5. Disappointment from Asia.

In my view, the consensus regarding Asia, and China in particular, is far too optimistic. Asia’s economies are far more dependent on exports to the US and Europe than most people understand. I expect many Asian economies to experience a dramatic collapse. In particular, despite massive stimulus efforts, growth in China will start going flat to negative by late 2009 and through 2010.

The Chinese are currently compensating for the collapse of the export sector through massive (and wasteful) public spending and completely irresponsible loan growth directed by the government. While the Chinese can certainly sustain this level of fiscal stimulus and bank lending for a while, they will not be able to grow it from current levels. In the absence of a recovery in the export sector – unlikely given my outlook for Europe above – this implies flat growth in 2010.

In addition, there is a wildcard: The effects that internal migration trends will have on the country. For the past 30 years a main driver of growth in China has been the incorporation of labor from the countryside. Most of this production was either zero productivity or was not even part of the cash economy (i.e. the production was not captured in GDP accounts). The export sector collapse has halted and even reversed this secular trend. This is a hugely important development that few if any analysts have understood, much less incorporated into GDP forecasts.

6. Commodity collapse.

Many folks are still waxing lyrical about “peak oil.” And there is much speculative chatter about buying commodities generally as a hedge against inflation. These speculations have fueled massive run ups in various commodities via ETFs which have inflated prices to current levels. Economic disappointments in Europe and Asia will soon prove such speculations to be untimely and will cause sentiment on commodities to reverse. This will trigger a dramatic unwind of these structurally unsound markets in which activity by legitimate commercial actors is being overwhelmed by financial speculators. I expect crude oil to revisit the 30s and perhaps even the 20s. Other commodities such as copper, which the Chinese have propped up through stockpiling, will also collapse back towards 2008 lows.

7. Emerging-markets crisis.

Most emerging markets outside Asia are highly dependent on commodity exports. The Russian economy will be devastated by lower oil prices. Ditto for nations such as Venezuela and Mexico. Brazil will be tremendously affected by the decline of various agricultural and industrial materials commodities. Emerging markets are also highly dependent on investment and remittance flows. After a brief dawn in mid 2009, these external factors should once again become a major drag on emerging economies in late 2009 and early 2010.