Which Perception Is the Reality?

Amongst the cooling embers of a fiery 2009, markets have appeared to be having trouble breaking through, even in the u.S. with lowered job loss. The catalyst for crisis was clearly one of credit and misjudgments of the risks of securitization. The debt refinancing/ restructuring in Dubai now in late 2009 has in our view re-emphasized issues globally of implicit assumptions of guarantee. Most immediately, Mid-east financing is moving well beyond the “too important or big to fail” stances of the past decades but the lessons are clear more broadly on greater corporate loan transparency by financial institutions and massive new capital issuance globally.

Central bankers favored analogy is that of fire-fighting but the reality may be closer to sheriff in the old west– as both participant and arbitrator. Salutary considerations include weighing present deflation/weak growth fears in advanced economies with transparency a subtext between the Fed and the ECB versus the issues of fast growing economies, namely inflation such as in India, the fears within China that the recent stimulus may exacerbate overcapacity risks and in Asia generally, real estate bubbles caused by global easy money. More than just slackening into year end, intraday dissipation by the close of a day (that has taken place in advanced and fast growth markets alike) may indicate sifting of the myriad perceptions of 2009 for the likely reality for 2010. We hold that likely reality, irrespective of market, to be favorable for bifurcation by quality of balance sheet/physical operations with financials remaining a crucial component.

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