The Risks to Watch in 2012

The Risks to Watch in 2012
Tue 03 Jan 12 | 07:34 AM ET
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2011 was a year that saw dictators topple devastating natural disasters. the end of one war and the continuation of another and the global economy that still struggling. joining is now with the 2012 outlook is ian bremer, co-author of top risks for 2012 report. he’s here exclusively. a lot happened in 2011. a lot happened that we didn’t predict. this whole arab spring. i don’t know if that was on your list. it wasn’t on a lot of people’s lists. a lot of other things happened. when you look at 2012, let’s go through the list, i don’t know if you want to do it as a countdown. we can count down from the backside or start at number one. i think starting at number one is the way to go. biggest risk for investors and for the world, 2012 is — i’m glad that we didn’t have that at the beginning of 2011. seven talking about it the first couple months. frankly, it didn’t pan out. made a lot of headlines. but if you ask me have we seen lots of dictators topple in the middle east, we had tunisia. there is a lot of instability there. top risk for 2012, with international intervention, a lot of instability. that is true. the biggest risk is the end of the 9/11 era. the reason i say that is we’re seeing contemplation of politics and economics absolutely. explain what you mean about that. the end of a 9/11 era. two parts of it. the first is that we’ve been focusing for the last ten years on geopolitics as being primarily security issue and bin laden’s dead. al qaeda functionally is much less of a threat. we’re out of iraq. we have ended the threat if we have ended the threat if afghanistan. we’re tilting towards asia. not because it’s the big security threat, but because it’s an economic threat. clinton’s doctrine, the closest the u.s. has to a foreign policy doctrine is economic state craft and pay attention to the chinese. so geopolitics should be driven by economics. at the same time, when you think about what is driving investments out there, whether it’s emerging markets, becoming more important for global growth where politics create more instability and more volatility for the market, the fact that in the developed world, investors are concerned about what the politicians are going to do. whether it’s in europe or japan. finally, this rebalancing between the developed and developing countries. that’s really creating a backdrop which brings politics and economics together. you tell your investor clients this thesis and what should they do with it? what it means is all of the risk that’s are out there, i think politics are overplayed in 2011, like all the elections going on, but the backdrop creates much less willingness to go out and place your bets. and so it means that despite the fact that a lot of the numbers in 2012 are going to look better than people. you’re not going to seat crash of liquidity coming in. you’re not going to be seeing companies — where is euro contagion not on your list? actual fragmentation in 2012 isn’t going to happen? because it’s going to happen in 2013 or what? europe is definitely a risk. it’s not the euro-zone falling apart. it’s that germans continue to find ways and the ecb to play this out. sean, jump in. do you agree with this? on the first point about our withdrawing from afghanistan and middle east, it’s happening in part because we can’t afford it anymore. the cost was — so that’s the negative. getting rid of the negative. those wars cost us $3 trillion. the u.s. government debt is $15 trillion. the easy solution is get rid of the war exposure and help improve the debt to gdp. also, there’s no question that the gravitas is moving to asia. why not focus on that? the big structural problem that has yet to be solved and actually is equal or maybe even ov overshadows the eu is emergence of china and their interest in holding high reserves because they don’t have the social safety net. it’s causing major dislocations that people don’t know how to deal with. and in the past, it’s been very easy to rebalance budgets. that’s not happening. it’s likely to be tensions over the next couple of years. ian, china? china is a challenge for the u.s. put it on your risk spectrum? well, there is a big leadership transition in china as there are around many countries around the world. that is not a significant risk. currency is not a significant risk. we’re going to top it. but there are a few that are major. indigenous innovation and security issues, direct security issues in asia between the u.s. and china. if you’re an investor, you do what with it? if i’m an investor, i wore why about western multinationals that are exposed to china’s corporations and are going to start losing that bet. that’s going to start having a negative impact on their abilities. on the security front, there are a number of countries in asia that are not going to have the capacity to pick it. they’ll be in one camp or another. asian securities is an area where you would love to integrate politically and securitywise throughout united states, economically towards chib. it’s just not going to work through 2012. the united states on the one hand for the same reasons that sean mentioned isn’t going to be willing to pay the kind of money to insure security guarantees for the countries when they don’t get the economic benefits. more importantly, the chinese are going to be completely unwilling to allow those countries to maintain the security relationships given their increased political and economic clout. isn’t the biggest thing about risk is you don’t know where the next real risk or the next real problem is going to come from. you don’t know where the surprises are coming from. but the fact that so many of the questions come from political instability and when you look at countries much more unstable, that’s where shocks come. you didn’t know the arab spring was going to come. but you absolutely knew that a country like tunisia would be vulnerable and saudi arabia was not. so you need to pay attention to underlying ideas. give me the one big surprise in 2012. if there is something on your list that would blow people’s minds that may not come true but that you worry about. actually, the surprises this year are on the good front they’re the red herrings. people are so focused on economics coming together, you have over 50% of the world’s gdp has elections coming up this year. actually not a big deal from a pashgt p market perspective. not in the u.s., not in china, not in rush yachlt these are big, big elections. everyone is saying 2012 is the year. all of the transitions don’t matter nearly as much as the other instabilities. ian bremer, thank you very much. appreciate it. when is that book coming out? we’ll be looking for that. ian bremer, appreciate it very much. all right. when we come back, we’ll talk

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