The 2010 Quiz: What Next?

London, UK - 29th December 2009, 16:30 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

We trust that this "ATCA 2010 Quiz" finds you in excellent spirits. We wish you and your family the very best for the year ahead and hope you will enjoy playing this quiz. To begin with, ATCA presents a forward analysis of 2010 divided into nine sections:

i. Zeitgeist: Spiritual and Environmental Awakening;
ii. Green Technology, Lifestyle and Sustainability;
iii. Healthcare and Progress Above The Poverty Line;
iv. Digital, Nano and Robo Tech;
v. Shift in the Balance of Power;
vi. Growth Post Financial Shock;
vii. Sovereign Bond Yields and Debt Trap;
viii. China Mismatch; and
ix. Currency Turmoil, Gold and Inflation.

To play the "ATCA 2010 Quiz" just solve:

x. The Black Swan Mystery and Rank Order of Priority of the nine sections.

The 2010 Quiz: What Next?

Introduction

One of the many lessons of recent years is that if something does not happen immediately, it does not mean that it will not happen at all. For example, ATCA had noted gravity-defying unsustainable challenges to economic fundamentals in 2005, 2006 and the first half of 2007. These together became The Great Unwind and The Great Reset that unfolded subsequently. Although they were not a surprise, their scale, speed, severity and synchronicity were breathtaking. Many signs and signatures that we have noted over the years, have taken some time to manifest: this coming year may be no exception. The following outcomes are anticipated by the mi2g Intelligence Unit (mIU) and the ATCA Research and Analysis Wing (A-RAW):

i. Zeitgeist: Spiritual and Environmental Awakening

Spiritual and environmental awakening at an individual level and stake-holder activism at a group level is going to become much more pronounced in 2010 as people continue to connect with each other around the world in their billions and have more accurate information at their finger-tips. The perceived truth is increasingly an amalgam of alternative perspectives in regard to events and personalities obtained through mobile devices, social media, micro-blogging and other personalised expression outlets heralding the step-by-step decline in influence of newspapers and other traditional media.

The intelligence accessible via powerful online search engines, roaming mobile telephony and trans-national independent digital networks is delivering much more by way of protecting human rights, raising awareness amongst the masses, promoting democracy and the values of liberty, equality and fraternity, in comparison to the global confrontations orchestrated to achieve just that.

The more that humanity communicates and connects, the more it bonds to move beyond physical and intellectual differences towards realising the collective universal consciousness or the Omega Point. As global dialogue develops, greater connectivity, introspection and inner progress is likely to yield further rewards in mutual understanding, forgiveness, tolerance, compassion and mercy towards all fellow sentient beings and our united ecology.

ii. Green Technology, Lifestyle and Sustainability

Green technology is poised to take another massive step forward as individual lifestyles begin to modify significantly as a result of greater consciousness. Not only is the new technology evolution, in some specific cases, surpassing traditional fossil fuel alternatives, but post Copenhagen, many governments, businesses and individuals appear ready to make green technology and sustainability their immediate focus of attention.

We predict the rise of CSOs – Chief Sustainability Officers – at most major businesses over the next few years. Watch out for further greening of the corporate world, as it tries to reinvent itself in the face of pressure from its major stakeholders and the large pension funds' awakened sense of fiduciary responsibility towards the next generation.

The rise of electric, hybrid, solar, hydrogen, wind, geo-thermal, hydro and tidal power as well as alternative clean fuels is inevitable and necessary to balance the over-dependence on unclean fossil fuels from an energy security perspective and the huge environmental degradation caused by industrial pollution.

Governments also wish to be seen to be getting greener in the area of clean energy production, distribution and consumption as well as coming up with inventive policies on taxation and resource allocation. Locally generated clean energy solutions may be preferred by discerning users in favour of centrally produced traditional energy solutions. These developments are already visible in the proliferation of local waste-to-energy recycling solutions and sustainable methodologies on the one hand and eco-friendly infrastructure investments on the other. Nuclear technology is also likely to be touted and embraced as a solution -- once again -- but it may not live up to expectations as the true cost and ten-to-fifteen year output delay of new nuclear programmes is determined, including the cost of processing the radioactive waste over its full life cycle.

Water shortages caused by droughts and floods will continue to show a steady rise. The need for the delivery of locally refined water through non-energy-intensive solutions is likely to increase. This presents a great opportunity for innovation. Expect a better quality of government response to climate induced crises, than in the past.

iii. Healthcare and Progress Above The Poverty Line

Macro development has to be matched by micro development in order to ensure stability and balance in national growth.

The US government is poised to pass a huge healthcare bill: one that could result in millions of newly insured citizens and billions of new dollars heading to healthcare companies. Specifically, pharmaceutical companies will see a large influx of new customers. Hospitals, most of which treat everyone regardless of ability to pay, will start making money from what used to be charity cases. The biotech firms that unveil effective drugs, and get them through the FDA process, will likely top the single-day gainers list.

In emerging countries, sub-standard living conditions for the mass of humanity gravitating towards urban metropolitan areas continues to skew growth. Governments are likely to experience growing citizen support to tackle extreme poverty and reduce mass unemployment to avoid social unrest with destabilising consequences.

The growth of micro-finance and micro-business solutions assisted by mobile telephone networks is proliferating. This is the only viable mechanism for offering small tranches of capital for self-employment and small scale entrepreneurship banking. Expect multi-nationals to announce a number of inverted pyramid solutions taking lessons from players in fast moving consumer goods (FMCGs) with a view to growing the market for their products ever faster in the emerging nations, given the weakened demand for their products in the developed world.

iv. Digital, Nano and Robo Tech

Previous troubled economic periods have given birth to technology bellwethers and the current downturn is already creating a new breed of tech entrepreneurs. Third party software developers writing applications for Personal Digital Assistants (PDAs) and social networking sites are booming in the midst of a global downturn. 21st century new technologies continue to proliferate and to cause disruptive innovation, with their associated challenges.

The Digerati are taking advantage of two recent and connected changes in the world of digital technology, especially the fast-moving sector of mobile telephony. First there is the move to "open", rather than proprietary, software platforms, which has led to the second major change – the explosion in the use of web and mobile phone applications. The current generation of social media sites such as Twitter, Facebook and LinkedIn are all open to third-party developers. They all have "Application Programming Interfaces" (APIs), which means that almost anyone with some programming skills can create applications that harness the power of such sites with millions of users.

Nanotechnology based devices and materials are becoming ever more ubiquitous: from personal entertainment devices to "special properties" clothes that perform better than cotton, silk, wool or any of the traditional natural fibres in surpassing their key benefits. Human-like robots have also begun making their foray into domestic environments, especially in the care of the elderly, and also at some airport lounges and for monitoring traffic.

v. Shift in the Balance of Power

The most significant theme shaping the world economy is the shift in the balance of power from the West to the East, most recently witnessed in Copenhagen. From US unipolarity to multipolarity, with a few significant actors, appears to be the latest outcome. The principal eight actors are: US, China, European Union, India, Japan, Russia, Brazil and South Africa. This is leading to a new power matrix, with the winners being countries with young human capital, inward investment attraction power, natural resources and the ability to compete by adapting and changing faster than their competition. Such agile countries may continue to enjoy stronger growth at the expense of the established incumbents.

vi. Growth Post Financial Shock

Let us recall that since August 2007 and over the last two years:

1. The Great Unwind -- deleveraging and paying off debt; and
2. The Great Reset -- collapse in global demand for durable products;

continues to unfold, and has brought about an unprecedented fall and slow down in world trade. World trade is a much better measure of the real global economic health as opposed to the frothiness of the global financial markets, which can be pumped up for a while via excessive liquidity creation or leverage.

The Great Unwind and The Great Reset justified aggressive stimulus and policy actions by key G20 member countries and other governments acting in concert. The combination of massive liquidity provisions, extremely low interest rates, tax incentives and increased government borrowing and spending have thus far provided the free lunch escape route the world economy needed to continue its addiction to the cheap credit pyramid. This cannot continue for too long because the loss of Lady Prudence over the very short term may be possible but in the medium to long term, this can lead to a total loss of confidence by lenders, ie, buyers of debt! Our message is simple, "There is no free lunch"!

Whilst the measures taken in 2009 appeared to be costless for many large economies, is 2010 the year in which they will pay for them? Economic fundamentals matter, and if something appears unsustainable or out of line with reality, then it probably is! At some stage it will need to be corrected, and the longer it takes, the more severe the correction is likely to be. Collectively, the associated global risks are not Unknown Unknowns or Black Swans in the classic sense. They are more like Grey Swans or Known Unknowns. However, they may end up being perceived as Black Swans, as and when they come to pass in the year ahead, because they run contrary to popular expectation, speculation and crowd behaviour in the financial markets, which is continuing to stoke several asset bubbles yet again.

The financial sector is unlikely to be as strong a contributor to future GDP growth as it has been historically and this will have consequences for other parts of the established economies. The crisis in the banking sector is similar to an oil shock because virtually every consumer and company uses banking services just as everyone depends on energy. A persistent problem in the banking sector can translate into problems across all economic sectors, graded by the dependency of each industry on banking.

Post government bailouts, hardnosed short term pure-profits-driven capitalism with huge bonuses for gambling is now more out of fashion than ever before. The renaissance themes for 2010 and beyond are going to be frugality, sustainability, longevity, going green, philanthropy, social entrepreneurship and building a better world together for generations to come, with many minor and some major hiccups along the way.

vii. Sovereign Bond Yields and Debt Trap

Real bond yields could be the single biggest threat to economic healing, since this would slow the process of repairing balance sheets and re-ignite concerns about the possibility of sovereign default. Quality sovereign debt may be the ultimate safe-haven if something goes wrong, perhaps in the PIIGS: Portugal, Italy, Ireland, Greece or Spain; or further afield in the Middle East or Far East countries. Yields on sovereign bonds – the good ones – is likely to plummet as deflation raises its ugly head again later in 2010. For example, the 10-year German Bund yield may fall below 2.5% and the same may happen to US Treasuries, despite the significantly unbalanced fiscal policies. Sovereign debt yields of not-so-good and bad countries, on the other hand, are likely to spike upwards significantly. The worst-case scenario for any government to avoid is a debt trap. This may occur when government debt begins to exceed annual GDP, and when the “real” rate of interest paid on this debt, that is, the rate of interest minus inflation, exceeds a country’s rate of economic growth. It is the government version of maxing out on a credit card and then finding it a challenge to pay the monthly interest bill. The only solution is to keep increasing national debt as a percentage of GDP, which is what Japan is doing and this eventually becomes unsustainable.

viii. China Mismatch

Chinese growth has been built on an investment bubble creating massive spare capacity, which may need to be cut substantially to match with the much lower world demand. The efforts of the Chinese authorities to stem the credit growth and avoid bad loans, combined with the creation of several growth bubbles could ultimately reveal the Chinese investment-driven growth as being deficient. The massive Chinese spare capacity and the economic backdrop could be a deciding factor in devaluing the Chinese currency. We are Sino-data sceptics and we note that China's alleged industrial and GDP growth figures do not tally with their weaker electricity consumption in the last twelve months, for example. Therefore, we believe that contrary to universal expectation of a sharp appreciation, the Chinese Renminbi may be devalued versus the US dollar in the near future, as capital takes flight and further real growth in China fails to materialise.

ix. Currency Turmoil, Gold and Inflation

The demand for riskier and higher-yielding currencies and assets will break down further in 2010, with the dollar gaining on its safe haven status and relatively better US fundamentals and economic data in comparison to other established countries. This is consistent with the negative correlation of the dollar with riskier assets, which has prevailed in 2009. A resurgent US dollar is likely to power through 2010 with its up-trend intact, as a steadily improving US economy leads investors to believe interest rates will increase sooner than had been expected. The US dollar could also snap back sharply next year because the US dollar carry trade has been too easy and too obvious for too long.

The strength of the Japanese yen is not reflecting economic reality at all. Japan's economy is sick and becoming sicker. They are struggling with a huge and growing debt burden combined with an ageing population. The Japanese yen is an overvalued currency and as the yen carry trade comes back into vogue and the dollar rebound gains traction, the yen is likely to weaken significantly. Also 10-year Japanese bonds could lose value, given that current rates of 1.25% may not be sustainable at a time when the public debt is exploding to cross 200% of GDP.

Gold could spiral down way below $1,000 an ounce in 2010, from its all-time high of above $1,200 in 2009. The inflation beast has been slow to wake up – mostly because the dollars thus far created don’t even begin to erase the hole of dollars destroyed during the financial crisis. We may see some selective signs of inflation in 2010 – but in view of the huge collapse in world demand manifest in the world trade figures, the fundamentals do not point towards a massive inflation threat at present.

There is a lot of speculative hot money in gold assets right now that needs to be shaken out. Whilst some quasi-restoration of a gold standard by some emerging countries, may again lend wind to the sails of gold bullion, it is still going to undergo a correction like all other commodities suffering from rampant leveraged speculation. The strengthening of the dollar will break the back of the recent speculative element in gold and other commodities. However, the long-term fundamentals do remain in place, and gold prices may rise once again in the longer term.

x. The Black Swan Mystery and Rank Order of Priority

In order to play the "ATCA 2010 Quiz", we request your response in regard to three specifics:

1. What are the Black Swans -- unknown unknowns -- that your specialisation, experience and imagination conceive, that could have a big impact on the world in 2010?

2. How would you re-arrange the order in which we placed the top nine sections in the 2010 list? And

3. Do you have any other thoughts, observations and views in regard to 2010, which you would like to share?

Let us know and we will publish select responses to queries 1. and 3. and the highest frequency tallies for query 2.

[ENDS]

We welcome your thoughts, observations and views. To reflect further on this subject and others, please respond within Twitter, Facebook and LinkedIn's ATCA Open and related discussion platform of HQR. Should you wish to connect directly with real time Twitter feeds, please click as appropriate:

. ATCA Open

. @G140

. mi2g Intelligence Unit

. Open HQR

. DK Matai

Best wishes