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 us, 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, which 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 straightforward. 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.