2010 What Ifs

Year’s end is neither an end nor a beginning but a going on, with all the wisdom that experience can instill in us.

~ Hal Borland

Yesterday we looked at some notes that I had made at the beginning of 2009. Today, we look at possible problem areas for 2010. Again, these are obviously not predictions, as I’m too chicken to stick my neck out on what I think will happen. Further, I don’t have any idea what will happen, nor do the thousands of pundits making their “here’s what ‘s going to happen in 2010 lists”. This is meant to be food for thought, and nothing more. (I don’t know about you, but I could use a little more of that kind of food rather than the calorie-filled sort I’ve indulged in over the past week!)

1. Debt:  I think this may possibly be one of the biggest factors in determining how the economy and markets perform in 2010.  Consumer, business, bank and especially sovereign debt may be in the headlines a lot this year.  The U.S. and other countries will continue to issue record amounts of debt in the form of bonds in 2010. If the appetite to buy those bonds dries up, interest rates will rise, causing a chain reaction in the economy and markets worldwide.  In terms of bank debt, I’m not sure what happened to all those toxic assets on bank balance sheets that we were so worried about last year.  As far as I know, they’re still there, but banks are using the steep yield curve to offset them with profits.  Consumers still have a lot of debt globally, and we smug Canucks have even increased our debt load over the past year thanks to crazy-low interest rates. Tavia Grant of the Globe and Mail wrote about increasing Canadian debt levels.
2. More Mortgage Trouble: We’ve had a lot of warnings lately about a potential housing bubble forming in Canada from many quarters (look here, here, and here).  One thing I haven’t heard reported on a great deal is the looming resumption of option ARM resets in the States.  Bill Bonner over at the Daily Reckoning wrote about the issue back on November 10th, and Jim Nelson provided an update on December 21st, with data from Whitney Tilson and Glenn Tongue of T2 Partners.  Those guys were ahead of the curve on the last wave of resets, so I’m at least going to listen to what they have to say.
3. Sluggish Employment:  Recent reports indicate that unemployment may be leveling off, or possibly improving. There have been so many job cuts, it’s hard to imagine more.  But that doesn’t mean it can’t happen, or that things can’t just stagnate for awhile.
4. Problems with Commercial Real Estate:  There have only been a few casualties in this area so far, but it is my understanding that the worst may be yet to come. There is a recent article from Business Week on the subject. The Globe had an article as recently as yesterday on the dangers of a growing bubble in China’s real estate markets – both residential and commercial. Yesterday Michael Panzner posted about what’s really happening in real estate.
5. U.S.  Dollar Volatility: I think currency fluctuations may play a greater role in the markets in 2010, as traders continuously change their minds over whether or not the U.S. is going to hell in a handbasket, or is still the most robust capitalist bastion in the world.  I think that will probably depend on where the sovereign debt fires are burning.  If they are outside the U.S., people will flock to the greenback.  If questions about the U.S. fiscal problems become louder, traders will dump the U-buck and buy gold.  Which will happen?  Probably both.
6. Interest Rates: This is a complicated question as well, but I’ll give you my 2 cents anyway, on the condition that you realize that my opinion probably isn’t worth that much.  If it makes you feel any better, there are tons of really smart people that will tell you that rates are going much higher.  There are an equal number of brilliant minds who will tell you they are staying put. (Going much lower isn’t really an option at this point.)  I think that if the economy continues to improve and unemployment rates fall, there is a chance central banks will raise rates.  If debt problems resurface, they will not hesitate to cut them again. If sovereign debt becomes an issue, you could see bond traders take rates up on the longer end of the curve.  Chaya Cooperberg had a good article on preparing your budget for higher interest rates.
7. Commodities: What happens with commodities will largely depend on how the U.S. dollar trades.  If the dollar rises, commodities will likely fall.  The inverse is also usually true.
8. Geopolitical Risks: I’m not sure these risks are any more elevated now than in many other years.  Of course, hot spots to watch are the usual suspects:  terrorist organizations, Iran, North Korea, and the ongoing Israeli-Palestinian conflict.  Again, you would need a really good crystal ball to predict what might come up in this arena, but it always bears watching.

How’s that for swimming in the deep end of the pool? I realize that to some of you, this is Greek. (Incidentally, Greece is one of the sovereign debt hot spots.)  I can understand those who are so completely not interested in this level of detail.  I’m not suggesting you should be.  But if things begin to unravel again, it might be good to know what warning signs to look for in the headlines. These are possible trouble spots ahead and it doesn’t hurt to know what sleeping monsters may be out there.

If you want to know what professionals are predicting, you can read what David Rosenberg and Richard Bernstein have to say.  Both left Merrill Lynch last year and both used to be renowned bears. Today, Rosenberg still leans bearish, but Bernstein has turned more bullish. Another of my favourite market watchers is Doug Kass. Each year he puts out a list of predictions that are usually quite contrarian, but sometimes prove prescient. His 2010 predictions are as intriguing as always.

If you didn’t stop reading after the first paragraph, let me know what your thoughts are on all of this. What do you think 2010 might have in store for us?  Will we avoid the potential potholes above?