Right now, nothing is more boring than the market. It seems up, up, up is the only way it can slowly go, but for the April 7 minor blip.
But serious crises loom on the radar, many that could send the markets into chaos as traders try to gauge reaction around the world.
By our judgment, some seem far more likely than others.
Sovereign Debt Crisis: Japan Collapse
Image: Vitaliy N. Katsenelson
Threat: Japan’s sovereign debt levels are far higher than any other major economy. If investors, included domestic, were to become disinterested in buying Japanese debt, the country would have trouble rolling over its current accounts.
Impact: Japan is the world’s second largest economy. A debt default would crush confidence in many of the country’s key corporations ability to deliver products to market, as the yen comes under further speculative pressure.
Likelihood: Extremely low, the world and domestic Japanese investors have shown an appetite for the country’s debt. The event could become more likely, if other countries experienced similar defaults.
Sovereign Debt Crises: U.S. Debt Collapse
Threat: The U.S. government has had to take on unprecedented amounts of debt as a result of the financial bailouts, wars in Iraq and Afghanistan, and stimulus packages. That debt has now piled up to the point where foreign investors may lose confidence in the American government’s ability to fund itself.
Impact: Foreign investors start to pull cash out of American coffers. The government is unable to find buyers for its debt. Treasury yields spike and the crisis becomes worse, culminating in high inflation as the government seeks to pay off debt.
Likelihood: Extremely low, foreign countries (China and Japan) rely too much on the American consumer to be able to withdrawal from the U.S. debt market. Demand will remain for U.S. debt.
Real War: North Korea-South Korea
Threat: A war between North Korea and South Korea has been on the cards since the two countries ceased hostilities. Recently, a minor crisis erupted on the peninsula when a South Korean ship was sunk by what was first believed to be a North Korean torpedo.
Impact: War on the Korean Peninsula would bring the U.S. into the conflict, as it has troops in the border area demilitarized zone and is required by pact to the defend the south if it is attacked. China is considered an ally of North Korea, and would likely provide some form of assistance to the country if a conflict erupted. This could lead to a broader U.S.-China war or, at least, a rise in economic hostilities between the two nations.
Likelihood: Extremely low, the U.S. and China will do everything in their mutual powers to prevent the two from entering war, as both are better served by peace on the peninsula, China for its economic growth to continue, and the U.S. because it is already overextended in Iraq and Afghanistan.
Sovereign Debt Crisis: The Collapse Of The Euro
Image: AP
Threat: The European common currency ceases to exist as countries return to their individual currencies as a response to euro devaluation and sovereign debt crises.
Impact: European financial markets in chaos as states pursue a go it alone approach. Significant defeat for the common market. Trade between European states declines.
Likelihood: Very low, the euro is now a part of Europe for the long term. It is likely that Europe become more federal, not less, as a result of the sovereign debt crises impacting Greece and other PIIGS.
Economic War: China-U.S.
Threat: The United States government, upset over the way that China manipulates currency markets, responds with further protectionist measures against the Chinese economy.
Impact: Tariffs on Chinese products imported to the U.S. increase, China responds in kind to U.S. provocations, and trade between the two countries decreases. Being the world’s two leading economies, global growth slows, and markets head lower.
Likelihood: Very low, as U.S. Treasury Secretary Geithner has recently taken a more hand off approach to Chinese movements on the currency, and China has responded by working with the U.S..
Failed War: The Collapse Of Iraq
Threat: In post election violence, Iraq continues to disintegrate.
Impact: Iraq’s chaos allows Iran to spread its influence over the Shia portion of the state, broadening its power in the region, and endangering Gulf allies of the U.S. like Kuwait, Saudi Arabia, and Qatar. Oil markets react negatively, broadening the chance of a price spike, which could have a catastrophic impact on the entire market.
Likelihood: Low, Iraq has shown strength in dealing with internal terrorism as the government’s grip on the state expands.
State Debt Crises: States Default On Their Debt
Threat: Many states in the U.S. are currently experiencing budget crises based on extremely high deficits, debt, and off balance sheet liabilities. In the midst of an unemployment crisis, many states may be unable to make payments and could default on their debt.
Impact: The impact would be the U.S. Federal government stepping in for those liabilities. If multiple states defaulted simultaneously, the result would be a heavy burden shifted the the federal government, and further questions about U.S. sovereign debt.
Likelihood: Low, and if it was to occur, the federal government would likely fund the gap. The impact would be felt most in the state itself, which would likely have to cut spending from key services.
Terrorism: Strike In The Strait Of Malacca
Image: www.personanavalpress.co.uk
Threat: The Strait of Malacca is a key shipping route for almost every global product. Threats of terrorism have become common, and are linked towards Islamic radicals and Al-Qaeda elements in the region.
Impact: A terrorist attack here would push the price of commodities upward, as key Asian economies like China and Japan rely on the Strait for shipping deliveries. This would spiral into global price rises, due to shipping being impacted.
Likelihood: Low, an attack here the size to halt the shipping route would have to be something that would push insurance premiums so high, that shipping became cost ineffective. It would take several, not a single attack, to achieve this.
Real War: Israel-Iran
Threat: Israel, concerned over Iran’s nuclear weapons program, decides to target the state and its facilities. Iran retaliates targeting Israel and perhaps U.S. troops in Iraq, in an escalation of the conflict.
Impact: Oil movements out of the region become more difficult, as ports are used for war shipments and tied up in the conflict. The war could spread to take in large parts of the region, particularly if Israel breaches Jordanian or Syrian airspace to attack Iran.
Likelihood: Moderate, the U.S. government is doing everything to tie the hands of hawkish Israeli Prime Minister Netanyahu, but he may still act if his information suggests that Iran is close to finishing a nuke. This is an existential crisis for the state of Israel, and so it will be an extremely harsh assault if it is to occur.
Failed War: U.S. Loss In Afghanistan
Threat: U.S. forces fail in their attempts to stabilize Afghanistan. The country moves towards further instability, and influence on the state is shared between Iran and Al Qaeda forces in the Waziristan province of Pakistan.
Impact: The U.S. would have lost a major bulwark in the presumed containment strategy on China. Simultaneously, faith in the U.S. government’s ability to back up its word in war would be undermined, which may suggest to other Asian states, like India and Pakistan, that they seek security backing elsewhere. Oil prices would rise as a result of the uncertainty.
Likelihood: Moderate, President Karzai is already doubting the power of the U.S. in Afghanistan, and considering switching sides to Al Qaeda. President Obama has planned a withdrawal from the country.
Terrorism: Strike In The Strait Of Hormuz
Threat: Similar to the Strait of Malacca, Hormuz is a vital trade route for outgoing oil and gas shipments. Iranian government interests or Al-Qaeda could move to attack the strait and halt trade.
Impact: This would impact oil prices greatly, as Iraqi, Kuwaiti, and Qatari energy products would have trouble reaching American and other markets. Depending on who conducted the attacks, the response could bring the whole region into uncertainty.
Likelihood: Moderate, there are two sources of attack here, Al Qaeda and Iran, which raises the likelihood. Iran, however, must be aware that such a move would provoke the U.S., as its allies Saudi Arabia, Qatar, the UAE, and Iraq would be impacted.
Real War: Russia In The Caucasus
Threat: The attack by Chechen rebels on Moscow last week brought out the heavy handed rhetoric from the Kremlin, with intentions to strike the region clearly stated. A Russian response would have no care for human rights.
Impact: Oil and gas production in places like Georgia might be hit by Russian ordnance or stopped for safety. Foreign countries would condemn the Russian regime, broadening its isolation. Russia may be so ostracized that it refuses to support Iranian sanctions.
Likelihood: High, Russia is going to respond to these attacks. The manner in which it responds is in question, but it is likely to be met with EU and U.S. opposition.
Real Estate: Housing Market Double Dips
Image: AP
Threat: Housing markets, after the withdrawal of federal aid, weaken and produce a second nationwide double dip. Many areas are already experiencing such price weakening.
Impact: Further price weakening would hit construction industries hard, as current available homes would not be sold. Linked industries would also be hammered, with mortgage lending companies hurt even harder than they already have been. The impact on the mortgage backed security market would likely hurt banks, both regional and national, and create more failures.
Likelihood: High, housing guru Robert Shiller has set the chances of this scenario at 50-50.
Commodity Crisis: Oil Price Spike
Threat: Oil prices continue to rise as a result of leading data like shipping demand and manufacturing increases. A terrorist attack or war related event could shock the market into thinking supply is about to dramatically decline.
Impact: Markets absorb the shock by discounting the value of a myriad of assets, bringing prices down on everything from stocks to manufacturing commodities like copper.
Likelihood: Highest, there are a great deal of events, such as the one’s previously mentioned, which could lead to a spike in oil. Fundamentals look unlikely to change dramatically, so if an event was to occur, supply shortages would hit prices.
Now Check Out The 12 Oil Rich Leaders Who Have The U.S. On Its Knees
Join the conversation about this story »
