Chris Lau - Seeking Alpha

Monday, December 28, 2009

Outlook for 2010

Many financial media sources are providing outlooks that argue either a bullish case or a bearish case for the stock markets in 2010.

My view is that investors need to macroeconomic factors and then react accordingly, since making predictions is an act that is very difficult to do so accurately and consistently.

While searching for the factors that will matter in providing a financial outlook for 2010, two excellent arguments were found.

The first is from Zero Hedge. The site's argument is based on the dynamics of fixed income.

The full article is here, and is entitled "Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else."

The site concludes with the following:

Everyone has major problems at home, and is more focused on the supply than the demand side of the equation.
What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:
  1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
  2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
  3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.
If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors.
My second source below is more optimistic.

Jon Fisher combines the observation of the inverse relationship between housing starts and unemployment with a model in entrepreneurship: the planning the actions while having the end in mind.

In this video, Fisher asks what would happen if everyone was wrong with the forecast that unemployment will continue to rise. What if unemployment peaks at 10.4% in the United States, and then falls...rapidly? If that is the case, then the place to invest in will be in technology and real estate.

Entrepreneurism, Begin With The End In Mind: Jon Fisher
Commonwealth Club