BarroMetrics Views: Themes for 2010
At the beginning of each year, I attempt to peer into the future by selecting two or three themes that are likely to play a pivotal role. This year I see three:
Will China Deflate?
Last year, Chinese banks lent the entire year’s lending budget in the first quarter. The Chinese Government, worried about inflation, signaled a halt or at least a slowing down of the lending in August 2009. As a result, the Shanghai Index dropped 24% in 20 days. Worried, the Chinese Government retraced its policy and the Index has been rallying but has failed to capture the old highs.
Now inflation again is raising its spectre. For example read the Sydney Morning Herald report.
Sooner or later, Peking will have to act to dampen the results of the easy money policy. If the Index’s August price action is any guide, we’ll see an almighty crash.
When Will the US Banks Start Lending?
Most of the liquidity created by quantitative easing is being redeposited with the St Louis Fed Reserves. US banks are not lending - unlike the Chinese banks who do what they are told. Once they start to lend, we’ll see inflation start to rise. Will the Fed take appropriate action? But here’s the rub. Because banks have not been lending, the deficit spending has not resulted in new jobs. What will happen if rates rise in this context?
And if rates rise while unemployment is still a problem, will the US Stock Market follow the Shanghai Index? Deflation 2 anyone?
Wither the US$?
This, in my opinion, is the key to the short-term direction of commodities and the stock marker.
In Xmas, the US$ had a nice rally. The question is can it be sustained? If it can, the next question is whether the US Stock Market will break (along with Gold and Crude)?
We should know the answer to these question in the next 7 to 10 days.
FIGURE 1 Shanghai Index
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