Running out of steam ?

Ages since I last posted but Q4 seemed to have been dominated by the markets love affair with risk. With so much bullishness around what new was there for me to say? "If you rest you rust" as the old saying goes.

Is it my imagination or does the 'risk-on' rally finally seem to be losing steam ? Maybe it's Citibanks difficulties with getting away its $20 billion capital increase, or maybe it's the end of the Dollar Goes Down Forever (DGDF) trade, or maybe simply year end torpor that have unsettled market sentiment over the last few days. Of course it could be the awful recognition that Greece is sleep walking to default or a growing understanding of the scale of Dubai's continuing problems.

As we enter 2010 I can't but help feel that the stimuli packages entered into around the world have kept the banks solvent ( that's a real result) but have done little else to stem declining fundamentals in the broader economy. Certainly the consumer doesn't seem to be riding to the rescue and the corporate sector is going to find accessing capital difficult as 2010 wears on. Calls in the US and the UK for an immediate end to both loose fiscal and monetary policy are growing - if they are followed through are we prepared for unemployment of 10% in both countries with an even larger number of underemployed? What does that mean for tax rates and GDP growth?

At one stage in November I was lulled into believing that the threat of a double dip had passed but horrid hotel occupancy numbers and the continued weak level of demand for airline business class seats still point to a 50% chance of one occuring. In 2009 mid-week business travel has been much weaker than weekend leisure travel so that we are now at the lowest hotel occupancy rates in the US since the 1930's depression. In the Emerging Market space the scope for another spat between Russia and Ukraine over gas is firming up for early January, while the PRC's non-performing loan book (and associated fraud) hovers over Beijings banking sector like a wraith.

I guess quality corporate bonds are as good a place as any to park as we enter the New Year while I try to work out whether we're headed for inflation or deflation. For the time being I guess we should be preparing for the fact that we are experiencing a recessionary environment within a longer term depression. The emphasis on cash rich , blue chip, well managed companies seems to be coming right at last.