Global Market 2010 Predictions – Part One

10 12 2009

 The Likely Scenario :The Second Leg Down of the “W” Shaped Recovery

The short version: we look for significant declines in global risk assets:

 Equities: The S&P 500, Dow Jones Industrials, DJ Euro Stoxx, Nikkei, Hang Seng et. al. will likely be traveling South this year for an extended stay.

Industrial Commodities: The same goes for oil, gas, base metals, and most industrial commodities.

Forex: Risk currencies, i.e. those that are in demand in periods of optimism: the Australian Dollar, New Zealand Dollar, Euro, Canadian Dollar, and related currency pairs that benefit the AUD/USD, NZD/USD, EUR/USD,  and USD/JPY.  Safe haven currencies, like the Yen, Swiss Franc, and even the maligned US dollar, are likely to do better in the coming year, as will assets denominated in these. Thus these pairs are likely to make good shorts in times of peaking fear. Admittedly, this factor alone might  provide  some support for the related stock exchanges. Gauging the interplay among asset markets is notoriously treacherous

Note that we are assuming that the US Dollar, Yen, and Swiss Franc retain their tendency to rise in times of fear. Because their ability to do that depends on their maintaining lower short term interest rates, (likely), they will benefit as risk trades unwind.

Industrial Commodities: The same goes for oil, gas, base metals, and most industrial commodities.

Admittedly, the timing is far from assured, given the impressive ability of governments worldwide to hit the global economy with unprecedented flows of liquidity. Many analysts have mentioned the first half of 2010, but 6 month plus time lines usually mean they don’t really know.

Logically, however, the game can’t continue, because global asset markets are still far larger than the state assets available for bailout and stimulus. Thus after over 2 years,  Judgment Day can’t be deferred unless genuine self sustaining growth kicks in fast, which does not appear to be happening. While there is not enough space here for detailing our reasoning, (see our prior posts at for details).

The financial sector remains in deep trouble, even after most of the stimulus “bullets” have been fired, in terms of spending and low rates.

Unfortunately, we need the financial sector to lead the recovery. The financial sector has led us into the current global recession and into the current rally. Too much credit risk, both personal and now, sovereign, threatening banks and financial systems combined with too little improvement in employment and growth to allow them to earn their way back to health.

If anything, the arguably justified but failed massive deficit spending in much of the world has left governments even less able than ever to fund further bailouts and stimulus. The spending has helped, but has not produced a recovery.

Now the weaker economies are already starting to fall like dominoes, with Dubai, Greece, and Spain already in serious trouble ,and other European governments teetering as well on both sides of the continent. A European financial crisis is likely to rather quickly become a global one.

Timing the global economic cardiac arrest is not possible for us, but we have reason to believe it will come in the next 12 months. Possible catalysts (and this is pure speculation) include a domino-like  chain of  sovereign default and credit seizure, leading to commercial debt defaults, unemployment etc. , or mortgage rate resets, or reaccelerating unemployment. A wave of commercial real estate and/or consumer defaults is also a possibility if the employment picture fails to improve significantly very soon.

We lean toward sovereign debt as the likely near term catalyst. Consider:

Dubai Default Official on Dec 14th: Unless about 80 creditor banks can agree on a restructuring (aka who gets what of the remainder) Dubai defaults.

Euro-zone countries don’t have the US or UK’s ability to print as much money as they wish to fight a recession, limiting their ability of the weaker members to keep a lid on social unrest and at the same time avoid default. Known problems include:

Greece’s recent downgrade means Greek banks can’t sue the country’s BBB+  bonds they hold as collateral for ECB loans, at best meaning they will need to pay more for further borrowing if they can get it. It’s public debt is about 95% of GDP, and estimated by Goldman Sachs to grow to 555% by 2050 if current social security disbursement policy continues. Greek government attempts to cut these back caused riots last year.

Spain, Ireland, Portugal, and Latvia are also reported to be in trouble.

The recent US employment reports of December 4th suggest genuine improvement.

If job growth can come quickly enough, with concomitant improvements in spending, credit risk, and confidence, the next leg down could be far more minor than we suspect.

We hope so, but we don’t think so.

In the coming Part II, we briefly examine the less likely but still possible scenario of “U” shaped recovery and its implications.

Disclosures: Long assorted income generating  equities as long term holds, no direct positions in FX or commodities at this time.



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