Comment by Stuart Thomson, economist at Ignis Asset Management
“The road to hell is paved with good intentions and the socialisation of private sector debts last year helped end the Great Recession and dampen volatility. The key questions for 2010 are can excess liquidity, loose fiscal policy and emergency interest rates continue to dampen macroeconomic volatility and keep the good times rolling? In other words, having provided significant debt relief, are consumers, banks and corporates willing to resume their rapid accumulation of leverage and return the global economy to its profligate ways and strong growth?
“Rapid credit growth is not required in the early stages of recovery, which is driven by loose policy, pent up demand and inventory accumulation. However, it is essential for sustained growth. Questions over sustainability will be swept aside in the first half of the year by stronger than expected activity. The US economy is likely to resume its role of locomotive for two quarters at least. The economy is expected to grow at an annualised rate of 4.5% between the fourth quarter of 2009 and the second quarter of 2010.
“The impetus from the early stages of recovery will be exaggerated by seasonal adjustment. Seasonal adjustment from the October 2008 – May 2009 collapse in production and employment should drive significant improvement in employment, production and investment over the period. This reflects our basic hypothesis, that if you throw enough money at an economy, it will grow. But if you withdraw this money while the financial sector is still impaired and anxiously awaiting greater regulation, then the economy will slow.
“The Fed is acutely aware of the risks of premature tightening, but its credibility has been impaired by Bernanke’s association with the previous Greenspan-led Fed and will be pressurised to start removing emergency interest rates as well as withdrawing liquidity in the second quarter. Consequently, our major trade of the year is to be underweight short-dated forward government bond rates as governments’ shift from crowding in to crowding out.
“Stronger US growth in the first half, followed by its subsequent slide back to mild recession will make the Dollar smile. The Dollar’s rictus grim shows outperformance during very strong and very weak growth. After further weakness in the first quarter, strong growth and higher interest rates will set in motion a prolonged Dollar rally. The Dollar’s largest gains will be achieved against those tradable currencies that are most over-valued. These are the Australian Dollar, the €uro and the Yen.
“Sterling is the classic bridge currency between the €uro and the Dollar with the added frisson in 2010 of political uncertainty. There is a clear risk of a hung parliament unless the electorate deliberately shy away from disaster. A hung parliament would result in an immediate knee jerk decline in sterling and gilts as well as a severe warning from the rating agencies. We expect any government to agree a set of fiscal constraints sufficient to satisfy the rating agencies and keep our triple AAA rating throughout 2010.”
These are the views of the author and do not necessarily reflect those of Ignis Asset Management.
Do let us know if you require any further information or if you would like to speak to Stuart.