The 5
Biggest Risks of 2010
Although the crisis appears long
behind us, it's important to keep an
eye on the bigger picture.
As we enter the new year, investors
will be wise to focus on the risks
of 2009. Although the crisis appears
long behind us, it's important to
keep an eye on the bigger picture.
Little has changed in terms of the
structure of our global economy;
therefore, the risks remain largely
the same. Let's take a moment to
highlight some of these risks as we
begin to prepare for a new year:
1) Those darned analysts
It would be comforting to think that
Wall Street's analysts were in fact
doing us all a great big favor with
their expert analysis, but the truth
is, more often than not, they
aren't. The analysts have been
behind the curve at every twist and
turn of the crisis. They remained
too bullish heading into 2007 and
2008 and then were behind the curve
as operating earnings tanked and
they turned very bearish in Q408 and
Q109. Like clockwork, the ER
bottomed and the market soon
followed. The greatest risk heading
into 2010 is an analyst community
that becomes wildly bullish and sets
the expectation bar too high for
corporate America to hurdle itself
over. Early readings show this is
not a great risk at this point, but
it continues to tick higher.
2) Stimulus, stimulus, stimulus.
There is little doubt that the
greatest mean reversion in modern
economic times has been largely due
to government stimulus. The bank
bailouts, housing bailouts/stimulus,
and auto bailouts all helped stop
the bleeding during a time when the
economy appeared to be on its
deathbed. Unfortunately, government
spending isn't the path to
prosperity, and the private sector
will be forced to pick up the slack
sooner rather than later. 2010 is
likely to largely hinge on this
transition. The government will
begin to sap the economy of its
massive stimulus as the year drags
on, and with that comes increased
risks that the equity markets will
struggle on without big brother's
aid.
3) Anything China
China has grown to become the hope
of the global economy. With their
booming growth, growing consumerism,
and fiscal prudence, China is the
envy of the economic world. The
rally in commodities and
manufacturing continues to chug
along with a great deal of help from
China. If anything goes wrong in
China (and we mean anything), equity
markets will tumble.
4) The almighty bond market
Low interest rates and benign bond
market action have helped to
stabilize the global economy. But as
the United States and Japan print
paper like it's going out of style,
the risks in the global bond market
continue to increase. As Julian
Robertson (and recently David Tepper)
said, bond investors will not put up
with signs of inflation for long. If
bond investors get antsy and yields
spike in 2010, the party is over.
And the party might quickly turn
into a nightmare. If any country
begins to dump U.S. Treasuries on
the market, mortgage rates would
spike and the Fed would be unable to
maintain their accommodative stance.
The Peter Schiff's of the world
would rejoice as the global economy
tanks, a potential dollar crisis
ensues and that yellow metal
skyrockets higher.
5) Banks. ALL OF THEM.
Our zombie banking system continues
to hold back the economy. As we copy
the Japanese, the battle between
bank survival and loan growth
continues to this day. Banks remain
wary lenders as they attempt to
reduce their balance sheet risks,
maximize the quality of their
earnings, and minimize their
dependence on the federal
government. Meanwhile, the king
zombie, the Central Bank of the
United States, continues its
boom-bust policy of low interest
rates and "accommodative" money.
This is not only a 2010 risk, but
likely a risk for the rest of this
new decade. The banks are likely to
be fixing their balance sheets for
some time to come, and the Fed's
boom-bust policy will almost
certainly end the same way
Greenspan's boom-bust policy
ended--right back where we began.
SOURCE: MORNINGSTAR The Pragmatic
Capitalist Blog
