Lewis Spellman believes the major trends in financial markets during 2009 will reverse in 2010 because of (1) the Fed's exit and (2) sovereign debt issues. Over the last few weeks, sovereign risk and the Fed's exit strategy have brought uncertainty into markets: the S&P500 is down, the VIX is up, and the dollar is rallying as investors flood back into dollar-denominated assets. Will this reversal continue as Spellman predicts?
Its a question that I plan to explore over the next few days. This is an interesting time for markets. The reinflation momentum that drove markets the first half of 2009 has fizzled as markets look ahead. Chinese growth is no longer seen as a light in the dark but as either insufficient or unsustainable. The market has realized the economic growth over the next few years depends not on the industry of the East but the institutions of the West. The market can now reasonably rule out both extremes: a V-shaped rebound recovery is unlikely as unemployment is still increasing, but an L-shaped demise is equally unlikely as business activity has improved.
The world is watching the West deal with its financial issues. This week we might have witnessed watershed moments for sovereign debt issues and inflation expectations. If markets can be calmed, many believe the future is bright.
