(A) yr f fllng n th gps - f y cn ndrstnd ths, y’ll d wll n 2010!

Arno Lawrenz of Atlantic Asset Management writes that a couple of years ago well- known online financial newsletter guru, John Mauldin, coined the phrase, “statistical recovery.” While this could mean many things, market participants have had a crash course over the past 18 months in terms of the risks that such a recovery poses.

With government taking over big business in just about every developed country on the planet, and formerly large multi-nationals operating like zombies it is becoming clear that the rules of the game have changed dramatically.

While markets have been off to the races now for going on 10 months, the difficulty for these governments to extract themselves out of some of these businesses may literally take years. Not only that, in many instances Main Street has become so addicted to the presence of government, it will be key to see how it survives without the assistance of big brother, as and when the umbilical cord is eventually severed.

Be that as it may, there can be no denying that forecasters have grossly underestimated the extent of the statistical recovery, and may well do so for a second year running. In their defence, estimating inventory rundowns and re-builds are hard at the best of times, but in an environment such as the current, it become almost impossible.

Closer to home South Africa appears to be through the worst of the aftershocks caused by the global financial tsunami that hit our shores in full force in 2009. Once again investors were reminded that we remain an economy geared extremely closely to that of the global one. The trick is whether we used this opportunity to our advantage - no recession should wasted - in other words, did we fix South Africa's balance sheet?

The jury probably remains out on this issue. Instructive though were comments made in President Jacob Zuma's ANC 98th anniversary speech on 08 January. While there can be little denying that we have opened the flood gates as a country in terms of social spend (we now have roughly 2.5 individuals receiving grants for every 1 taxpayer), it is clear that authorities are starting to learn quickly that these good (and free!) times cannot last indefinitely, and perhaps a period of tighter purse strings await.

"Government will be prepared to use tax policy and spending restraint wherever possible"

However, we should not fool ourselves completely either, in that short speech alone there was enough reference to the fact that hidden taxes and even outright taxes are a given for the future (not dissimilar to the global situation).

2010 will be year full of surprises. Here's to 2010!

Figure 1: (below)SA white maize future - while the longer-term theme both locally, as well as abroad will remain one of food scarcity/security (creating a floor under most soft commodities and more than likely lead to most food stuffs trading at a premium, causing inflation), the short-term impact of the benefit of this drop-off, together with renewed government noises on perhaps finding alternative means for Eskom funding (even selling assets?) should prevent the bears from becoming too vociferous in the rates market. (Key horizontal support currently sits at 1,220.00)

Fixed Income

The trading range in bonds have ratcheted up slightly since our previous communication - where bonds (here we always use R157 as our proxy, incase stated otherwise) appeared trapped in a 8.30/8.45% range for pretty much the entire second half of 2009, the 20-odd point sell off at the start of the new year (and decade) seems to be driven in large part by the fear that excessive issuance could influence rates over time.

While it is early days yet and the importance of being open-minded should not be underestimated in such a volatile global economic environment, an interesting trend appears to be developing, that in most part seems lost on the bulk of forecasters. And that is the issue of a statistical recovery.

What we are implying by this is that consensus still seems stuck on focusing on the most recent past when it comes to pegging a level for 2010 GDP, using the likely -1.7/-1.8% outcome for 2009 as their guide to what the 'future' may look like this year, discarding completely (in some instances), the impact one of the most aggressive run downs ever in inventory has had on the end result for 2009 growth. In other words, the inventory rebound in 2010 may be much larger than is currently contemplated possible. And it is here where we need to start concentrating… Can you recall what government's forecast for 2010 GDP was in their MTBPS assumptions? It was 1.5%... Yes, ONLY 1.5%... GDP may well print closer to 4% in 2010 when all is said and done. (This does NOT imply that South Africa will experience a V-shaped recovery by any stretch of the imagination). To the contrary… all the classic issues remain. Severe bottlenecks; education and healthcare constraints; extremely low skill levels in the labour force and on the latter amazingly still some of the most liberal labour laws on the planet! (In fact, we continue to argue that in due course the penny may well drop that government will have acknowledge that it has failed the masses massively over the past 16 years and that previous pipedreams of 4.5% trend growth needs to be cut back to 3.0-3.5%.)

For our money the issuance story is now probably being overplayed. In the views section we discuss the issue around tight purse strings. Will the 2010 Budget be the follow-on from the MTBPS 'under-promise, over-deliver' sermon? We think it may well be…