2009 - A year of roller-coaster ride to end the first decade of 21st century

As I bid farewell to 2009, I pondered what we had went through for the past year, and there is only a word I could describe it, "harrowing". For the stock market, the S&P500 has ascended almost 70% from its March lows to end of 2009, which will tend to carry through January 2010. It was definitely a roller-coaster ride year. A lot of investors had continued to sell their holdings into the March lows, believing that the major US banks would be nationalized; but missed out on the rally that began after March, fearing that it would not last.

It seemed that the global economy is back on track, and everything is hunky-dory again ala 2007. However, I would like to remind readers that we did not enter the abyss due to the Fed and US Treasury opening their floodgates to their "widest" since the Great Depression. The financial system was being stabilized; allowing the global economy to pick up from the bottom and chug along. On the other hand, the US government introduced the stimulus spending and Cash for Clunkers programs to revive the economy and encouraging consumer spending. Coupled with the Fed quantitative easing and putting a price floor on the toxic mortgages via the Public-Private Investment program (PPIP), bank balance sheets suddenly looked healthy by mid-year. By end of 2009, we have witnessed that the major banks that received cash injections by the government last year have paid back most of the money. Of course, we all know that the real motivation for paying back the money is to escape the constraints that TARP has imposed on bank bonuses payout.

There is still a caveat here. The stock market has bounced back by anticipating a great recovery to the US and global economy, but what we see missing is UNEMPLOYMENT. US unemployment has exceeded 10% in the last report, and it looked like it is likely to remain at that level for some time to come. This does not look a strong recovery because without job creations, consumers would not have the purchasing power to spend. 2/3 of US economy is based on consumption; therefore, this is a critical factor for a sustainable recovery. Nevertheless, the stock market is moving assuming that unemployment will eventually decline. 2010 will be an important year to assess this important barometer again.

Governments worldwide have also opened their spigots to stimulate their economies. As a result, most of the stock market worldwide bounced back with vengeance. China has spent Rmb2 trillion to stimulate its economy; through purchasing commodities worldwide and for consumer and enterprise lending. What we are seeing in China is a new asset bubble brewing, and the country single-handedly propping up a lot of countries economically in 2009. What will happen next is anybody's guess, but the world is seeing a new asset bubble in epic proportions with most nations' economies tightly intertwined and integrated ever as before. The carry trade is now in US dollars for years to come. Fed has committed to keep its interest rates as low as necessary, in turn, the US dollar has weakened considerably since early 2009, and commodity prices climbing higher, especially gold which touched a high of $1200 an ounce by December 2009.,

However, the recovery is not straight forward. Our sense of complacency is shattered when Dubai shocked investors worldwide by asking for postponement of its debt payment in late November. Suddenly, emerging markets became the focus and doubt is rising whether the economy would be derailed. Things quiet down after Abu Dhabi promised to lend 10 billion dollars to Dubai. To make things worse, the witch hunt has started to track the next government which will likely default. Unfortunately, Greece is downgraded by the rating agencies. Its government needs to take steps to control its deficit in order to keep its ratings. A host of governments mostly in Europe are likely to face the music in 2010. Next up to watch: Spain. In 2009, UK and Japan's credit ratings have been questioned by investors who doubt whether they would be able to maintain their prescient ratings for long. Their debt as part of GDP is reaching new highs. Therefore, we would see the same concerns in 2010. A run to US dollars and Treasuries for safety will be imminent if this scenario would ever happen.

I am sure the job ahead for financial and government regulators worldwide would not be easy in 2010. Loud calls to exit from quantitative easing and spending programs are growing louder by the day. The economy depends very much on the spending power of consumers to drive it forward. Without consumer spending, the economic recovery would not be sustainable for long. What would drive the economy for the next few years? Green technology? Carbon trading? Battery powered cars have been a hot topic in 2009, as witnessed in BYD (China) and A123 Systems stocks. The Fed is hoping that the recovery would be gradual (Goldilocks), and not turn too strong or weak. A strong recovery would presage higher interest rates in 2010, and this might derail the recovery since the US is likely maintaining its weak dollar policy. A tough job nonetheless.... If a double-dip recession were to occur, I am sure that the Obama administration would waste no time to introduce more stimuli in the future to prop up its economy. What we need are decisive actions from the government. My fervent hope for 2010 would be a sustainable recovery in the global economy.