Jan 04, 2010 Welcome 2010!
With the end of 2009 and the beginning of 2010 there is an overwhelming impulse for making predictions on how the markets will do. Here goes:
Expect the unexpected
Neither 2008 nor 2009 market outcomes could have been predicted with any accuracy; there is no indication 2010 will be different.
Short term trades should continue to dominate the markets
Little real research has been done on the effect of concentrated trading on markets. Clearly, but also anecdotally, proprietary traders and hedge funds have had profound effects on individual equities, debt securities and currencies.
However:
Corporate profit margins should improve materially
Revenues should improve and corporations will rigidly control expenses until the recovery is clear. For that reason unemployment will likely continue high.
The transition of the US from a consumer dominated economy to a more mixed model will not be easy or smooth
In order to do so, the US dollar will have to continue to weaken and the standard of living in the US to fall in relation to other countries. Realization of that fact will create a very unpopular political situation in the US. Never the less, Asian currencies in general will have to appreciate against the US Dollar. The Brazilian Real has already appreciated a great deal against the US Dollar since the financial meltdown. Asian currencies will eventually do the same. As a result of the de facto devaluation, the US Dollar will become a less dominant world reserve currency and the Euro should continue to appreciate.
The US Government will not be able to control the budget deficit or easily extricate itself from the various stimulus packages
Legislators find it easy to approve spending, but difficult to approve spending cuts or increase taxes. The Federal Reserve will have to utilize new, untried methods to withdraw reserves from the system. It is clear that the transition will not be smooth because of timing issues, if not because of bureaucratic ineptitude.
Both US Dollar short and long term interest rates should continue to move higher but the spread between them should narrow
The spreads between short and long term rates are at historically high levels. This cannot continue indefinitely. I expect US short term interest rates will increase faster than long term ones over 2010. This is an inevitable result of the need of the US Government to continues to finance the economic stimulus programs while at the same time funding the wars in Afghanistan and Iraq. These rate increases will tend to offset what would be clear market tendencies for a much weaker US Dollar, but the rate of increases will depend greatly on the expectations for global inflation.
Inflation should move higher, perhaps much higher, but perhaps not in 2010
Because of local demographics, China, India and Brazil will continue to re-inflate their domestic markets. These efforts have caused the global recession to be less severe than it would have been otherwise. However, once the global economy recovers those economies should impact the bias of world inflation higher. As the market realizes these facts, commodities markets and gold in particular, as well as inflation adjusted securities, will move higher.
Finally, questions which do not have answers at the present time:
How will world tensions affect the markets?
In a recessionary environment, tensions in the petroleum producing countries, for example, have demonstrated upward pressure on markets. As the world recovers, however, there will be more measurable effects.
How fast will the developed markets recover and how will those governments deal with the very much higher debt?
Higher interest rates on the much higher government debt levels will increase government budget deficits in a major way. It is hard to imagine less government intervention in the markets given the new reality facing developed countries, especially since the “markets” caused the financial meltdown in the eyes of most politicians in power today.
How will the new economic powers of China, India and Brazil use their new found economic power to influence world and regional politics?
Does economic strength translate into increased military, diplomatic and social influences in the regional and world stages? It seems inevitable, but the expense of ramping up military capability will likely be counter to funding of the needs of an increasingly expectant population.
Expectations and recommendations for 2010:
• Expect market volatility
• Stay diversified by asset class and by currency
• Avoid bonds
• Be nimble but focus on the long term
• Avoid overvalued markets and securities
Happy 2010!
by Charles W.K. Haberstroh |
