2010 FORECAST : New Normal, New Frugal
This is the time of the year when strategits make annual forecasts. We have already seen a wide range of forecasted outcomes but we would like to summarize the consensus :
- Muted Recovery but Recovery
- Equity Markets up
- Short Long Term Bonds
- Long Commodities
- Certain Volatility
- Inflation
We do not see the economic events of the last two years as a classic Recession/Recovery phase. So we think that the possible outcomes are very uncertain.
But let´s try to Forecast (do not forget that we are humans ) :
This recession was unlike any other we have experienced since the Great Depression. Typical recessions are inventory-adjustment recessions, caused by businesses getting too optimistic about sales and then having to adjust. You get temporarily higher levels of unemployment as inventories drop, and then you get the rebound. It is not quite as simple as that, but close enough. This time is more about credit expansion and contraction.We are in a post-credit collapse that is ongoing…
This recession was caused not by too much inventory but by too much credit and leverage in the system. And now, we are in the process of deleveraging. It is a process that is nowhere near complete. While the crisis stage is over (at least for now), there is still a lot of debt to be retired on the consumer side of the equation, and a lot of debt to be written off on the financial-system side. And this is true in US and in Europe as well.
Given the high rate of delinquencies and charge-offs of all sorts of debt in US, it is unlikely that we are going to see growth in loans in 2010. Consumers are working hard to reduce their debt. The New Frugal is part of the New Normal.
Past post-recession expansions have been built on growing credit and leverage. That will not be the case this time. We are going to see reduced lending and borrowing. Even though the federal government is running massive deficits ( US ), the stimulus portion of the debt will be running down in the latter half of 2010. There will be little political will to continue with massive stimulus and deficits. While this is good in the long run, in the short run it will reduce GDP.
Perhaps Inflation is a consensus forecast but Deflation is the present day reality and often lingers for years following an asset and credit bubble and further collapse.
We see the range of outcomes in the financial markets and the economy to be extremely wide at the current time.But a clear strategy is being defensive and minimizing volatility and downside risks and focus on where the secular fundamentals are positive such as equity sectors that lever off the commodity sector.
We are going to take a break for the next two weeks and recharge batteries, but we will be ready to go as 2010 comes around.
We wish you Happy Holidays and a great Year ahead…
