Bank of America Lists The "Other" Risks For 2012

Tyler Durden's picture

While not quite a "jarring" as the Saxo Bank "outrageous predictions", Bank of America has also put together yet another list of "other" risks for 2012, which as BofA's Martin Mauro says, "have persisted or become worse over the course of the year, but have escaped market attention due to the spotlight on Europe." The risks are as follows: i) Hard landing in China; ii) Currency wars (competitive currency devaluation); iii) Middle East oil supply shock and iv) Municipal default fears. The only thing we would add is that these are not really risks, as the are all developing processes in some stage of deterioration. And, as usually happens, they will likely all strike at the same time, just when the world is most vulnerable, likely minutes after Greece announces it has left the Eurozone, and the Euro is in legal and structural limbo. But luckily we have at least a few weeks to months before that happens. So here is Bank of America's predictive prowess in all its rhetorical glory.

From Bank of America

The “other” risks in 2012

As markets focus on Europe as the primary risk for the 2012 outlook, we highlight four more risks that could sneak up on investors in 2012. These risks have persisted or become worse over the course of the year, but have escaped market attention due to the spotlight on Europe. While our base case does not assume a flare-up of these risks, these could potentially be the unwelcome surprise of 2012.

Hard landing in China

Ting Lu, our China economist, expects a soft landing in China in 2012. There are two key risks that he outlines to this expectation: rapidly falling property investment under severe government restraints, and a much worse European sovereign debt crisis. The share of China in world GDP has increased over the years (Figure 1). More importantly, the contribution of China to world GDP growth has increased even more dramatically with nearly 18% of growth in 2010 coming from China (Figure 2). China’s support to world GDP becomes particularly important in years of slow growth in developed economies, as seen in 2008 and 2009 (world GDP contracted 5% while China GDP expanded 10%).

Therefore, a hard landing in China next year would have a disproportionately high impact on the already shrinking world growth expectations. Beyond the direct effect of a slowdown in China, the impact on its numerous trade partners could intensify the blow.

Currency wars (competitive currency devaluation)

Treasury Secretary Geithner warned China early in 2011 against the risks of not allowing its currency to appreciate quickly1. Demands to label China as a currency manipulator have repeatedly been voiced in the US Congress. While the Chinese yuan has appreciated gradually since late last year, the rate of appreciation has been only about 6% - a rate that Secretary Geithner expressed dissatisfaction with in his remarks. Moreover, the appreciation has stalled since mid-August and USDCNY maintained in the 6.35-6.40 range (Figure 3). Furthermore, it is quite unlikely that China would allow its currency to appreciate significantly in face of the headwinds facing its economy. In fact our FX strategists expect the yuan to stay in the 6.30-6.40 range for the next three quarters.

On the other hand, our US economists and rates strategists expect the Fed to undertake the third round of quantitative easing in summer 2012. Just like QE2 last year, QE3 is likely to invoke comment from China regarding its inflationary effects and dilution of Chinese investments in the US. Elsewhere in developed markets, the yen is at historically strong levels against the USD. Japanese authorities have expressed dissatisfaction, and intervened in recent months to weaken the currency. Further QE from ECB can also not be ruled out if the European crisis worsens significantly, although President Draghi has so far resisted such calls. Overall, the weakening global growth environment that we expect next year could very well trigger a race to competitive devaluation by major central banks in an attempt to boost their economies.

Middle East oil supply shock

The uprising in Libya earlier this year demonstrated how inelastic the demand curve in the oil markets can be in the short run. As Libya’s 1.6 mn b/d of supply was removed from the market, Brent oil prices spiked by over $20 (Figure 4).

While Libyan supply is expected to gradually start coming back to the market in 2012, the situation in the Middle East is far from stable. Protests continue in Syria, and potential involvement of Iran could deteriorate the political dynamics. Meanwhile, tensions continue between the US and Iran over the latter’s nuclear program. Iran is a much bigger supplier of oil (though of a different quality oil) than Libya (Figure 5). Our economists expect economic growth to start slowing next year on fiscal tightening and consumption pullback, and an oil supply shock in such an environment could materially worsen the outlook.

Municipal default fears

Readers will recall market concerns at the beginning of 2011 over municipal defaults. However, with the rally in Treasuries and the long duration of municipal debt, munis turned out to be the best performing asset class this year as the anticipated multiple defaults failed to materialize. We argued in the beginning of the year that municipal risk is significant, not systemic. However, as the European situation has worsened, credit spreads for municipals in the CDS market have retraced to the levels at the beginning of the year when default concerns prevailed (Figure 6). While the number of defaults stayed low, the year was marked by some high profile muni defaults, including Jefferson County, Alabama – the biggest muni default in history. We still hold our view that the risk of widespread defaults is low, but more high profile defaults could rekindle market concerns, especially in an environment of economic downturn.

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greased up deaf guy's picture

didn't realize zombies have opinions...

Manthong's picture

The walking dead pointing out how other undead shuffle their feet.


SGS's picture

They missed warning if their stock goes to .05 cents how that will impact berkshire and blackstone in 2012?

SnobGobbler's picture

...take your bath warren, take it !

Barack Obama's picture

Where the white women at?

Misean's picture

Number 5 was B.A.C. closes below $5. No time to find a replacement.

dark pools of soros's picture

at least most of the chicks they hire are hot.. that is all

vast-dom's picture

BAC has about as much credibility as a BPD whore claiming to not be interested in $$$!!!!!

Below Zero's picture

Why didn't they list the failure of a large US bank in 2012 as a risk?


It's not a risk. It's a certainty. 

Hi Ho Silver's picture

And it's already priced in...

Schmuck Raker's picture

They know 12 days still remain of 2011.

I am a Man I am Forty's picture

2012 could be the year of currencies, maybe not, but it is definitely a possibility because nobody has any fucking money, deleveraging fuckaaahhs!

heremynkitty's picture

Huh?  They missed the major risk of morons voting for OweBlahma again.

Ok, 'other' risks.  Nevermind.

Blank Reg's picture

They also missed Ron Paul being elected Prez and wrecking havoc on the status quo.

Al Huxley's picture

#1 Risk - buying BAC above $1.00.  (Way too easy)

ThrivingAdmistCollapse's picture

I think China is likely to have a hard landing.  However, coming from BOA it sounds like a joke.  These guys practically caused the economic collapse in the first place.

Winston Smith 2009's picture

Great interview where it is openly discussed that bank accounting "standards" are fraudulent.  Note the idiot interviewer who said at 1:45 that if banks actually reported the truth, there'd be chaos, as if truthful accounting wasn't the whole point of "accounting" and the only way to determine what is wise to invest in:



williambanzai7's picture

This is too fucking ridiculous to even consider. Who gives a flying fuck what they think.

dark pools of soros's picture

it's all too depressing for the holidays..  everyone tune out till next year



Franktastic's picture

Wow, Bank Of Amerika...the new penny stock.

chump666's picture

Trade war to China crash.  Going to be fun watching China try and devalue the Yuan whilst it's companies try and convert to USDs on huge scale.  The whole thing will implode, China will blame the US tariffs etc.  Gonna get very heated.

Respect to the swing traders still hanging in there.  Reset top positions, watch for the end yr attempt at a rally...then 2012 will be a year that will make 2011 volatility look like nothing.

F*ck the banks, must be pissed that santa aint going to show up.  Citi gets a big tick for being the doomiest.

ebworthen's picture

Kill the zombie.

Kill BAC.

Take your money out.

Iconoclast's picture

How about this as a doomsday scenario from a retail fx broker..

Mad Max or Blade Runner? December 19th 2012

Doomsday scenarios are so overdone, similarly futuristic predictions as to how we’d all be living in the twenty first century have always disappointingly fallen short of the mark.

vegas's picture

How about you might not have a job in 2012? Since your stock is now almost a penny stock, how much longer does the Fed consider you guys viable. I'd keep the resumes updated.

pineyard's picture

GUT BoA did NOT mention the BIGGEST " RISK : of all

The 300 BILLION US DOLLAR the US needs to borrow ..every Month

How convenient !