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 PART 2 – Chapter 1 – Bubbles Burst! (p. 115)

 
1 READING
Read the article below and answer the questions.
 
1. What are ‘black swans’?
2. Are they positive or negative?
3. What do ‘bullish’ and ‘bearish’ mean?
4. What can be done about ‘black swans’?
5. What ‘black swans' can be forecast for 2010?
6. Is there any risk of a currency crisis at the time of writing?
7. Why could China be a ‘black swan’?
8. What positive ‘black swans’ are discernible for the near future?
 
 
Investment strategist forecasts events that could affect the economic recovery
 
It's a tradition on Wall Street to offer predictions early in the year about where the economy is headed, whether companies will prosper and what will happen in the stock market. Here, Ed Yardeni, president of Yardeni Research, a New York-based firm providing independent investment strategy research, tries to spot 2010's 'black swans' – those rare and unexpected events that can change the course of history, or at least have an outsize effect on your portfolio.
 
Q.: What are black swans, and why are they important for investors?
 
A.: Black swans are events that are not predictable – they're surprises. Most of us live our daily lives pretty close to the mean distribution of experiences; in other words, we wake up in the morning, go to sleep at night, and events in between are fairly predictable and recur the next day. But every now and then, we get an event that's a total surprise. Black swans aren't necessarily bad. They can be bearish or bullish. But they're extreme and, by their nature, hard to predict.
That doesn't mean we shouldn't give it a try. As investors, we have to think about extreme scenarios. Sometimes, black swans start to appear in the distance. It's important to see them early and to try to assess whether they have the potential to radically change our financial lives. For example, early in 2007, we started to get news that there was trouble in the subprime-mortgage market. Yet few people appreciated the consequences that would play out in 2008 and 2009. That was a black swan.
 
Q.: Do you see any black swans on the horizon for 2010?
 
A.: Right now, on the negative side, there are certainly discernible black swans – events that are worrisome, especially if they continue to worsen. Clearly, the housing market remains the weak link in the economy. […]
Another issue here at home is the outlook for consumer spending, which obviously is related to labor markets. The black swan event is that the labor market will remain difficult, with unemployment remaining very high, and that that will depress consumer spending. Both of these concerns bear on the potential for a second dip in the economy.
 
Q.: Are there any swans swimming in the currency markets?
 
A.: There's definitely the potential for a currency crisis. There's a growing recognition that the dollar is the best of a dodgy breed of currencies. There's a greater risk that the yen, the pound or the euro would take a dive before the U.S. dollar does. The negative black swan could be a major decline in any of these four important currencies.
Countries such as Portugal, Italy, Ireland, Greece and Spain have such high deficits. What they have in common is that they're borrowing too much – they have too much debt outstanding and need to borrow more. The worst case black swan scenario would be the collapse of the euro, as relatively strong economies, such as France and Germany, refuse to support the weak economies that continue to borrow too much. A euro currency crisis looks to be a plausible black swan – much more so than the collapse of the dollar.
 
Q.: What else worries you?
 
A.: China could be another black swan. This is the first global recovery led by China, and China clearly matters a great deal to the global economic outlook. China, over one year has inflated a big real estate bubble, just as we did not too long ago. The Chinese authorities are moving to take the air out of that bubble by restricting credit, but history shows that it's hard to take the air out of bubbles – they usually burst. If that happens and the Chinese economy gets noticeably weaker, that will be bad news for the global economy and for stock markets around the world. That wouldn't be much of a surprise – sometimes you can see swans off in the horizon.
 
Q.: Pretty scary. Are there any black swans on the positive side of the ledger?
 
A.: The biggest surprise would be if the stock market ends the year at a new high. That would blow everybody's socks off. That's the most positive black swan out there. […] If profits continue to improve as they have the past four quarters, companies will start to get more optimistic, decide to expand, hire more workers and engage in capital spending. That could happen on a global basis. The global recovery could turn into a boom, and that would be extremely bullish for stock markets.
 
Q.: Is that what you believe?
 
A.: Yes, there are plenty of black swans out there, but I'm giving a 70 percent probability to the happy scenario – that economic growth continues better than expected, unemployment subsides and inflation remains subdued as the dollar rallies and stocks and corporate profits are stronger than expected.
 
(Adapted from «The Washington Post», February 7, 2010)
 
2 READING
Read the article below and
1. guess the meaning of the word ‘aughts’ and explain the whole title.
2. find the paragraphs containing the following:
 
a. the equivalent of the Italian word ‘pensatoio’
b. the housing bubble
c. economic growth in the past 80 years
d. recession 
e. job growth
f.   a contrast: productivity and people’s well-being
g. a lesson that should be taken
h. economic stagnation 
i. different bubbles
j. the housing bubble peak
 
3. explain the table on job growth.
 
 
Aughts were a lost decade for U.S. economy, workers
For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different.
   The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity. […] It was, according to a wide range of data, a lost decade for American workers. […] There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well. […] The Aughts were the first decade of falling median incomes since figures were first compiled in the 1960s.
   "This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this in spite of substantial growth in productivity, which should have been able to improve everyone's well-being," said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank.
   The miserable economic track record is, in part, a quirk of timing. The 1990s ended near the top of a stock market and investment bubble. Three months after champagne corks popped to celebrate the dawn of the year 2000, the market turned south, a recession soon following. The decade finished near the trough of a severe recession.
   But beyond these dramatic ups and downs lies an even more sobering reality: long-term economic stagnation. The trillions of dollars that poured into housing investment and consumer spending in the first part of the decade distorted economic activity. "The big bad thing that happened was that, in the U.S. and parts of Europe, we let housing bubbles get out of control. That came back to haunt us big-time," said Nariman Behravesh, chief economist at HIS Global Insight [the global leader in economic and financial analysis]. The housing bubble caused a boom in indebtedness. Total household debt rose 117 percent from 1999 to its peak in early 2008, according to Federal Reserve data, as Americans borrowed to buy ever more expensive homes and to support consumption more generally.
   The first decade of the new century was an experiment in what happens when an economy comes to rely heavily on borrowed money. […] People engaged in excessively risky behavior without realizing the risks associated. The experiment has ended badly. While the stock market bubble that popped in 2000 caused only a mild recession, the housing and credit bubble has had a much greater punch – driving the unemployment rate to a high, so far, of 10.2 percent.
   The lessons of the Bubble Decade are still being formed. At the Federal Reserve, the major lesson that top officials have taken is that bank regulation shouldn't occur in a vacuum; rather than monitor how individual institutions are doing, bank supervisors should try to understand the risks and frailties that the banking system creates for the economy as a whole – and manage those risks.
 
(Adapted from «The Washington Post», January 2, 2010)

Questo file è un’estensione online del corso M. G. Dandini, NEW SURFING THE WORLD.
Copyright © 2010 Zanichelli Editore S.p.A., Bologna [1056]