Home > Austrian School, Investment tips, Predictions for 2010 > Ambrose Evans-Pritchard’s predictions for 2010

Ambrose Evans-Pritchard’s predictions for 2010

Ambrose is a weird dude with an even weirder name (what would his nickname have been at school? Ambi-Pur?). 

However despite his weirdness, he is the closest thing the UK has to an Austrian commentator.  He accurately predicted deflation in 2009.  He didn’t pick the upturn in mid-2009, but then who did?  Strangely, even though he accurately diagnoses the problem, he advocates super low interest rates as a way out of the mess caused by too much debt.  So he is as stupid as the commentators in Ft.com after all.

His thinking is often shallow and muddled, he doesn’t have much of a theme other than “we are doomed”, but he is nothing if not decisive in his views.  He’s the closest thing to an interesting economics commentator the UK has got.

Here are his predictions for 2010:

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.

As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan’s Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent.

We will be reminded too that the West’s fiscal blitz – while vital to halt a self-feeding crash last year – has merely shifted the debt burden onto sovereign shoulders, where it may do more harm in the end if handled with the sort of insouciance now on display in Britain.

Yields on AAA German, French, US, and Canadian bonds will slither back down for a while in a fresh deflation scare. Exit strategies will go back into the deep freeze. Far from ending QE, the Fed will step up bond purchases. Bernanke will get religion again and ram down 10-year Treasury yields, quietly targeting 2.5pc. The funds will try to play the liquidity game yet again, piling into crude, gold, and Russian equities, but this time returns will be meagre. They will learn to respect secular deflation.

Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbour race to the bottom. By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.

The European Central Bank will stick to its Wagnerian course, standing aloof as ugly loan books set off wave two of Europe’s banking woes. The Bundesbank will veto proper QE until it is too late, deeming it an implicit German bail-out for Club Med.

More hedge funds will join the EMU divergence play, betting that the North-South split has gone beyond the point of no return for a currency union. This will enrage the Eurogroup. Brussels will dust down its paper exploring the legal basis for capital controls. Italy’s Giulio Tremonti will suggest using EU terror legislation against “speculators”.

Wage cuts will prove a self-defeating policy for Club Med, trapping them in textbook debt-deflation. The victims will start to notice this. Articles will appear in the Greek, Spanish, and Portuguese press airing doubts about EMU. Eurosceptic professors will be ungagged. Heresy will spread into mainstream parties.

Greece’s Prime Minister Papandréou will balk at EMU immolation . The Hellenic Socialists will call Europe’s bluff, extracting loans that gain time but solve nothing. Berlin will climb down and pay, but only once: thereafter, Zum Teufel.

In the end, the Euro’s fate will be decided by strikes, street protest, and car bombs as the primacy of politics returns. I doubt that 2010 will see the denouement, but the mood music will be bad enough to knock the euro off its stilts.

The dollar rally will gather pace. America’s economy – though sick – will shine within the even sicker OECD club. The British will need the shock of a gilts crisis to shatter their complacency. In time, the Dunkirk spirit will rise again. Mervyn King’s pre-emptive QE and timely devaluation will bear fruit this year, sparing us the worst.

By mid to late 2010, we will have lanced the biggest boils of the global system. Only then, amid fear and investor revulsion, will we touch bottom. That will be the buying opportunity of our lives.

I agree the overall theme will be deflation despite the desperate efforts of the central banks to start a fire, but I’m surprised by his apocalyptic predictions on Japan. 

It still has a massive trade surplus and is still producing good Toyotas and great Lexus models.  If Ambrose is predicting over-capacity and deflation worldwide, that hardly signals higher interest rates in Japan.  And if the Fed can buy at the long end to bring bonds down to 2.5%, why can’t Japan?  And if QE means hyperinflation for Japan, why doesn’t Bennie’s trillion dollar Fed purchases and massive QEs in the US also mean hyperinflation in the US in 2010?  And why will exactly the same policies “bear fruit” in the UK (via the emollient of a gentle and controlled depreciation of the pound) when they will produce nothing but hyperinflation in Japan?

What’s he got against the Japanese?  I was thinking if any economy could not get worse, it would have been the Japanese economy.  I was even thinking it might be a buy.  With Ambrose screaming apocalypse over Japan’s woes (no worse, no better than the US or the UK’s), I might look at buying the Nikkei index this year…

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