Market and Macro Themes for 2010
Welcome to 2010. Welcome to a new decade. Welcome to the year of the Tiger. Can we have another roaring year such as 2009? The answer to this question depends on a few key factors that global investors and our clients are now turning their attention to. The key question on minds of many is to try to figure out the full extent of the global recovery and attempt to accurately predict the strength or weakness of it and the factors that may or may not influence the recovery.
Everyone from Wall St. to Bay St. is pre-occupied with the Fed’s exit strategy this year – this could after all be perhaps the biggest market mover of the year. But in truth there is no such strategy because it is evident that the economy will never be able to recover without sustained doses of government stimulus – after all U.S. Q3 GDP growth and the yet to be released Q4 U.S GDP have all been supported by government spending and programs. This leads to believe that interest rates are either going to be in a trading range or trend lower in the U.S.
Our note to clients in November noted that the bearish stance on the U.S. dollar was too broad and overdone and that we could see a near-term counter trend rally that would cause a reversal in commodity prices and gold, which would open up a nice buying opportunity; that time has come, however soon we feel U.S. dollar will continue it’s decline, especially once U.S president Barack Obama outlines his budget on February 1.
Is the recession over? Might not just yet.
Quote of the month goes to the former National Bureau of Economic Research (NBER) dean of dating business cycles, Martin Feldstein:
“The recession isn’t over.” In a Bloomberg Radio interview on December 17th.
Now that’s blunt, isn’t it? But he may be on to something here.
Imagine that the best we could do with the massive fiscal and monetary stimulus was a 2.2% annualized growth in real GDP in the third quarter (real Gross Domestic Income (GDI) was closer to a 1% annual rate!). This result must be put into three perspectives:
1. It came in the face of $100 billion of real stimulus out of the U.S. This means that 90% of the growth in Q3 came courtesy of U.S. governments generous help. Looking at it another way, the economy was basically flat in the third quarter when GDP is measured “organically”.
2. Normally, it should be noted that during the first quarter of post-recession growth is that real GDP expands at a 7.3% annual rate; 2.2% is really nothing to get excited about — it’s actually should be a warning sign that perhaps the double may indeed still arrive our doorsteps in the second half of 2010.
3. Never in recorded history has growth coming out of a string of declines been as weak as what we just witnessed. Considering all the government efforts to usher in a V-shaped recovery, what unfolded in the real economy in Q3 – was admittedly a decoupling from the massive rally in global financial markets – was, in a word, sad and perhaps a bit scary of what may still come.
Perhaps we have been a bit too gloomy on the facts it should be noted as we sit here in Shanghai, China and witness the massive construction efforts across the city and around the region and indeed around the country we are reminded that China and in fact many economies in Asia will continue to support the global economic recovery and growth story in 2010.
It is the year of the Tiger and China is ready to keep roaring ahead.
