Previously I have held back from providing any traceable documentation of crystal ball gazing for the coming year, but this year, partly as a challenge to myself, I have succumbed to the temptation and below offer a collection of my very broad prognostications for 2010.

Within the larger time-frame context, I am still of the view that the world economy faces a risk of continuing deflation as the structural bear market dynamics which took hold in 2000, alleviated periodically with bubble blowing exercises designed especially to re-inflate US asset prices, are still extant and may well haunt the global capital markets for several more years.

Having said that, the extraordinary initiatives of central banks and policy makers, throughout late 2008 and all of 2009, to bailout any business that has been deemed to be strategically important or too inter-connected to fail, has created a highly unusual financial backdrop which has supported a new kind of risk taking during the last three quarters of 2009.

Adventurous asset managers and proprietary trading desks have been enticed back in to equity and commodity markets, to provide the liquidity lifeblood which modern financial engineering requires, by a not so subtly hidden safety net which takes the form of an accident protection package which is completely underwritten by the full faith and credit of the taxpayers of most of the world's economies.

US Equities

I see the S&P 500 hitting both 1280 and 870 during 2010, and it seems more likely that the 1280 comes in the first half and the 870 comes during the summer months or second half of the year. Both are key technical levels, as seen on the chart below, and the timing will have to do with the market's perception of when the Fed is planning to exit its super-accommodating monetary policy. I am sure there will be some significant missteps regarding the exact timing and mechanics of the exit strategy, and traders as well as the Fed itself could easily become confused by the economic data and the underlying strength of the banking system.

However, at some point during 2010, unless there is another systemic crisis, the Fed will have to begin raising short term rates and draining liquidity from the financial system to maintain any semblance of credibility. At the first real evidence that the die is cast in favor of higher…

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