Monthly Commentaries

A busy year ahead. – December, 2009

While 2009 will be remembered as the year we averted a global financial collapse, 2010 will likely see us lurching between a series of flare-ups, both financial and geo-political. Although uncertainty will not quickly disappear, growing financial stability has prompted the re-emergence of carefully calculated risk-taking. However, grenades are poised to explode at almost every turn. As a backdrop, the global economic recovery remains fragile and will continue to depend on government and central bank support until banks have sufficiently repaired their balance sheets to begin lending again - this time with prudent levels of risk and leverage. Only then can private sector activity gain sufficient traction to boost employment and confidence. Meanwhile, high unemployment and a weak real estate market will keep a lid on consumption. De-leveraging will continue, as the ratio of household debt to disposable income needs to contract further. For these reasons, inflation will stay muted for most of 2010 and those expecting a quick return to vibrant economic growth will likely be disappointed.

So, what are some of the minefields? • Turmoil across the entire mid-East will not subside in 2010. A general election and probable change of government in Britain and mid-term elections in the US - where several Democratic seats will be closely contested because of retiring incumbents - will sorely test both countries' commitment to their military efforts in that region as well as the Obama Administration's legislative agenda. Canada's minority government will likewise be exposed to continuing election risk. • Aside from creating social and political unrest in their own countries, deteriorating economic conditions in the less-transparent weaker sisters of the European Union will strain the cohesiveness of that organization as well as the authority of the European Central Bank. Prepare for volatile exchange rates. • Continued de-leveraging will expose further fraud and investment scams in less-transparent emerging economies that could have a knock-on effect on the global financial system.

• Premature weaning of the global economy from essential government support could jeopardize the recovery, as could an impulsive fear of inflation and any consequent escalation in interest rates. Redressing government deficits will require an increase in taxes - hopefully, more equitable and palatable consumption taxes - that should help restrain inflation. Building consensus around these issues, domestically and internationally will pose a significant challenge. • Technology combined with free and instant access to information has created a public platform that pits consensus building against vested interests and rabid ranting against cogent debate, making it difficult to differentiate the true scientists and philosophers from the rabble rousers. Confusion will linger while we rebuild our trust in individuals and institutions. This list is far from exhaustive and simply highlights some obvious obstacles that could derail a more orderly path to recovery while emphasizing the importance of being amenable to and embracing unexpected change. In this positive vein all of us at Toron extend our best wishes for health, happiness and success in 2010. Peter Sacks Founding Partner