Tuesday, December 30, 2008

FROM 2008 TO 2009

For those of us who have made through it, 2008 might well be remembered for personal successes and achievements, but collectively it has certainly set the world back, at the very least in terms of its wealth, health, environment, security and stability. With the possible exception of scientific progress, the faith in linear historical developments has now been duly, albeit belatedly shattered.

This surely makes us wiser. Yet, by itself, this is not a reason to gloat. As Vernon Sanders Law once quipped: "Experience is a hard teacher because she gives the test first, the lesson afterward". And so, let us bid farewell to 2008 without nostalgic sobs. We may in future remember it as those inexplicably 'hard' teachers from schools. In other words, we will remember 2008 better than other years.

Below are THREE LISTS of various events which occurred in 2008 and, deservedly or not, may linger in our memory. I begin with (rather obvious) negative headlines. This is followed by my own very personal view of what was positive throughout 2008. The third list focuses on the absurdities whose copious supply the passing year ensured regardless of the latitude, longitude and season.

The following TWO LISTS shift emphasis to the uncertainty surrounding the upcoming 365 days. I first review the risks of varying impact and probability of occurrence. Finally, to end on a perhaps naively positive note, I outline my wishes for 2009. They range from perfectly possible to nonsensically dreamlike. But then, the beauty of these times is that we are still free to dream. And to blog freely about it.

2008 - THE BAD:
1. Financial crisis deepens (Societe Generale, Bear Stearns, AIG, Freddie and Fannie, Lehman, fund redemptions, Madoff scandal). Severe liquidity breakdown. Volatility at all-time high. Spreads rocket. Markets collapse.
2. Economic crisis begins: US, China, Japan, Europe, emerging markets are all affected. The immediate response stinks socialism, but not (yet) protectionism.
3. Russia invades Georgia
4. China destroys Tibet
5. Cyclone in Burma
6. The situation in Afghanistan worsens
7. Zimbabwe violence, false hopes and misery
8. Terrorist siege of Mumbai
9. Sichuan earthquake
10. Kenya tribal violence
11. Iran is building up its military capability
12. Crude oil at $147/b
13. Rice prices destabilize markets in West Africa and Southeast Asia
14. Irish referendum freezes Lisbon Treaty
15. Iceland collapses
16. Near defaults in Hungary, Argentina, Pakistan, Latvia, Bulgaria and South Korea
17. Sarah Palin’s neo-fascist harangues stigmatize the ‘bad people’
18. Israel attacks Gaza in response to Hamas’ provocations
19. Fighting resumes in eastern Congo
20. China poisons milk, and not only milk
21. Rioting becomes politics in Thailand
22. Youth riots in Greece
23. Somalia’s piracy proves a rare winner in the Year of Losers
24. Al Qaeda successfully destabilizes Pakistan
25. The Jeremiah Wright case raises questions about Obama’s judgment
26. Clinton as a Secretary of State raises such questions a notch further …
27. Governor affairs reveal the corrupt nature of US politics – from Spitzer to Blagojevich
28. China’s Communist-nationalist propaganda nauseates in “Olympic” sauce
29. Power crisis hits South Africa and China. Supply constraints fuel coal price boom.
30. Doha Development Round negotiations fail
31. Venezuelan nationalizations
32. Fascist upbringing for Russian youth intensifies
33. German politics loses its Right
34. Israeli politics loses its Left
35. Sectarian violence in Nigeria
36. Violent riots over alleged election fraud rock Mongolia
37. Typhoon in the Philippines
38. Hurricane in Haiti and Cuba
39. NATO fails to agree a Membership Action Plan to admit Georgia and Ukraine
40. Tensions in the Turkish and Iraqi Kurdistan pit Ankara against PKK’s positions
41. Maoist Sendero Luminoso reappears in remote regions of Peru
42. Polar bears on endangered species list
43. Saddening departures: Edmund Hillary, Mahmoud Darwish, Bobby Fisher, Harold Pinter, Sydney Pollack, Robert Rauschenberg, Alexandr Solzhenytsin, Paul Newman, Hector Zazou and Lars Hollmer

2008 - THE GOOD:
1. Obama won !!!!!
2. After 13 years on the run, Radovan Karadzic is caught in Belgrade
3. Ingrid Betancourt freed in Colombia shortly after Bogota hobbled FARC’s operational capability in Ecuador
4. Iraq’s (tentative) improvements in State building
5. Some Olympic glory (mostly Jamaican and in the fish-swimming events)
6. Pervez Musharraf bows out in Pakistan
7. Doha compromise averts further bloodshed in Lebanon
8. Constitutional crisis in Turkey avoided when the Court rejects a call to ban AKP
9. Kosovo declared independent
10. The Dalai Lama meets with Bush and with Sarkozy
11. The President of Sudan Omar al-Bashir indicted by the International Criminal Court
12. John McCain’s concession speech
13.The founding of COPE promises the creation a viable (?) opposition in South Africa
14. The Pope blasts pedophile priests during his trip to the US
15. Liberia’s Charles Taylor is put on trial at the Special Court for Sierra Leone and Rwanda’s Theoneste Bagosora is condemned to life imprisonment by the International Criminal Court for Rwanda
16. Gordon Brown thrives in crisis: not a bad performance at all…
17. After 40 years, Spain wins Euro soccer
18. Relative peace in the Taiwan Straits
19. Nambu, Kobayashi and Masukawa receive Nobel Prize in physics for their work on asymmetry
20. Particle accelerators at CERN are now ready to tell us more about it all…

THE ABSURDITIES OF 2008 (almost funny, except, they were true):
1. Private jets bring CEO beggars from Detroit to Capitol Hill
2. Greenspan spits it out: “I was wrong”
3. From London to Paris to Seoul, the Olympic torch “tour” of shame
4. “President” Dmitry Medvedev learns to walk
5. Sarah Palin’s family (was it Piper, Steeler, Rodder and Plater?) can see far from their window
6. Carla Bruni-Sarkozy mania towers over her husband’s high heels
7. Chinese sports fans “forgive” athlete star Liu Xiang for his failure to run 110m hurdle heat
8. Russian war games in the Caribbean (oh, phleeeze!)
9. Hillary Clinton’s tears in New Hampshire save her campaign (for a while). Then the poor woman suffers from Bosnian amnesia, probably caused by sniper fire.
10. Two Russian sumo wrestlers are banned for life by Japan’s Sumo Association for smoking marijuana. What were they thinking? That it would help them regain slim looks?
11. Joe the Plumber almost wins the US presidential ‘debate’, but in the process he inadvertently turns the 1.5% Americans who make $250’000 or more, into a “middle class”
12. Eureka! Eggheads at National Bureau of Economic Research take a year to recognize that US economy has been in recession.
13. Chinese children pose as ‘adults’ in gymnastic events (not enough baby formula perhaps?)
14. Forecasters’ demise. At the beginning of the year, Goldman Sachs made its 12-month predictions: crude oil at $105 per barrel (it is $38/b), natural gas near $11/mmbtu (it is $5.8), gold falling to $750/oz (instead it went up to $869/oz), Korean Won at 900 to the dollar (it is at 1260)…and the Fed Funds rates were supposed to be at 4% (it’s 0.25%)…
15. 40 years after USSR, China sends a manned rocket for a space walk
16. Helicopter Ben in action. US prints $7.6 trillion in bailout money during the first 11 months of the year. The combined debt is now apparently at $67 trillion.
17. Hugo Chavez sings on TV (and then sends troops to the border with Colombia)
18. It snows, so China can’t go on holiday. The Olympics is over, but China forgets to come back from the holiday.
19. Nearly thirteen centuries after Vikings established the first Russian state, Russia offers to “buy” Iceland (like you buy an aircraft carrier)
20. Rudi Giuliani’s presidential “campaign” founders in Miami. Thumbs down, but no one is thrown to the alligators.
21. North Korean nuclear “negotiations”: now you see it, now you don’t
22. Castro dynasty holds on in Cuba (sign of change: people are allowed to buy cellphones)
23. Hollywood strike saddens the nation, but somehow no one rushes with handouts
24. Education in action. Kindergarten kids in California are asked to pledge never to use anti-LGBT (lesbian, gay, bisexual and transgender) slurs…
25. At the peak of the market in June, famed pundits from Jim Rogers to Don Coxe hail commodity investments and launch new products. But they are young enough to be in it “for the long run”.
26. Mr McCain goes to Washington (to save us from the economic crisis). We are relieved.
27. Silvio Berlusconi is back (no grey hair here)
28. John Edwards’ campaign-financed lovemaking fails to ruffle his hairstyle
29. Having scrapped onboard service, punctuality and courtesy, some US airlines now charge for checked-in luggage, a cup of tea and a glass of water. Lavatory use and pillows will be next.
30. Russia recognizes South Ossetia as “independent”. North Ossetia remains ‘part of Russia’.
31. Paulson’s summertime tale: ‘sorry, children, no shorting allowed now’
32. Anglican Church faces a schism. The world holds its breath.
33. Food fascism invades US schools: a child in Connecticut is suspended for buying a candy bar
34. Oprah Winfrey can’t lose weight and Madonna lives sexless life for six long months…
35. Surprise: O.J. Simpson is a bad man. No SUV chases this time due to political incorrectness of the vehicle.

2009 - THE RISKS:
1. The world plunges into global deflation, hobbling both the deleveraging private sector and the re-leveraging public sector. Oil hits $20 per barrel.
2. Competitive currency devaluations
3. Social instability in China redirects the regime to nationalist adventurism abroad
4. Hillary Clinton derails Obama’s agenda
5. Al Qaeda’s operatives in Algeria and Morocco mount a terrorist offensive in Europe
6. Iran gets the Bomb
7. Israel strikes Iran. Iran retaliates. US navy presence in Hormuz strengthens radicals in Tehran.
8. Impoverishment in China triggers another wave of Avian flu
9. Financial deleveraging and precautionary hoarding of capital continues apace
10. Czech Republic’s Vaclav Klaus chairs EU and derails whatever European cooperation there still is
11. Benjamin Netanyahu wins elections in Israel but depends on Mosche Feiglin’s support
12. Felipe Calderon loses the war on drugs in Mexico
13. Obama’s administration taxes capital, and in a chilling reminder of the 1930 Smooth-Hawley act moves to “protect American jobs” from international competition.
14. Trade financing collapses, leaving strained value chains and empty shelves
15. Hamas does what Hezbollah did in 2006, i.e. strengthens radicals after another Israeli military failure
16. In the wake of the above, Egypt falls into chaos, fuelled by Muslim Brotherhood’s radicalization. Amr Khaled’s televangelism loses audience.
17. Major Internet glitch
18. Al Qaeda wins control in the tribal areas of Pakistan
19. Zulus and Xhosas resort to violent means in the fight for political spoils and sinecures in South Africa
20. India intervenes against ‘terrorist camps’ in Pakistan
21. Russia cuts off gas to Ukraine and Europe
22. From US to France to Slovakia to Russia, global automotive industry dies out, rising jobless rates by millions
23. Collapse of $54 trillion market in credit default swaps
24. Global protectionism kicks in (no trade financing, non-tariff barriers, NAFTA moribund, WTO defanged)
25. Global capital expenditure fails to respond to stimulus. Lack of upstream investment lays the foundations for future hyperinflation.
26. Peer Steinbruck wins elections in Germany and allows Russia to reclaim proxy influence in the Baltic Countries
27. Canada disintegrates
28. Bolivia fractures in a violent manner. Santa Cruz struggles to have its independence recognized internationally.
29. Failure to reform “mark-to-market” rules further undermines confidence in the market
30. The Dalai Lama dies, opening the way to overt (and bloody) independence struggle in Tibet
31. Kim Jong Il dies and leaves unstable vacuum of power in North Korea
32. Western military intervention in Darfur fails
33. Warren Buffett proves to be yet another scam…
34. Populist politicking in US kills a proposal to declare a holiday on payroll tax
35. Cash-strapped local governments raise taxes, offsetting national stimuli…
36. Kosovar mafia and Salvadorian maras shake transatlantic hands after yet another year of rising crime rates

1. Osama bin Laden and Ayman Al-Zawahiri are captured and tried for their crimes
2. Major breakthrough in combating cancer (through stem cell research?)
3. International financial and economic cooperation is made possible under Obama/Volcker leadership. Counterparty confidence returns and usable collateral reappears in the market. Interbank funding conditions improve.
4. Nicolas Hayek’s companies in Jura accelerate successful commercialization of a fast electric car
5. Low sunspot activity delays climate change and helps extend glaciers
6. A public exchange for credit derivatives is inaugurated with success
7. Russia runs out of foreign reserves due to its ill-conceived defense of the ruble in the environment of low oil prices. Brave Russians bring the end to the decade of Putinism.
8. Governor Bobby Jindal rises to lead the Republicans. The influence of social conservatives marginalized.
9. Mohammad Khatami runs against Mahmoud Ahmadinejad in Iranian elections and wins
10. Zhang Qingli, Secretary of Communist Party of China in Tibet is put on trial at the International Criminal Court
11. The Fed prints even more dollars and when the bond yields rocket, it buys them back, keeping interest rates low and transferring the wealth from creditors to debtors. In the process, inflation cuts down the debt burden and a weakening dollar radically reduces the value of foreign reserves accumulated during the preceding decade thanks to the mercantilist policies of oil producers and China.
12. Gold protects investors exposed to weakening dollar
13. Global airline industry consolidates into a binary market: low cost and high-end, killing hapless US airlines (and ‘rude hostess’ jobs) in the process
14. The Amazon forest conservation system brings first territorial gains in Brazil. Indonesian officials are invited to study the progress.
15. Dick Cheney, former Vice-President of the United States is accused of, and tried for maintaining links with Halliburton while in public office in 2003
16. In a breakthrough initiative, US induces Israel to abandon illegal settlements in the West Bank. A viable Palestinian state is made possible.
17. Israel gives back Golan Heights. Syria becomes a US ally.
18. EU boosts its defense capabilities and cooperation with NATO, with positive impact on the military engagement in Afghanistan and Darfur
19. Further development of the global market in liquefied natural gas (LNG) and EU investments in Central Asia begin to wean Europe of its dependence on Gazprom
20. Further opening of arable land to cross-border investment in agriculture
21. Governments revitalize corporate credit markets
22. Taiwanese hi-tech companies revolutionize touch screen technology, ushering in a new era in notebook development
23. After international navy forces squash the pirates, the former Somalia is officially divided into three states (Somaliland, Somalia, Puntland) in an international conference which also solves Maakhir and Northland issues
24. Germany, Brazil, India and Japan become permanent members of the UN Security Council and begin to reform the organization
25. A modern, multiracial bi-party system is born in South Africa, with COPE building a strong opposition to ANC. Cyril Ramaphosa returns to politics.
26. Supported by international forces, Kinshasa finally cracks down on Interehamwe’s forces. Rwanda’s security is safeguarded and Laurent Nkunda neutralized.
27. Robert Mugabe dies. Structured international assistance helps Zimbabweans rebuild their country
28. Belarus opens up to the West and sucks in investment, offering high rates of return
29. A new technology is developed to denitrify waters contaminated by overferilization
30. Commodity prices stabilize. Saudi Arabia manages to protect the markets from high volatility in oil prices.
31. Serbia swaps the Kosovo emotionalism for EU membership. Hardline nationalists marginalized.
32. Venezuela’s Chavismo turns less rhetorically virulent and more pragmatic, avoiding clashes with Obama’s administration
33. Beijing redirects defense, navy and 'star wars' funds to education and health care reform
34. Music sharing via internet remains free
35. FARC signs an unconditional peace agreement in Bogota. End to decades-long civil war opens up Colombia to investment and tourism.
36. End to the Yushchenko/Tymoshenko political feud in Ukraine helps stabilize the economy
37. Greek government chills out: less anti-Macedonian rhetoric, more labor market reforms
38. Guinea (Conakry) escapes violence in its transition to democracy
39. Good monsoon relieves pressure on agricultural economies of South Asia
40. A post for an infrastructure Czar is created in the White House, helping to channel stimulus funds without subcommittee filibuster
41. US and Germany regulators abandon plans to destabilize the “banking secret” rules in Switzerland
42. A power-sharing deal ends the political stalemate in Thailand
43. Guantanamo Bay detention centers closed
44. With little export dependence and much interest rate firepower, Indonesia joins Brazil to emerge as the most defensive emerging market anchor for global investment
45. Roger Federer beats Pete Sampras’s grand slam record
46. Due to rising populations, polar bears, tigers, snow leopards, black rhinos and Iberian lynxes are taken off the endangered species list
47. China and Iran abolish death penalty
48. Justice and peace in Burma, Xinjiang, Kashmir, Pakistan, Darfur, Afghanistan, Kurdistan, Kivu, Palestine, Abkhazia, Ossetia, Chechnya, Niger Delta, Ogaden, Eritrea, Cote d’Ivoire, Sri Lanka, Northern Uganda, Michoacan, Mindanao, Dagestan, Fiji, PNG’s Highlands, Bougainville, Tibet, Mauritania, Southern Thailand, Crimea, Nagorno Karabakh, Corse and the Basque Country.
49. Atlantis is re-discovered. Religious zealots and fundamentalists of Evangelical, Sunni, Shiite, Judaist and Hindutva ilk are all relocated to live there in their own, pure way.

Postjudice wishes you all the very best for 2009.

Sunday, December 7, 2008


Over the last several weeks, the focus of the market has shifted from ‘financial crisis’ to ‘global economic crisis’. The surplus savings economies that were supposed to bail us all out have exposed structural weaknesses of their own. For years, the petro-economies and mercantilist Asia plunked their savings in the supposed safety of US Treasuries. This investment inertia has not only led to the relative atrophy of these immature economies’ own capital markets (as a percentage of their GDP), but also crippled any development of their risk management capabilities. If the investment in US Treasuries was, by definition, riskless, then why bother assessing uncertainty of other investments? Risk aversion and paucity of other investment options have now resulted in a new bubble –in cash (mostly US dollar and the Yen) and in US Treasuries, which, at the time of writing yield barely 2.56% on a 10-year note.

When the fabled sovereign wealth funds and other pools of capital were eventually deployed into the Western assets in the late 2007, the subsequent losses proved to be politically unacceptable. Not surprisingly, the massive reserves accumulated by mercantilist China will now most likely be deployed to re-nationalize domestic assets where personal connections allow for building trust networks, an age-old bulwark against risk.

The unfortunate corollary of this collapse in trust is that it not only prevents any rebalancing between the external surplus economies and the external deficit economies, but that it could lead to the collapse of the trading system as we have known it.

Since early in this decade, the global trade flourished even if no new trade liberalization round has been achieved. The integration of China into WTO in 2001 was a major step boosting the trade flows. After the move to re-industrialize its economy (2003-2004), China’s trade links to other emerging markets allowed many smaller economies to flourish. On a net basis, the losers were small textile producers. The winners were commodity exporters.

The commodity imports were, next to craved foreign technology, the only form of large scale imports condoned by China’s mercantilist rulers. Instead of growing internal demand and a balance external accounts, China developed an economic system favoring massive exports based, as it was commonly believed, on cheap labor and undervalued currency. But there was a third factor in this extraordinary export boom. For centuries, China’s economy stagnated because of trust deficiency outside of family networks. The clans were broad-based and often spread their merchant tentacles around island South-East Asia. But further out, in the wild, threatening world of non-kin, plagued by greed and exploitation, you could only purchase something if you paid for this up front. Now, this is exactly what most of us do in Carrefours, Walmarts and Ito Yokados if we decide not to pay with a credit card. But it is different in long distance, long term trade. The British excelled early on in global trade networks because of extraordinary expansion of a reliable merchant credit and credit insurance system. Letters of credit (LOC) were introduced by the banking system to facilitate the flow of goods and ensure the eventual payment.

As China slowly integrated into the world economy, the letter of credit system appeared also in its dealings with overseas trade partners. Buyers’ banks would issue an LOC to the seller, whose own bank would subsequently discount it. The growth was extraordinary. By 2007, almost 70% of China’s exports were financed with LOCs, leaving a smaller percentage to government-led insurance discounting, as well as traditional up-front payments and down payments. Two-point factoring, another form of international trade financing did not expand as fast in China as this system may easily fall victim to a fraud.

On the import side, so vital for supplying China with raw materials, letters of credit were practically the only avenue for trade financing. It is in the current collapse of China’s LOC system that we should see the roots of the devastating, deeply deflationary, catastrophic slump in most commodity prices. It is devastating and catastrophic because unknown in its depth and extension, or so we hear from Australia’s largest company whose ships full of bulk materials float aimlessly in search of an eventual buyer.

Throughout China’s boom years, Beijing failed to develop alternatives to the LOC system, which are necessary to keep the trade flowing during periods of credit stress. Factoring could have been one way to deal with the issue. It is astounding that in an economy of 1.3 billion people, the Chinese government issued only two import factoring licenses over the last 30 years. Even worse - the lack of proper reform of the credit system in China means that exporters into China cannot properly assess credit worthiness of the buyers. 30 years since the opening of China’s economy there still is NO proper credit system in place which would allow you to track information about the buyers, regulate disputes and collect insurance! You do not know who you deal with through proper credit assessment (and risk assessment). You ‘know’ it by holding lengthy, MSG-sprinkled dinners in one of Chinese restaurants. We are back to the limited circle of trust, and away from the modern, albeit never infallible, credit system.

This stunning revelation is coming to our attention only now, when Chinese importers default on ‘long-term’ contracts or disappear into the thin air. Chinese banks are equally fearful of discounting letters of credit for the country’s exporters. This is risk management in the form of risk aversion. Chinese banks do not trust their counterparties overseas, fearing massive bank failures and complicated recourse procedures. Although fear has gripped many corners of the global credit market since September, no single trade financing institution has collapsed as yet. Chinese banks’ risk aversion is, therefore, a self-fulfilling prophecy leading to the ultimate collapse of the trade links. Only yesterday did we hear that the world’s largest container producer, based in Shenzhen, had stopped production since October due to lack of demand. And although it should be expected that the government intervenes in export promotion through more wide-ranging use of insurance discounting, for now many Chinese exporters require up-front payments from overseas importers, which is highly damaging to these partners’ working capital. At a time when equity and credit markets send a deflationary signal that “cash is king”, parting with your current assets to secure imports is a finite solution at best. And after that? Empty shelves at Walmart?

All the hopes that the global crisis will concentrate the minds around a global solution have now been dashed. Mr Wang Qishan and Mr Medvedev are barking at Washington, faulting the US economy’s recession not only for their fast evaporating riches, but also for undermining the very basis of their power, this implicit pact with the local populations that a quest for freedoms is but a secondary, and easily dismissed footnote under the universal desire to live in opulence. Russia’s rapid impoverishment is unprecedented. Within only two months the country which last summer postured with military swagger has lost a staggering $123bn of reserves trying to shore up the rouble, an effort eventually abandoned. China’s growl is even more ominous. Beijing angered EU by executing an Austrian citizen’s father for allegedly ‘spying for Taiwan’ (read: revealing secrets about Chinese leaders’ health). In a huff, China has now also called off a high level summit with European Union after President Sarkozy agreed to meet with the Dalai Lama. Beijing had recently rejected Tibetan envoys’ proposals for regional autonomy (which is enshrined in PRC’s constitution). Yes, the Communists intend to run Tibet’s allegedly ‘Autonomous Region’ directly from Beijing, in a blatant breach of their own constitution. But the economic collapse and 70m unemployed Chinese workers (and counting) are clearly making Beijing fearful, increasingly angry and paranoiac. The country has cornered itself into overdependence on US Treasuries’ performance, but this is only the latest bubble of many that formed over the last 15 years. Since the dollar bottomed in mid-July, yields on 10 year Treasuries have fallen 21%. This is exactly equivalent to gain in US dollar index. This rally, and an even stronger appreciation in the Yen would mean that the world bracing for a deep deflation. Yet, at the same time, in dollar terms, gold has lost only 21% since that mid-July anchor. This means that the yellow has stayed flat in constant dollars. And gold-buying is a sign of inflationary insurance further down the line, which could be brutal when the velocity of money picks up again and the Fed will rue the extraordinary expansion of its balance sheet from $100bn in September to $750bn sixty days later…

The thesis of a very sharp inflation following the impending deflationary spiral is increasingly being hushed about. Someone calculated that, at $7.5 trillion of new bailout money, a stack of $1000 bills would build a tower 760 miles high….

Meanwhile no concomitant expansion has taken place in gold, or indeed in other commodities. There is no doubt in my mind that dollar-denominated assets will again, as they did in the late 1970s, overshoot on the upside, powered not only by this extraordinary expansion in liquidity, but also by the unprecedented contraction in capital expenditure and new project development. The combined effects of collapsing demand, declining corporate profits and surging corporate bond spreads leads not only to shutdown of marginal production, but to outright destruction of future productive capacity. Already, OPEC is warning that the current oil prices are discouraging investment into new capacity. As the Russian oil production ebbs away from the next year on, significant capacity constraints may hit again in the upcycle, even before the global transportation eventually weans itself of its overdependence on diesel, gasoline, jet fuel and bunker fuel. In the mining industry, an estimated $200bn worth of capital expenditure has been taken off the table for the next 4 years. Essentially, the miners are telling China: “you do not want our stuff? Well, you won’t get it when you need it”. Mothballed projects, closed smelters, silent refineries, cold blast furnaces and idle berths do not augur well for the global economy in 2009. But when the tide turns, there will not be enough “stuff” to satisfy the reinvigorated global demand. The investment cycle has been quick to drop to near-zero levels. It will eventually come back, but with a lag. And when it does, brace for mass inflation and high interest rates. But in the meantime, pity Greek shippers.

So are we all going for a long vacation, nesting at home with a new Wii? Maybe not. There are pockets of capital and pockets of activity. Very few people made money in the highly volatile 2008. But there are those whose activity was never too fond of cycles and volatility. Family estates and private operators will pick up listed assets on the cheap. Cash-heavy Japanese trading companies will expand again just as their more market-sensitive competitors need to protect their balance sheets and shrink their portfolios. Drug cartels will thrive in the economic slump and benefit from increased crime rates. What was boring and unexciting in the boom may turn out to be highly rewarding and promising in the slump. And whoever can properly time a ‘long oil, short US Treasury’ trade will be celebrated as the brightest man on the planet.

But there is also a danger. A danger of such a deep socio-economic dislocation that the world re-emerging from this recession could be radically different from the world of allegedly benign ‘global imbalances’. Thai middle class’s anti-democratic street activism could set a dangerous precedent whereby privileged elites fail to take responsibility for the welfare, education and social advancement of other social groups which happen to share the confines of the same international borders. This indifference and latent antagonism, common to many fast growing economies, may, in economic slump, turn into open hostility. It could pit city vs countryside, as it does in Thailand. But it could pit religion vs religion. Majority vs ethnic minority. Nationals vs foreigners. Our nation vs that wicked neighbor. Scapegoating could easily gain traction among vast numbers of unemployed, young and increasingly angry males. And if they do not have enough money to get married or to pay for sex, their anger may boil over. Watch out for skilled demagogues harnessing that frustrated energy.

Fault-finding, angry talk and competitive currency depreciations by Moscow and Beijing will not help resolve this crisis. Rebalancing global demand patterns, on the other hand, would. There are, alas, no global institutions that could constitute a suitable forum for such a solution. Integrating the superficially capitalist economies into the global trade and investment network worked wonders in the boom. It can pin us down to the bottom in the recession. This morning we received data on China’s electricity production. It fell 7% year on year. China is really shrinking. The world should shudder.