A View from the Trenches, December 11th, 2009: "Thinking about 2010"
“…And when output has increased and prices
have risen, the effect of this on liquidity-preference will be to
increase the quantity of money necessary to maintain a given rate of
interest…” (J. M. Keynes, “The General Theory of Employment, Interest
and Money”, Chapter 13, Section III, 1936).
Please, click here to read this article in pdf format: december-11-2009
It seems that in the last 24 hrs, the world has put the ongoing
confusion in perspective, and become a bit more optimistic on the
outlook for 2010. At “A View from the Trenches”, we remain optimistic.
Too many times, we have written that liquidity remains intact and that
as long liquidity is not affected, the rally will continue.
Now, although liquidity is out there, the underlying force behind
it, fiscal deficits, is also alive. From the research that I read and
comments that I heard in the last days, I feel analysts are
underestimating this issue. There is a widespread expectation that
volatility in 2010 will be more muted. But if the growing trend in
fiscal deficits is to be broken, something of consequence needs to
happen. And when something of consequence happens, expectations must be
reassessed, which hardly represents a picture of muted volatility.
Thus, for me to remain bullish entering 2010, I need to see that the
fiscal gap is manageable, that it is not a problem, because if it is,
things are going to spiral out of control and rather swiftly.
All one can ask for is consistency, and so far, we have not seen it.
Next year will give us an environment with a US Treasury issuing more
debt (and with longer average duration), with a still unsolved demand
for Agency debt (once the Fed stops its bid in Apr/10), with the Euro
zone falling into pieces, and with creditor countries in Asia
exacerbating the USD peg. This is barely a picture of muted volatility
and higher valuations…
I am confident we will see effective policy action on all of these
fronts. But, muted volatility? I don’t think so. I am also confident
that there will be further monetary coordination in 2010, and
consequently, I believe gold could underperform, according to our
Thesis No.2. On this basis, in 2010 I am tempted to slowly shift my
investments to USD denominated assets and give equities a chance (I see
credit/fixed income a bit rich vs. equities).
Below, I show a chart (source: Bloomberg) with the US Treasuries
(Active) yield curve. You can see the steepening move since the
beginning of December. Please, do not ignore it. It will be a move of
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