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Ten Themes for 2010


This is, in many ways, a frightening juncture in world history but it's no time to be a shrinking violet.

Additionally, The US public pension system -- one of our 2009 themes -- faces a higher-than-expected shortfall of $2 trillion that will increase pressure on strained finances and further crimp economic growth, according to the chairman of New Jersey's pension fund, as quoted in the Financial Times.

This evolution should lead to a comprehensive Federal bailout package in 2010. TARP money returned to the government will likely be funneled back to the states, including but not limited to Arizona, California, and New York, as taxpayers shoulder the load and bear the burden of our outsized societal largesse.

It's a Walk-Off!

Expect housing foreclosures to increase in scope and size. While the wealth effect -- contingent on continued strength in equities -- and another bailout plan could moderate this dynamic, baby boomers have experienced three crashes during the last decade and many have said "no mas" to the stock market volatility.

As courts continue to rule on lending practices -- many are demanding proof that lenders have a legal right to the underlying property and in some cases, they've wiped away mortgage debt and invalidated foreclosure proceedings -- the judicial process will influence how rapidly this dynamic unfolds.

Look for underwater consumers to migrate away from big-ticket obligations, such as homes, and migrate down the debt food chain to credit card obligations, which will eventually lead to higher delinquencies rates.

The World According to TARP

When Franklin Delano Roosevelt was inaugurated in March 1933, his first act was to declare a national "bank holiday," closing banks for a three-day cooling off period. It was during this time that he famously declared, "The only thing we have to fear is fear itself."

It's worth noting that this occurred four years after the crash. While the rush to repay TARP dominated recent headlines, the causal elements of the modern day financial crisis remain very much in place, corporate debt obligations notwithstanding.

Richard Suttmeier of estimates the FDIC will have to tap its $500 billion line of credit by the end of this year and 800 banks could close by 2013 as Alt-A mortgages reset and unemployment pulls prime mortgages into default. (See his Top Ten Predictions for 2010)

Bracket Buster

According to Sports Illustrated, if you invested $25 in a US treasury EE bond on January 1, 2000, it would now be worth $36.10. If you plunked that money in the S&P, it would be worth $22.45. Had you invested in an index fund that tracked the value of professional sports franchises, it would have doubled or tripled.

As the Age of Austerity permeates, look for attendance at sporting events to decline as consumers curtail discretionary spending. This should manifest through regional blackouts (when local teams fail to sell-out the stadium) and the contraction of major league franchises, particularly the NHL.

While there will be relative winners -- soccer should benefit with the arrival of the 2010 FIFA World Cup -- we'll likely see "status backlash" against high profile professional athletes. Ironically, that could add millions of dollars to the bottom line of traditional endorsers such as Nike (NKE).

European Disunion

The European Union is committed to the regional and economic integration of 27 member states, with sixteen countries sharing a common currency. That was a fine idea when it was first founded but the economic fallout of the financial crisis will put loyalties to the test.

Look for the Union to adopt more stringent guidelines in the coming year, including but not limited to distancing itself from the weaker links such as Greece and Ireland. Sovereign defaults, as a whole, should jockey for mind-share. This could conceivably spark a rally in the US Dollar, which could have ominous implications for the crowded carry trade.

Hot Pockets

Over the last ten years, the cumulative imbalances in the marketplace compressed volatility in an array of asset classes until it unwound with great vengeance and furious anger. That caused a multitude of bubbles and busts throughout the financial spectrum, including technology, housing, China and crude oil. (See A Decade of Decadence)

While "fat tail" (outlier) events are by definition rare -- and we've experienced more than our fair share the last few years -- the confluence of technology and artificial market influences will manifest with sharp spates of market volatility surrounded by stretches of quietude.

While the speed of information has quickened the ebb and flow of the synthetic business cycle, investors will once again learn that when it comes to a healthy and natural progression, it's never wise to mess with Mother Nature.

The Rising

Minyanville professor Peter Atwater, CEO of Financial Insyghts and the former Treasurer of Bank One, offered that the battle between the faced vs. the faceless -- populist reforms at the expense of big business -- would emerge as a prevalent theme this year. (See 2010: The Robin Hood Economy)

Profitable corporations such as Exxon Mobil (XOM), Goldman Sachs (GS), Wal-Mart (WMT) and JP Morgan (JPM) don't exactly pull on the heartstrings of the average American. In fact, most of them generate outright hostility and a searing sense of betrayal.

Peter aptly reminds us of the adage, "Those to whom much has been given, much is expected." The lifestyles of the rich vs. a struggle to exist will continue to play out in 2010. That may manifest through a transaction tax -- traders are perceived as an acceptable casualty of war in Main Street America -- or, more moderately, though new and different approaches to conducting business.

This is, in many ways, a frightening juncture in world history but it's no time to be a shrinking violet. If the greatest opportunities are bred from the most profound obstacles, lucidity, awareness, and proactive preparedness will be our staunchest allies as we together find our way.


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