses and “guaranteed” incentives are out, “clawback” for poor performance is in – banks know regulators do not want to hobble London or New York as financial centres. That, and the threat of being accused of collusion, make unlikely any voluntary agreement to limit pay.

Andrew Hill



Will the currency wars go nuclear?


No, barring renewed global recession – but heavier ordenance may be wheeled into action. After several years when exchange-rate tension was largely a bilateral US-China affair, emerging markets across Asia and Latin America have joined the fray, complaining about their currencies being driven higher. But, rather than China taking all the blame for holding down the renminbi, the US drew at least as much flak for “quantitative easing” pushing down on the dollar.


A unified global campaign against China’s currency policy will continue to elude Washington. Instead, the US could finally carry through its long-standing threat to block Chinese imports on the grounds of currency misalignment. While Congress is angry, it is not ready to start a global trade war unless the economy worsens markedly. Any legislation that makes it to presidential signature will have been watered down. Meanwhile, experiments by countries such as Brazil, with restraining inflows of “hot money” are likely to be repeated. But, given their risks and limited effects, a wide-scale return to capital controls is highly unlikely.

Alan Beattie


Where will oil finish the year?


Looking at the oil markets today, the bulls are making the most noise. Oil demand is set to increase in 2011 – the International Energy Agency has lifted its estimate of global oil demand growth for 2010 to 2.3m barrels a day, the second-highest level in recent history. Stronger economic growth will help underpin that demand. Opec, however, will be under pressure to make sure prices do not go too high and may increase production. 2011 will be remembered as the year when oil prices tipped $100 a barrel – they are likely to finish the year around that level, plus or minus.

Sylvia Pfeifer



Will there be a global food crisis?


Yes. The global bill for food imports will surpass the $1,026bn record of 2008 and prices of several agricultural commodities will also top their previous record. The Food and Agriculture Organisation’s benchmark food index will also set a new high. Among key crops, wheat, corn, barley and oilseeds such as soyabean will see large increases; only rice will have limited gains.


Behind the spike is a string of supply problems related to bad weather. Demand is also strong, partly boosted by biofuel consumption. But there may be fewer food riots than in 2007-08: African crops have been abundant, shielding poor countries from the brunt of surging prices.

Javier Blas


Will I be seen naked in airports?

With luck, no. Contentious body scanners mushroomed after the “underpants bomber” tried to blow up a Detroit-bound jet last December. But US manufacturers say computers can now pinpoint suspicious objects – humans need no longer check scanner images. Some experts have their doubts, but manufacturers say the kit could be installed in 2011 – if the authorities clear it. Yet even this technology would not halt intrusive pat-downs for those wanting to avoid scanners.

Pilita Clark



Will Britain’s coalition collapse?


No. But things are about to get very rough for the Conservative-Liberal Democrat government. Though the coalition is likely to hold together, the same cannot be said with certainty about Nick Clegg’s Lib Dems. History has shown that the smaller party almost always fares badly when it joins Tory-led governments. The coming year may see history repeating itself. As spending cuts bite, Mr Clegg’s party may well bear the brunt of public anger. It has already lost support over student tuition fees while David Cameron, prime minister, has proved remarkably adept at keeping the Conservatives above the fray. Mr Clegg and his Lib Dem ministers have nowhere else to go. That is not to say the party is not in danger of fracturing – especially if a referendum on electoral reform sees the country rejecting Mr Clegg’s call for change.

Philip Stephens



Will the UK voting system change?


Probably not, though the coalition has promised a referendum. There is a palpable lack of public enthusiasm for this issue – it does not quicken the pulse of the electorate. Moving from first-past-the-post to the alternative vote system (which ranks voters’ preferences) feels like a watery change.

Unlike proportional representation – which is easy to grasp – the electoral impact is neither immediately apparent to voters nor readily explicable. AV also lacks powerful political advocates. Both big parties are blurry on the issue, while its biggest champions (and beneficiaries) – the Lib Dems – are sinking in the polls.


AV does not even get its own standalone referendum day – which might allow enthusiasts to carry the day on a minuscule turnout. Instead it will probably piggyback on May’s local and regional elections. Given this, it seems likely that indifference will win the day.

Jonathan Ford


Will we find the Higgs particle?


The Higgs boson, predicted but still unseen, is the most wanted subatomic particle. Scientists believe it underlies the most important property of matter – mass – and its discovery would help tie up several ideas about the laws of physics.


So the Higgs is target number one for the world’s most powerful atom smasher, the Large Hadron Collider at Cern near Geneva, which has been running at full tilt for a year.


But the world’s second most powerful accelerator, the Tevatron at Fermilab near Chicago, has a head start in collecting data for the Higgs hunt; it could just pip Cern to the prize. Between them, they should record enough collisions during 2011 either to detect the Higgs or to rule out its existence, which would blow the whole theoretical framework of physics wide open. I’ll go for detection.

Clive Cookson
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Copyright The Financial Times Limited 2010

OPINION

DECEMBER 30, 2010.

Home Prices Are Still Too High

They would have to decline another 20% just to get back to the historical trend line.

By PETER D. SCHIFF

Most economists concede that a lasting general recovery is unlikely without a recovery in the housing market. A marked increase in defaults and foreclosures from today's already elevated levels could produce losses that overwhelm banks and trigger another, deeper financial crisis. Study after study has shown that defaults go up when falling prices put mortgage holders "underwater." As a result, the trajectory of home prices has tremendous economic significance.


Earlier this year market observers breathed easier when national prices stabilized. But the "robo-signing"-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable. A longer-term view of home price trends should sharply magnify this fear.


Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized.


By all accounts, the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, and topped out in June 2006 was extraordinary. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year. As we know now, those gains had very little to do with market fundamentals, and everything to do with distortionary government policies that set off a national mania for real-estate wealth and a torrent of temporarily easy credit.

The American economy

Proceed with caution

America’s economy looks set for a good year. But investors should beware the treacherous path beyond 2011

Dec 29th 2010
from PRINT EDITION

THE American stockmarket enters 2011 in a jolly mood. In the past four months it has leapt by 20%, to heights last enjoyed when Lehman Brothers was a going concern. Investors are likely to cheer a second consecutive year of double-digit returns.

This partly reflects growth elsewhere: American companies make a third of their profits outside the United States. But the most recent spurt has been driven by a sharp change in the outlook at home. At the end of the summer Wall Street worried that growth was grinding to a halt. The Federal Reserve was running out of monetary ammunition. The incremental contribution of Barack Obama’s $814 billion stimulus had faded and a gridlocked Congress seemed incapable of supplying new support. Big business was rattled by Europe’s sovereign-debt crisis. Wall Street’s bears sniffed deflation.

What has changed? In part it is simply a underlying American economy case of the turning out to be stronger than pessimists imagined: consumer spending, business investment and job creation are all up lately. But policymakers have also done their bit. In November the Fed began a second round of “quantitative easing”—buying bonds with newly created money in order to push down long-term interest rates and stimulate lending. And in December Mr Obama and the Republicans agreed to extend George Bush’s tax cuts until the end of 2012 and to pump a further $300 billion into the economy in 2011 through a payroll-tax cut and other measures. The deal should spur growth; it also got rid of the (until then very real) danger of inadvertent fiscal tightening tipping the economy back into recession. That is the main reason why bond yields have risen with share prices.


Bolder investors are less willing to accept rock-bottom yields in return for safety.


This bipartisanship will bankrupt us


Put these things together, and the American economy could grow by nearly 4% in 2011: so Wall Street is right to be cheery on that score. But share prices are meant to be based on more than just the next 12 months’ earnings, and the medium term is as treacherous as ever; perhaps more so.


Start by noting that the recovery is subdued by historical standards. This is not because of high interest rates or frail business confidence, the sorts of things that a well-honed stimulus might quickly cure. Rather, households and banks are working off the excess debts of a reckless decade. Monetary and fiscal easing should make this less painful, but this deleveraging still has years to go.


There will be more weak patches like the summer of 2010, when investors’ joy may quickly turn to gloom.


Next, the new tax deal has made America’s long-term fiscal problems even more intractable. The payroll-tax cut may well not expire in a year’s time: it will be portrayed as a tax increase when unemployment is still high. But the real problem is the Bush tax cuts. Optimists hope that their expiry in 2012 will allow a grand bargain to be agreed before then: the lower tax rates could be kept in exchange for a plan to stabilise the federal debt as a share of GDP by closing loopholes and cutting spending. A good idea, but both Mr Obama and the Republicans are hellbent on fighting the next presidential election over the tax cuts (with Mr Obama keen to let the cuts for the richest Americans lapse). Neither side has much incentive to fix the problem before 2012 as part of a longer-term deal.


Much worse is what the deal says about the nature of bipartisanship in today’s Washington. The Republicans and Democrats merely agreed to each other’s huge giveaways. Real bipartisan budgeting must involve far more painful things —increases in taxes and cuts in entitlements. The politics of cutting health care and pensions is getting worse. In 2011 the first baby-boomers retire and the number of elderly voters will only grow (see article). The Republicans claim they are ready to reform Social Security and the tax system. A wise Mr Obama would call their bluff by presenting a plan for both in his budget. But don’t bet on it. The longer both sides drag their feet, the more likely a revolt in the bond market and a skint Treasury squeezing American businesses for cash.


Wall Street may be right about the economy in 2011. But the American government’s inability to sort out its finances in a credible way should unsettle investors everywhere.