1.22 AM Wednesday, 6 December 2023
  • City Fajr Shuruq Duhr Asr Magrib Isha
  • Dubai 05:28 06:47 12:13 15:10 17:33 18:51
06 December 2023

A catastrophe can derail recovery

By Martin Baker

This is going to be a watershed year. Forgive me if you're sick of predictions – and I am aware that 2010 is already under way – but I truly believe that this year is going to be one of those which shapes the future in a radical way for many years ahead.

This time last year, my predictions were for 12 months of consolidation and sideways trading. Come the end of the first quarter of 2009, it looked like I was wrong, at least as far as equities were concerned. But the world's markets rallied, and yielded a nice little turn – between three and 12 per cent, depending on which market and which currency you measure in. Here in London the FTSE 100 offered up around per cent, in sterling terms. I'm expecting a sideways, gently positive year, for most markets in 2010.

This brings me to currencies – an area where I got it oh so nearly perfectly right. I called for the euro to briefly have greater value than sterling, then fall back, and to increase in value against the dollar. Well, the euro came pretty close – with a cross-rate of 1.04 in Asian markets at one stage. That translated into a euro being more valuable than a pound if you were foolish or desperate enough to have to exchange notes in a hotel lobby (where the spreads, of course, are as wide as the Atlantic).

The euro has begun to slide back against the dollar and sterling, and this trend will continue in 2010. But here's the rub: I foresee the possibility of a major political crisis in Europe in 2010, followed by a really sharp run on the euro. The reason? The massive budgetary problems in euroland countries Ireland and Spain.

Here's what I envisage may occur. The essence of it is how these countries deal with what is essentially the same problem: cutting back their massive debts and trimming their budgets to fit in with the norms laid down by the European Central Bank – and the political forces that dominate it in Germany (and, to a lesser extent, France).

The Irish have instituted savage public spending cuts, and are suffering from their inability to manipulate interest rates (controlled in Frankfurt, of course) and deal with their inflationary problems that way. The Greeks are trying to institute similar measures, but the government is facing massive political unrest.

There are two possible solutions to these problems. Either the central banking authorities let the individual countries slide on the budgetary front, or in some way unlawfully subsidise their debt for reasons of political expediency. Or there's the Doomsday Scenario.

The Doomsday Scenario would be for the government or governments (far more possibly, the Greek administration) to have to default on its sovereign debt in the capital markets. That would precipitate a massive run on the euro. I'm confining myself to simple financial analysis here – but a hugely weakened euro, and a real crisis of confidence in euroland would have far wider political and economic consequences.

My concern – and I'm not being alarmist, merely adverting to a real and alarming possibility – is that the bottom might fall out of financial Europe, with potentially disastrous knock-on effects in a world that is as politically volatile as it's been in decades.

Which brings us to that great financial hedge, gold. I think I broadly got this one right, too. I've opined in this space on the merits and drawbacks of bullion a few times over the year. Gold hit the $1,000 (Dh3,673) mark in the middle of the year – though, after adjusting for inflation, it's still some 40 per cent of its "value high" when it reached $800 in 1980. I've reported on the rash of commercials I've seen round the world for gold-to-cash companies (they take your jewellery and melt it down, offering a cash rate that makes hotel lobby currency transactions look generous). I expect gold to hold its value through the year against all currencies. But if the Doomsday Scenario for the euro proves true, gold will soar against that currency. France, Belgium, Germany and Switzerland are still full of people who have seen their parents and grandparents hoarding gold as a hedge against the vicissitudes of economic crisis and even war.

I'm also pretty sure we're going to see some real fall-out from the world of the internet. People say that bankruptcy or insolvency occurs in two stages. You go broke very, very slowly, then very, very fast. The US author Malcolm Gladwell wrote very entertainingly on this theme in his best-selling book, The Tipping Point.

So here's what I expect to happen sometimes soon. It may occur in 2010, or it may be a little later, but occur it will: traditional media companies are going to die. Newspapers survived the first wave of the internet just over a decade ago. Even now, with vastly improved bandwidth, the paper product will be OK. But television and paid-for content (specifically moves and sport) are in real trouble. US investment bank Morgan Stanley produced a scary report on 2009. Teenage researchers looked at how teens consume media – and the results were grim indeed for movie producers, television and broadcast companies, and, ultimately, sports club owners.

It's all about consumption patterns. Young consumers watch movies and sports on their mobiles. And they can usually get the content they want for free, via some service provider based in a remote domain that the content producers cannot control. That means that very little will be able to be stored behind a "Pay Wall". Advertising, not sale or rental of content, will be the prime revenue streams. Those revenues will be smaller, too. The knock-on effects for movies and sports (notably the world's biggest sports brand, he English Premier League) will ultimately be catastrophic.

And finally, I revert to the topic of catastrophe itself. Last year I wrote that there was always the possibility of a super-terrorist attack on a city (a big, or dirty weapon attack, for example). Such an event would throw us into a world of darkness and unforeseeable consequences. I truly hope this never happens, but I see no signs of its likelihood abating.

And on that sombre note, I wish you all a happy and prosperous 2010. There's every chance it could be just that.

Martin Baker is a journalist, author and commentator on international business affairs


Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.