10 things to watch for in ’08

Predicting the future is a mug’s game, or as US sportsman Yogi Berra once said: “the future isn’t what it used to be”.

Forewarned of the dangers, Briefcase still thought it interesting to sign off 2007 with a look at 2008, particularly at what it thinks will be the really big events of the year ahead.

1) The economy. Looking into its crystal ball, Briefcase can see Australia sitting comfortably aboard a Chinese ‘lifeboat’. Higher interest rates will hurt investors and property owners but business, especially the resources sector, will survive comfortably thanks to Chinese demand for raw materials. The US, for a century the world’s economic engine will sputter, but not conk out. Troubles in the US will, however, cause a lot of pain in Europe. WA and Queensland will rise above any downturn with comfort – but that Chinese lifeboat will take on a political dimension as the year progresses (more on that later).

2) Money. Seemingly inseparable from the economy but a special case in 2008 because the year will start as ’07 ends, with no-one quite sure what a dollar (or a euro, or renminbi is really worth). Mere mortals will see this as irrelevant. Briefcase sees it as a critical element in the decade ahead, not just next year. Unless the US dollar stages a miraculous recovery, its plunge in value over 2007 represents the biggest sovereign default since the collapse of the Roman Empire. Anyone holding US dollars, and that means just about everyone in the world, is poorer today because of its sharp fall in value when measured against rival currencies.

3) Gold. In theory, but awaiting its most stringent test since the boom year of 1980, gold is poised to crack the $US1000 an ounce mark. Obviously that target is somewhat less challenging because of the depreciation of the US currency, but for Australian mining companies, and resource stock investors, gold could become the hot commodity of 2008. Having said that, the great gold revival is now about 25 years overdue, which means smart investors will not bet the house on gold doing what it’s supposed to do. Central banks, stung by the collapse of their US dollar holdings, will be mightily tempted to dump a few hundred tonnes of gold onto the world market.

4) China. A very special case in 2008 because of its over-heated economy, under-valued currency, polluted environment, inflexible (and still communist) government, and that single big event, the Olympics. For the year ahead, China has the appearance of Churchill’s Soviet-era Russia: “I cannot forecast to you the action of Russia. It is riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” In the experience of Briefcase it’s those last seven words, so often omitted when quoting Churchill, which contain the key to China in ’08 – what is in China’s national interest. Next year, and for decades to come, Australia will have to accommodate what is in China’s national interest because it has become our biggest customer and could easily dictate future economic development in this country. All wise businessmen know that a single customer should never dominate your order book, something Australian politicians are yet to learn.

5) Australian politics. Boring. In a nutshell, that will be life in a period of wall-to-wall Labor governments, with everyone agreeing with everyone else. If Briefcase has to make a prediction it is that the electorate will quickly tire of all that agreement and start to ask when will we get shorter hospital queues, more teachers, and better roads. That will be especially true at a state level as the wheels of government grind ever slower and Alan Carpenter and Eric Ripper wake up to the fact that no-one of any talent actually wants to work in government. The only people available are those true believers in the Labor ideals. Everyone else is off to make money in the private sector – complaining all the way about appalling government services.

6) International politics. Much more interesting, especially in the US, where it is possible that the Democrats will choose either a white woman or a black man as their presidential candidate for the November poll. Whoever is chosen should be guaranteed a high-speed trip to the White House, so on the nose is the Bush government. But, as Briefcase has learned over many years, never over-estimate the average American. He/she is even more average than the average Australian, and conservative to his/her bootstraps and could easily go for four more years of Republic administration rather than elect a woman (of any colour) or a black man.

7) The environment. Al Gore reckons we’re close to a “tipping point” in public opinion when it comes to curbing greenhouse gas emissions. Perhaps, is the opinion of Briefcase, because as we get closer to making the hard decision about saving coral reefs and curious animals in far-away places, we will face the critical question of who pays? Green energy, small carbon footprints, and non-fossil fuels cost money. During 2008, this will become a super-sensitive issue, which is why Australia’s environmental policy is top of the agenda on Prime Minister Rudd’s desk, and we have an environment minister in Peter Garrett who has nothing to do – except win green votes at elections, and then disappear to save any embarrassing comments (and certainly not make decisions).

8) Xenophobia. Big word. Big subject. Boiled down it simply means fear of foreigners, and while we’ve got used to Japanese and Korean investors in Australia, the Chinese horde will be different. Idle chatter of a Chinese government bid (wrapped inside a bogus corporation) for Rio Tinto might not eventuate, but the Chinese will be pressing for a bigger slice of the Aussie pie, and that too will keep our Mandarin-speaking PM on his toes. What will he do if the Chinese oil company, Sinopec, moves to buy part, or all, of Woodside? Would the Chinese get the same brush-off as the Dutch did when Shell bid?

9) Global property. What a mess, and doomed to get worse as the sub-prime financial crisis forces the US to prop-up distressed house owners – code for ‘the taxpayer foots the bill for yet another banking disaster’. The deeper question is how far the devaluation of property will spread from the US? Briefcase reckons Europe is the next disaster zone, as industry in that region is strangled by US competitors selling goods priced in depreciated dollars. Airbus is already in crisis negotiations with its government owners because Boeing is undercutting it on price. More to come.

10) Risk. It’s rising everywhere. Poor countries are getting poorer thanks to the Arabs squeezing the oil price higher, or simply because there is no more oil to pump. Higher commodity prices have led to the rise of nationalism across South America and Africa (again). For investors, have a close look at where your favourite companies are doing business, and ask why?

That’s it for Briefcase in ’07, and it’s farewell from me.

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The last word goes to Benjamin Franklin: “Love your neighbours, but don’t pull down your hedge.”