THE PROBABILITY OF A CRISIS WILL BUILD DURING 2010
So says the team of equity analysts at Barclays. Although policymakers helped avoid the second Great Depression, Barclays believes we have simply kicked the can down the road. As their head of U.S. equity strategy said in November, the likelihood of Japanese style de-leveraging stagnation remains very high.
Like TPC, the bank argues that 2010 will be a year of halves. While the first half is likely to be characterized by more of what we saw in 2010 (improvement in corporate profits and accommodative government actions) the second half is likely to be characterized by an increasing burden on the consumer as the baton is handed from the public sector to the private sector. Barclays says this passing of the baton has the potential for an even greater crisis as higher taxes, higher interest rates and lower government spending create increased risks.
Barclays remains more bearish than the consensus. Global economic growth is likely to disappoint as spare capacity fails to lead to a sharp rebound and unemployment remains high. They see the probability of a crisis increasing as 2010 goes on:
The probability of a crisis will build during 2010. Although it might seem natural to think that the probability of a dire scenario falls over time, as more quarters of growth are recorded, in fact the opposite is true. The main reason why is that, faced with resistance to a more fundamentals shift, currently, policymakers are trying to recreate the “old” world, which was clearly unsustainable in a number of respects, such as in its reliance on “rich” consumers to spend and “poor” ones to save. The longer that that continues the higher the probability of a train crash.
Because of this, the likelihood for an “ugly” economic outcome is 40% according to Barclays. Unlike the consensus, who is overwhelmingly bullish about 2010, Barclays sees just a 10% probability of a “good” outcome:
As the crisis remains unresolved the potential for policy mistakes grows with every day. Barclays now sees four primary risks to their 2010 outlook:
- The Fed gets it wrong and spooks the market with rate increases.
- The US Treasury gets it wrong on fiscal tightening and results in yield spike.
- Consumers get cold feet and become permanent savers.
- Foreigners lose confidence in the US and a dollar crisis ensues.
The implications here are fairly straight forward. We are not yet out of the credit crisis woods and 2010 has the potential to remind us of that. Although the first half of 2010 is likely to mirror what we saw in 2009 the back half of 2010 has the real potential for another economic relapse and even a double dip. As we mentioned in our 2010 investment outlook investors would be wise to remain nimble and keep investment durations fairly short.
Source: Barclays
Weird to read this from a big bank. I wonder how long these analysts will have their jobs? The results of another “ugly” crisis would certainly be harmful to Barclays and their future.
It wouldn’t be harmful if they’re on the right side of the trade. Remember that Wall Street (and collectively all financial players) like giant bonfires up and down. They have too much money and aren’t smart enough to trade a “no change” environment.
“ugly” isnt quite as ugly as it was in 08 though SS.
Plus plenty of room to tighten by removing QE and cutting wasteful spending before touching the Fed rate.
To Blobby,
Touching what Fed Rate? The Fed Rate is non-existent. As far as removing QE, that possibility is long gone. The Fed is caught in their own trap. If they remove QE the Bond market crashes, since they are the only current buyer of US treasuries; and mortgage defaults rise exponentially overnight in a more serious replay of 2008 which will kill the banking industry and Wall Street (not that it is a bad thing after all. Unfortunately, the consequences will be felt by everybody. But that is inevitable anymore.)
Buy hard assets and store outside the US, and hope for the best!
We will in fact be lucky to see “the first half of 2010 … mirror what we saw in 2009.” Indeed, a wealth of evidence suggests the turn lower is nigh.
i wonder if all of this legitimate concern at the macro level is keeping us from seeing that many companies are coming out of this crisis with higher cash and lower debt levels than usual, increased operating leverage, and a earnings comparison to last year results that will be an easy beat….namely there is still plenty of money to be made on the long side of equities. i am short treasuries precisely because of my macro concerns, but i am long equities because i think there will be, among other things, pent up demand for additional M&A activity that will juice the equity market generally…plus i think EM and frontier markets still offer promise.
I largely agree in the short-term. I would not get very negative on a macro level until I begin to see everyone showing signs of severe optimism (which has the potential to occur later this year).
There is no doubt that the recovery is very weak and the economy remains fragile, but in the near-term we still live in a world of very low expectations that is likely to result in “better than expected” results and higher equity prices.
Looks like the Ponzi continues today. TPC, I hope you’re not still long when the music stops.
Yesterday was a classic knee jerk reaction on unimportant news. Alcoa is not a barometer of earnings to come. The bears are all talk and no action at this point. I hear lots of people who don’t like this market, but none of them are willing to put their money where their mouth is and short the market. Unless we get a major selling catalyst this market will continue to melt higher as earnings season progresses.
How long will you be an owner of stocks here? You’ve said your duration is fairly short, but how short?
Likely near the end of the month. I like stocks into the middle of earnings when I believe a “sell the news” mentality is likely to set-in.
Nice post, nothing to add other than I liked Edna’s bonfire analogy…bankers appearance today were a reminder of this, and I sense they run up at earnings time.
Nothing new here, same old same old. “THere is a severe possibility that things may, or may not, be worse, or better, than they were before, with a distinct likelyhood of possibly being different than at any time when they were better, but not worse, than now”. Chilling, in-depth analysis of things to come. It’s a wonder these weak kneed sophomoric moron writers still have jobs.
Call me paranoid,but I see something that will take all of our minds off of every aspect of the economy…
A serious terroristic attack(false flag)to be blamed on Iran.
Thanks to our biggest enemy who only masquerades as our ally-Israel.
Think I’m being unfair?,which country(and their faithful)has completely permeated our government,TV media,banking and publishing houses?
Which country has/is spying on us,stolen money from us and gotten us involved in wars that benefit them,Iran or Israel?
DAVE , ..TAKE YOUR MEDS !
Sorry,that’s one of the problems that we have in this nation(US).
There are tens of millions who rely on “meds” to dull their thinking or dull their outrage to what they realize government is doing to them.
I will not join you in your intentionally induced apathy.
Consumers already have frost-bitten feet — and with the continued rise in unemployment, there will be fewer and fewer robust consumers left (and many of them are already cutting back).
The Fed and UST get it wrong every time they take action — attempts to produce a short term “sugar” high appear to work — but in the long run the damage is widespread.
And yes, obviously foreigners could (actually some already are) lose confidence in the USD along with a lot of other currencies. But even if a major loss in world confidence does not occur, as long as the printing of new US dollars continues 24/7 we will have neither a sound economy or strong dollar.