I in depth I
O verall prognosis: A game of two halves; good for all in the first
half, less good for some – especially the West and Japan – in
Diagram 1: Yankee Go Home!
PERCENT OF TREASURY ISSUANCE
250 BOUGHT BY FOREIGNERS
My essential prognosis for 2010 is that, whilst the US, Europe and
Japan will NOT have a double dip recession in the sense that they 200
will again endure two quarters of negative GDP growth, they will
experience softness in the second half of 2010, creating a skewed 150
14 ‘W’ growth profile for 2008-2010. Whilst this will weigh more on
sentiment in the West and Japan, it will not impinge on eastern 100
growth. That said, in Q3/4, equity markets everywhere are likely to
pause or even decline in sympathy, though again more so in the 50
West and Japan than in the East generally.
27% 23% 6%
1. Currencies: Expect a stronger US Dollar (or at least a less
pronouncedly weak US Dollar) in the first half of 2010 but only
against the usual suspects £, €, Sw Fr and the Japanese ¥. 2 3 4 5 6 7 8 9
p t0 p t0 p t0 p t0 p t0 p t0 p t0 p t0
To blunt domestic inflation, China will again allow marginal Se Se Se Se Se Se Se Se
appreciation of the RMB prompting the China Club (Sing $, Kor Source: Bianco Research, LLC
Won, Taiwan $, etc.) to ease up also on FX intervention; too;
stealthy India will do the same. The second half will see the US
Dollar again weaken materially as an even tepid return to growth
restimulates demand for imports (esp. oil) and so weighs on the Diagram 2
US’s current account deficit. Declining participation by foreigners Clusterstock Chart of the Day
in Treasury auctions will also weigh on the Dollar. Commodity U.S. Federal Budget 12m Trailing Sum (blns) - Fiscal Meltdown!
currencies will be firm throughout the year, but more so in the
$3 500 120%
second half than the first, see diagram 1.
2. Bond yields and the risk free rate: Continued funding of BAL/RCPT% (rhs)
deficit shortfalls (met by continued Fed debt repurchases, i.e.
monetisation) cause bond market indigestion and so further yield 100%
back up. Prematurely, this will start to do some of the Fed’s “Exit
Strategy” work for it. Incumbent US politicians and even the Fed $2 500
itself will decry this, as it will boost mortgage rates and the cost
of capital, especially with mid-term elections looming. With little 80%