You can put together as many lists of stocks and themes as you want, but overshadowing all of your investment theses will be the simple fact that in 2010 we’re going to to have to face the End of the Easiness (apologies to Don Henley).
The Easiness of which I speak is made up of two separate but intertwined components:
- Fiscal Stimulus (programs put into place by the White House and Congress to delay foreclosures and to spark hiring, home buying, lending and consumer spending)
- Monetary Stimulus (the Federal Reserve’s discount window availability, capital repurchase programs and zero percent interest rates)
At some point in 2010, various aspects of both monetary and fiscal stimulus will begin to subside. Tax credits will expire, bond and mortgage purchases will cease and, of course, interest rates will rise. These items will not disappear all at once, but it would be a good idea to start planning for an environment without them all the same.
Some of the more thoughtful analysts and economic bloggers have already begun to offer some commentary on what the End of the Easiness will look like. Below, I’ve put together a roundup of three different takes on a cessation of quantitative easing…
David Merkel (The Aleph Blog):
- …the investment grade corporate bond market, the junk bond market, and the bank loan markets can’t have a better year in 2010. Rates would have to go below Treasuries, perhaps even to zero.
- I think the Treasury and Fed are trapped. They will have a really hard time removing the stimulus, because they don’t want to raise interest rates. Banks have become more reliant on low rates since quantitative easing started.
The Pragmatic Capitalist:
There is little doubt that the greatest mean reversion in modern economic times has been largely due to government stimulus. The bank bailouts, housing bailouts/stimulus and auto bailouts all helped stop the bleeding during a time when the economy appeared to be on its deathbed. Unfortunately, government spending isn’t the path to prosperity and the private sector will be forced to pick up the slack sooner rather than later. 2010 is likely to largely hinge on this transition. The government will begin to sap the economy of its massive stimulus as the year drags on and with that comes increased risks that the equity markets will struggle on without big brother’s aid.
Christian Broda, Piero Ghezzi and Nick Verdi (Barclays Capital):
- We expect strong global growth in the next two quarters: Asia is likely to slow significantly from its recent rapid pace, while growth in the U.S. and Europe is likely to remain robust.
- We expect the end of quantitative easing in major economies to take long-term rates gradually higher globally. But we do not think exit strategies will spook business activity in 2010, as tighter policies should mostly be the result of strong economic activity.
editor’s note: how ironic that Henley’s End of the Innocence song was a dirge lamenting the Reagan/Bush I years…if only he knew how good we had it back then, when a market crash like ’87 could be repaired in a few weeks and a recession like the one in the early 90’s could be solved without going into $14 trillion in debt. That era was way more innocent than this one. Oh well.