Saxo Bank Outlook 2010: 'Year of Reflation'

Reflation is prolonging the crisis - Saxo Bank warns of a 'rollercoaster ride' in the year ahead

Saxo Bank, the online trading and investment specialist, in its yearly Financial Outlook, believes 2010 will be a year of reflation, and that the positive trends from the latter half of 2009 will continue well into 2010. However, 'structural headwinds' lie ahead of us that could turn 2010 into a 'rollercoaster ride'. One of the most influential potential triggers for a global market turmoil in 2010 will be a sharp decline in economic activity in China, when the so-called investment-driven export model runs into a "brick wall" of fading Western demand. Chinese exports are down almost 20 per cent over the past year, and the eyes of the world are looking at China in the same way as they did on Japan in 1988. Chief Economist at Saxo Bank, David Karsbøl comments: "The current improvement in financial markets in GDP figures and consumer sentiment is no more real than the speculative boom fostered by easy money from 2003-2006. The developed world has been dominated by credit-induced bubbles since the mid-1990s and each problem has been met with lower rates and more debt. The problem is that it takes an exponentially growing amount of stimulus to keep the party going. Low interest rates have fostered wild speculation, moral hazards, over-investments and mal-investments, creating an unserviceable debt burden. "What we need now is deleveraging and defaults in order to reduce the debt burden and make it serviceable again. Unfortunately, every government effort to stimulate the economy stands in the way of change towards long-term sustainability and will only prolong the crisis into 2010."