In reading the animal spirits of the world economy, a major sea change has occurred in the last six months.  We went from a time of great fear, where a collapse of the euro and Greece seemed imminent, to a time where it's been publicly announced that the transition on Greek debt has been finessed.  The US stock market has rocketed quite handsomely since October, and many indices are near the highs that they were in 2007.    And there are signs in the economy that green shoots are actually starting to re-emerge again. The electoral picture has brightened considerably for Barack Obama as well as the odds of a Democratic victory seem much more likely now.

And yet....

 There are a number of areas where our peace and prosperity might be threatened now.  In no particular order of likelihood they are:

China  I've said for many years that China is an accident waiting to happen, and 2012 may very well be the year that this prediction shows itself.  There are a variety of storm clouds on the horizon.  You should be well aware of the "ghost cities" of incredible overbuilding with financing from underground banks in collusion with corrupt local officials.

It's no accident that the number of civil protests has been rising exponentially over the years.  From 3,000 to 7,000 to 13,000, and in the latest year I heard about -- 30,000 separate outbursts have occurred all over the country.  Once again, the pro-democracy movement in China is spreading like a wildfire underground. And it's gotten harder and harder for the government to put a lid on this civil unrest.  Hu Jintao, China's Premier has paid lip service to democratizing, even as the old guard has been too powerful for now.

Last week's sacking of Bo Xilai, political head of Chongqing in the Central Committee is indicative of significant unrest this year, and an omen of significant future unrest at the highest levels of government.  By law, the Chinese Communist Party is expecting a major turnover of personnel from the old generation to another younger age cohort.  The fear within the Party is, that a split in its homogenaity will lead to a Tianamen Square incident. 

A stockmarket pullback Recently, technical indicators for the Dow Jones and S&P  indices have been overbought conditions, and complacency has been at historic highs as well (as judged by various technical indicators).  One symptom of the potential frothiness of the current market can be seen in Apple Computer.  Six months ag0, a share cost $335.  Today, that same share is $600 -- over a 79% increase.

If someone tells me that Apple is 79% more valuable fundamentally than where it was six months ago -- I would eat my hat.    Is  Apple really worth more than the entire country of Poland? The decline of Apple alone could put market indices into a 10% to 15% correction. When coupled with a move into more speculative stocks overall, and a total ignorance of the proven fragility of megabanks like Citigroup and Bank of America,  this does not look like a good time to jump with both feet into the water of speculative investment right now.

The price of gasoline  Of course, $106 a barrel oil is a tax on 99% of all Americans. And no, it's not the fault of President Obama.  It's not even Benyamin Netanyahu's insane fixations with taking out Iran.  No, the chief culprit is Wall Street speculation.  Remember, in 2007 the crash was preceded by a spike in oil and commodity prices.  And here we are again, although with lesser intensity than 2007.

It has been estimated that Wall Street speculation accounts for 30% of the pump price of gas.  And remember, 60 Minutes ran an expose in 2008 about the last run-up in oil prices, and they found that the largest holder of oil reserves ready for the refinery back in 2007 was in fact, J.P. Morgan Chase. 

Iran  Let's be honest, realistically the chances of unilateral military action by the Israelis this year has been estimated at only 15%.  However, that means that there is a 1 in 6 chance that Nutanyahu might actually decide to attack Iran, and then the whole world economy will truly be in the tank.  But the greatest fear  for now is from the speculators who would encourage rumors of war (as they did on Friday) to keep the price of oil elevated far beyond what it should be.

The European Union  Yes, it looks like the European Central Bank has arm-twisted Greek creditors into accepting much lower interest, watered down securities. And official spokespeople say this is a great engineered victory.  However, Standard & Poors rating agency recently put Greece on its absolutely worst credit rating, as Greece had officially entered into default by its rating indicators.

Even more troubling is the fact that an official condition of Greek default still leaves a potentially dangerous condition of liability for holders of the new Greek securities.  We do not know how any individual bank may be affected by an official unwinding of derivatives leveraging their books, not do we have any idea of the interrelations of debt swaps between financial institutions affected by a default.  

But we do know that this financial engineering puts more long term pressure on Italy, Spain, and Portugal.  And we do know that a program of further austerity for Greece and other PIIGS is a long term recipe for disaster.