The runes for 2010

This was written before Volcker-Obama rode into town. That deserves a blog of its own

So long since last post. In between, there has been some skiing, but also discussions with friends (who have provided the best of the ideas below, while the dodgy ones are all mine), as well as active trading in the last few days of the year recent weeks. Trading summary for 2009 will be written later in the usual place, as well as the more technical views on trading for the next term.
So the time to examine entrails is upon us again. In short, the executive summary: by end of the year we'll be in trouble. Longer term picture even worse.
Still, this year could be a very profitable one, as January has shown, assuming of course that the right approach is deployed.
Macro Picture
The big picture is unchanged from what we have been banging on about. To recap:
1) In the medium term, deflation remains more of a concern (apart from UK) then inflation.
2) Without stimulus, the economy would roll over and die, or at least play possum.
US housing market is slowing.
US small and medium enterprises never exited the recession, and there is no sign that they might be on the verge of.
Unemployment is still baaaad (see U6 in the US, length of time out of work, etc)
Personal incomes are decreasing.
Consumer confidence is going down
PMI, Zew surveys are turning south.
The private sector, esp. individuals, keep on deleveraging.
Etc.
Still, we might get a few positives (they are noisy signals after all), so next 2~3 months will stay patchy
3) US/UK governments have already shot most of their ammos, mostly in the foolish bailouts of the big banks, GM, AIG, ... and are now in a perilous fiscal position.
4) Japan, Italy, Greece, Ireland, etc, are in the same perilous (what a word!)  conjuncture though broadly they were there already, so can't really blame the banks there...

4) UK has problems of its own. Contraction of the monetary base, though still inflation. Its banks still have risky assets on balance sheets worth several times GDP. Its second most important airport grinds to a halt for days on a few inches of snow. Its middle class is still bidding up its properties (no, they never learn). So, altogether now, repeat with me: "UK is f***ed! UK is f***ed!"

5) US has midterm elections for the house and the Senate, come the autumn.
The just resentment of the American people is welling up. Pitches and forks are being sharpened, tar and feathers warmed, and there are whispers of ropes being greased.

We thank all of our benign deities for the simple fact that we do not work in big bank Ed.: shouldn't you add "anymore" here? 
6) China has powered ahead with a mixture of hard work, chutzpah and incredible loosening/stimulus, though the comrades at the top are getting scared now and are trying to back pedal, increasing rates and asking banks to stop lending.

Their housing market is now crazier than the hallowed one of 80's Japan (remember the story that the Emperor's Palace was worth more than all of California's real estate? at least on a mark-to-market basis... a bit like banks' balance sheets).
It is not unlikely that it will slow down, or even crash, this year. Still, they should survive it better than the Anglo-Saxon world
7) Germany: still a bastion of strength, at least the state and the manufacturing sector. The banks and financial institutions are not quite the same architectural paradigm. Another one comes to mind (built on sand maybe?). Expect blackholes for 500 to 1000 billions still to come. Still, they will survive it better than the Anglo-Saxon world, and the EUR periphery
8) Geopolitics: Iran, Afghanistan remain a constant drain on policymakers, and coffers. Wildcards: a blowup in the Iran/Israel area, Venezuela contortions, Horn of Africa linkages (as pointed out by a friend)

Now to policy...
Central bankers and politicians are not stupid (contrary to widespread belief). Despite whatever statement to the contrary, they would love some inflation to kick in, in order to reduce the deficit without defaulting on it.
Hence: policy rates will stay at zero or close to it across the board
a) UK will probably be the first to follow Sweden in introducing negative rates for bank reserves. QE might be stopped as expected in the short term, but will resume with gusto shortly afterwards, probably after the elections, especially if a path of fiscal consolidation is announced, as it seems now more than likely. Most of it will be concentrated on monetizing the state debt, i.e. buying gilts, as foreigners will stop (having more than enough of their domestic debt to buy). So not a lot of room left for corporate bonds buying.
b) US not too dissimilar. No chance that the Fed increases rate in 2010, though it might remove some of the QE in the next few months. Soon it will return to it, one way or another, as the FHA and the GSE (Fannie and Freddie) will need a LOT of additional cash, the unemployments benefits will have to be extended in time, and more stimulus will be needed to try and create jobs, any jobs, given that the elections are coming.
c) Glass Steagall will return, hopefully improved and strengthened, a Glass-Steagall squared. The fight will be hard, but the entrails suggest that this time banks' lobbyists and their coteries (Geitner, Paulson, etc) are doomed: this is the only populist wave that Obama can ride now. So he will. (Ed. this sounds negative! we are in favour of that are we not?)
This will be healthy for all of us in the long term, but in the short term it will drag down financial sector stocks, as well as other risky assets: the free capital that is now available to push them up will be reduced.
d) Domestic savers will keep on moving towards income and out of equities, especially towards government bonds. 2010 will be a volatile year for sovereign bonds, but overall it should be a positive one, especially for German bunds. Gilts? just say no.  US Treasuries? hard to call the effect of China overhang vs domestic buying.
Yieldcurve shape is even harder to call. It should stay steep, given that the front is anchored at zero~, and there will be massive supply at longer maturities. But there are buyers... domestic and Central Banks. So be careful with the spreads, and don't be short bunds.
e) ECB will probably keep policy rate at 1%, but cut the deposit rate to 0% or lower. At the same time though it will remove some of the QE as announced, especially to send a strong signal to Greece and the others. The periphery situation might keep pressure on the EUR medium term, though it might regain a position of safe haven later in the year
f) Swiss looks safe. Its main banks seem to be further on down the road of cleaning up than the other european. Once again a safe asset.
g) Stocks with clean balance sheets, boring business plans, safe cashflows and decent dividend yields will do better than the rest. This of course screams utilities (and maybe healthcare - not pharma- and consumer staples)
h) We might see unorthodox policies, such as special high saving rates for small investors, pensioners and so on. The crazy rates of UK NS&I end of last year might have been just a little test run.
Along those lines, the chances of policy mistakes are increasing.
i) As we are in the tail end of the recovery, the next couple of month will remain volatile. The debate inflation/deflation will remain, making bonds volatile, and equity will spike up every time some numbers beat expectation. This will transition to a proper bear market sometime, so use the ranging, but better not to take too many bullish risks
j) Oil should trend down, staying probably in a 60 to 85 range. But huge spikes are possible on political events. And a crash could be on the card if China slows down. So positions must be subtle there.

Some suggestions on how to apply the above wisdom will be published later in the usual place.

Good luck to all. This year might make money if investing/trading wisely, but let's not forget that such money will be scant consolation given the misery that the economic recession will keep on spreading all around, and especially on the less fortunate.

Sorry! no nice pictures! will try to find some later