Yesterday’s entry listed a number of things that could go right in 2010, and that could potentially be catalysts to extend the cyclical bull market. While the list is valid and all the points are worth considering, there are also many counterbalancing risks that we are faced with as we enter the new year. Below are some concerns that we will be keeping a close eye on:
A wave of Option-ARM mortgage interest resets has the potential to kick off a fresh round of mortgage defaults, which could put renewed pressure on housing, the financial sector, and credit conditions (see chart below).
A re-bubbling of energy prices could potentially push gas prices over $3/gallon and dampen economic growth.
The sugar high emanating from Cash for Clunkers, homebuyer tax credits, and other creative stimulus initiatives may simply wear off and leave the global economy facing the possibility of a double-dip recession.
The cyclical economic upswing could begin to run into the stiff headwinds created by the “new normal” (more regulation, higher taxes, continuing deleveraging, higher domestic savings, etc).
Tariff wars between the U.S. and China could intensify, which has the potential to increase geopolitical tensions, stoke inflationary pressures, and would give China another reason to use their vast holdings of Treasuries as a financial weapon.
The nascent improvement in employment could stall, leaving wages and consumption constrained, and preventing top line growth in earnings from materializing.
The commercial real estate market could continue to erode and overwhelm small banks that don’t have government backstops.
Parts of the Eastern European banking system could collapse. This has the potential to cripple the global banking system and could test the Euro’s status as a secondary reserve currency.
A major rise in the value of the dollar (based on credit concerns) could bring back deflationary conditions, while a disorderly dollar drop (based on money printing and massive deficits) could create a spike in interest rates that would be a disaster given the amount of debt in the system.
Inflation expectations could begin to rise and put pressure on the authorities to begin removing stimulus too early.
The above are only some of the items we will be watching closely in 2010, which will be taken into account as we shape our view for the next few quarters. The entire Pinnacle Team would like to wish everyone a happy, healthy and prosperous New Year! See you on the other side…
